India’s Coffee Day Enterprises, parent company to one of India's leading coffee chains, officially began its share sale for its initial public offering (IPO) today. This has the potential to give the company a valuation of $1 billion by raising US$51 million from an initial sale of shares to institutional investors including Blackrock, Jupiter, and ICICI Prudential, and ‘anchor’ investors including Merrill Lynch, Capital Markets, Reliance Life Insurance and Swiss Finance Corp.

 

The anchor investors paid 322 rupees per share, a price directly mid-range of the 316-328 rupees per share that the company is launching its IPO at for investors prior to listing in Mumbai.

 

This IPO marks the largest within the industry in three years. Not only does Coffee Day own the country’s largest coffee chain with 1,500 Café Coffee Day outlets, but the group also owns 29,000 coffee vending machines, a kiosk chain with 590 locations, roasting and exporting assets, a technology park, hospitality operations, and financial services.

 

India’s coffee market is expected to grow from a value of Rs77 billion (US$1.2 billion) to Rs151 billion (US$2.32 billion) by 2020, according to data quoted in the Coffee Day Prospectus, and various companies are vying to gain an advantageous position within the market. However, Coffee Day rival companies including Barista with 180 outlets, Costa Coffee with 100 outlets, and Starbucks owning 40 stores as of last year, are dwarfed in comparison to Coffee Day’s presence in the market, giving Coffee Day a decided advantage.

 

Despite the projected growth, competition within the space is high with Gloria Jeans Coffee exiting the space last year and Costa Coffee and Barista consolidating locations. Even Coffee Day has felt the squeeze, opening 730 stores since 2012 but also closing 298 and a number of kiosks over the same time period. But Coffee Day has the scale to be able to push back through lower prices, charging 79 rupees (US$1.22) for a cappuccino as opposed to Barista selling them at 90 rupees (US$1.39) and Starbucks selling them at 120 rupees (US$1.85).

 

Of the proceeds from the IPO, the group plans to use the bulk of the capital to pay down debt, but has also earmarked 877 million rupees (US$13.5 million) to expand its café and kiosk locations, 974 million rupees (US$15 million) for manufacturing vending machines, 606 million rupees (US$9.34 million) for repairs, and 419 million rupees (US$6.5 million) on a second coffee roasting facility.