* Represents per share calculation based on number of shares o/s post issue; Source: Choice Broking Research, Company DRHP

Transcription

1 Healthy Coffee Business but Costly (CDEL) the parent company of the Coffee Day Group, pioneered the coffee culture in the chained cafe format in India under the brand Cafe Coffee Day (CCD). At the end of June 2015, the company had a network of 1,538 cafe outlets across 219 cities. CDEL is coming with an initial public offering (IPO) of ~35.1mn shares in offering to raise around Rs. 11,500mn, with subscription starting from 14 th Oct The issue will close on 16 th Oct The company is coming out with a 100% book building IPO of equity shares of face value Rs. 10 each with a price band of Rs per equity share. The issue is priced at 31.6 times its face value at the lower band and 32.8 times on the higher price band. Not more than 50% of the issue will be allocated to qualified institutional buyers (QIBs). Further, not less than 15% of the issue will be available for non-institutional bidders and the remaining 35% for retail investors. Net proceed from the issue will be used for following purpose: Setting-up of new cafe network outlets and Coffee Day Xpress kiosks (Rs mn) Manufacturing and assembling of vending machines (Rs mn) Refurbishment of existing cafe network outlets and vending machines (Rs mn) Setting-up of a new coffee roasting plant along with integrated coffee packing facility and tea packing facility (Rs mn) Repayment or prepayment of loans (Rs. 6,328mn) Valuation & Recommendation: At the lower band of Rs. 316 per share, the company s share are available at a P/BVPS multiple of 6.2x, while at higher price band, it is available at 6.5x multiple. Similarly, at lower and higher price band, CDEL s shares are available at EV/EBITDA multiple of 24.8x and 25.5x, respectively. With the repayment or prepayment of loans, the company s total debt is likely to decline by 16.3% (as compared to debt level in Q1 FY16). Moreover, CDEL s debt-equity ratio is expected to remain at elevated level at 3.3:1 as compared to pre-debt level of 4:0 in Q1 FY16. The company is well placed to gain from the long term consumer story in India, but non essential diversification in non-operating activities, higher debt on books, insignificant RoCE and higher gestation period for cafe breakeven makes it a risky bet. Thus, we recommend investors to Avoid the issue. Recommendation AVOID Price Band Rs Rs. 328 Total Issue Size Rs. 11,500mn Fresh Issue Rs. 11,500mn Bidding Date 14 th Oct. 16 th Oct Kotak Mahindra Capital Company Ltd., Citigroup Global Markets India Pvt. Ltd., Book Running Lead Morgan Stanley India Manager Company Pvt. Ltd., Axis Capital Ltd., Edelweiss Financial Services Ltd. and YES Bank Ltd. Registrar Link Intime India Pvt. Ltd. Sector/Industry Promoters Tea & Coffee V. G. Siddhartha Pre - Issue Shareholding Pattern Promoters 63.3% Institutions 8.2% Non-Institution 28.5% Total 100% Retail Application Money at Higher Cut-Off Price per Lot Number of Shares per Lot 45 Application Money Rs. 14,760 Discount to Retail Investors 0% Coffee Day Public Cheque Payable to Issue Escrow Account - R Rajnath Yadav Equity Research Analyst ( ; Ext: 975) rajnath.yadav@choiceindia.com FY11 FY12 FY13 FY14 FY15 Q1 FY16 Total Operating Revenue 10, , , , , ,230.6 Total Operating Expenditure (8,920.8) (13,760.4) (17,999.1) (19,680.3) (21,041.8) (5,208.4) EBITDA 1, , , , , ,022.3 Depreciation Charge (980.9) (1,471.6) (2,026.4) (2,485.4) (2,655.0) (667.3) Finance Costs (918.2) (1,234.6) (2,103.7) (2,777.9) (3,262.3) (833.7) Other Income Reported PAT (214.0) (770.3) (872.3) (200.4) Restated EPS (Rs.) (1.0) (3.7) (4.2) (1.0) Restated BVPS (Rs.) EBITDA margin (%) 12.9% 12.1% 14.3% 13.9% 15.1% 16.4% Reported PAT Margin (%) 1.7% 1.2% -1.0% -3.4% -3.5% -3.2% RoE (%) 2.0% 1.8% -1.8% -7.0% -8.3% -2.0% RoCE (%) 1.1% 1.2% 2.3% 1.5% 2.2% 0.7% * Represents per share calculation based on number of shares o/s post issue; DRHP CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 1

