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Reuters/Shailesh Andrade
Betting big.
CAFFEINE RUSH

What you need to know about the coffee chain that’s launching India’s biggest IPO in years

By Manu Balachandran & Madhura Karnik

India’s largest initial public offering (IPO) in three years is coming soon.

Coffee Day Enterprises, which owns Café Coffee Day, India’s largest café chain by store size, plans to raise as much as Rs1,150 crore ($175 million) through the offer, which will be launched on Oct. 14.

CCD, as the chain is widely known, competes with the likes of Starbucks and Barista in Asia’s third largest economy. Outside India, it has outlets in Austria, the Czech Republic and Malaysia.

“In 1995, globally, the café culture had picked up and I told my management team I wanted to put up cafés in India,” VG Siddhartha, chairman and founder of Coffee Day Enterprises, wrote in the Forbes Magazine in 2011.  The son of a coffee plantation owner, Siddhartha had started the chain with a capital of Rs1.5 crore.

In anticipation of the upcoming IPO, Quartz has culled some interesting, lesser-known facts about the company behind CCD. An emailed questionnaire sent to CCD remains unanswered.

Big sales, but still loss making

CCD is all about scale. The company had 1,423 outlets across India and abroad at the end of last year, a number that has grown to 1,538 stores over the last few months.

“Big brands came and said that they will open 500 to 1,000 stores and so we decided that we need to reach a scale of at least 1,500 stores by 2015 to remain ahead of competition,” Siddhartha told reporters on the sidelines of a press conference on Oct. 7.

Each CCD averages daily food and beverages sales of about Rs11,927 ($184). In comparison, a competitor like Starbucks makes over five times that amount, according to retail consultancy firm Technopak. However, CCD has many more outlets than Starbucks—the American coffee company had 64 cafés in India as of Dec. 2014—and cheaper offerings.

In 2014, CCD’s same store sales growth—the percentage change in sales over the previous year—stood at a healthy 9.13% according to the draft red herring prospectus filed by the company with market regulator, Securities and Exchange Board of India.

But CCD’s financial performance remains lacklustre, which could dampen investor interest.

The upside, however, remains that India is potentially a massive market. And that’s exactly what CCD wants to tap into.

“Out of 1.3 billion population, we are considering the market of around 30% of India,” Siddhartha told CNBC-TV18. “So, according to us, there is a mind-boggling opportunity in big cities, small cities and even the highways.”

The cheapest coffees

Among commercial coffee chains, CCD sells some of the cheapest coffees in India.

For instance, a small cappuccino at CCD costs Rs79 ($1.2), compared to Rs120 ($1.85) at Starbucks, as of Dec. 2014, the prospectus said. A small espresso costs Rs69 ($1.06) while a hot chocolate is priced at Rs101 ($1.55). At a Starbucks outlet, coffee drinkers would have to shell out Rs100 ($1.54) and Rs135 ($2.08) for an espresso and hot chocolate, respectively.

“Competitive pricing has attained better consumer penetration and strong connection with the young consumers,” the company said in its prospectus.

Not just coffee

Coffee Day Enterprises isn’t just into coffee.

Although it runs the CCD chain, the company has 40 subsidiaries, according to the prospectus. These subsidiaries deal in a range of businesses. Giri Vidhyuth (India), for instance, plans to establish power plants across the country.

Sical Logistics, another subsidiary, is one of the country’s biggest logistics firms and handles over 25 million tonnes of cargo every year. Founded in 1955, the Chennai-registered company was acquired by Coffee Day Enterprises in 2011, and is listed on the BSE. There’s also Sical Adams Offshore, which supplies vessels for offshore drilling.

High-profile investors

Siddhartha and his wife, Malavika Hegde, have nearly 57% stake in Coffee Day Enterprises. Hegde is the daughter of India’s former foreign minister SM Krishna, and is also in charge of the group’s hospitality business.

Other significant shareholders in the company include Nandan Nilekani—co-founder of India’s third largest IT firm, Infosys—private equity firm KKR Mauritius and Standard Chartered Private Equity. The Bennett Coleman and Company Limited,  India’s largest media company, is also an investor.

Post IPO plans

CCD plans to use a large chunk of the IPO proceeds to repay and prepay loans worth Rs632.8 crore. They company will also use the proceeds to set up new stores.

“As we grow, we plan to expand by setting up new Café Network outlets, in high visibility and high traffic locations, under our three main outlet formats—Café Coffee Day, The Lounge and The Square—with a primary focus on our Café Coffee Day outlets, catering to the needs of different segments of customers, with a focus on Tier 1 and Tier 2 cities across India,” the prospectus said.