2 Indian Cafe Market Overview: India primarily being a tea-drinking nation, had witnessed a low consumption of coffee (with an exception to the South India), with a per capita consumption of about 0.1kg per year as compared to the developed countries (with consumption of about 8kg per year). However, over the past few years with the increased consumer purchasing power coupled and favorable demographic positioning has led a higher acceptability of cafe culture. During the same period, to capture the increased demand and market share, the cafe market has witnessed an entry of new players and also aggressive expansion by established brands. The concentration of new cafe players has been primarily in the metropolitan cities due to the cosmopolitan culture and ease of back-end integration. Currently, there are approximately 100 cafe and bakery chain brands with an estimated 3,200 outlets spread across various cities in India. As on 31st Dec. 2014, with 1,472 outlets, Cafe Coffee Day (CCD) had a market share of 46% followed by Barista Coffee Company Ltd. (Barista) at 5%. Geographically, South India contributed 33% of the total number of chained outlets of all players operating in the cafe segment. Cafe outlet penetration or spread is low in the eastern region with CCD and Barista having just 9% of the total outlets. Market Share of Key Chained Brands by Number of Outlets in Chained Cafe Market in 2014 Geographical Spread of Key Brands in Chained Cafe Market by no. of stores (as of Dec end) 41% 46% East India West India North India South India 9% 22% 22% 24% 17% 36% 5% 33% 74% 27% 52% 49% 38% 1% 2% CCD Costa Coffee Dunkin Donuts Others 3% 2% Barista Starbucks Coffee Bean & Tea Leaf 45% Starbucks 17% Dunkin Donuts 28% 38% 17% 27% 9% 9% 7% CCD Barista Costa Coffee Coffee Bean & Tea Leaf Over the years, CCD has maintained its aggressive expansion drive, with 700 cafe outlets in FY08 to 1,472 outlets by the end of FY15, translating into a growth of 11.2% over the same period. Moreover, the company s products are competitively priced; this coupled with established brand positioning may assist in expansion in the penetration level and thereby the demand of its products. Growth of Cafe Brands in India (Number of Outlets) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 CCD ,020 1,100 1,286 1,454 1,568 1,472 Barista Costa Coffee Starbucks Dunkin Donuts Coffee Bean & Tea Leaf CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 2

3 Indian Cafe Market Overview (Contd ): Pricing of Cafes Products in India (as of Dec. 2014) Cappuccino Espresso Hot Chocolate Brownie Veg. Sandwich Starbucks Coffee CCD Barista Costa Coffee Coffee Bean & Tea Leaf Dunkin Donuts With higher rural population and preference of eating at home, the per capita spend on food services in India is lowest as compared to the other countries and thus it provides a good potential for growth. The size of the organized cafe market is estimated to be at around Rs. 67bn in 2014 and is projected to grow at a 15% CAGR over 2020 to Rs. 151bn. The chain cafe market is approximately 27% of the total organized cafe market at Rs. 18bn in 2014 and is estimated to be 36% of the total organized market by During the same period, the chained cafe market is estimated to grow at a CAGR of 20%. (Source: Company DRHP). Organized Cafe Market in India in E 2016E 2017E 2018E 2019E 2020E Licensed Standalone Market Chained Cafe Market CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 3

4 Company Introduction: (CDEL) the parent company of the Coffee Day Group, pioneered the coffee culture in the chained cafe format in India under the brand Cafe Coffee Day (CCD). The company first opened the CCD outlet in Bengaluru in 1996 and over the period till the end of June 2015, has expanded to a network of 1,538 cafe outlets spread across 219 cities. As of 31st Dec. 2014, CDEL had nearly four times larger cafe footprint than the cumulative footprint of the next four competitors with a market share of approximately 46% in India (source: Company DHRP) Coffee Business: The company is engaged into coffee business through its subsidiary, Coffee Day Global Ltd. (CDGL). In addition to having the largest chain of cafe s in India, CDEL is engaged into coffee trading and also operates a highly optimized and vertically integrated coffee business which ranges from procuring, processing and roasting of coffee beans to retailing of coffee products across various formats. As of June 2015 end, the company operated coffee business under various formats mentioned below: Non-Coffee Business: Apart from coffee business, CDEL through its subsidiaries has operations in other businesses, namely, development of IT- ITES technology parks, logistics (52.8% stake in Sical Logistics Ltd.; SLL), financial services (Way2Wealth Securities Pvt. Ltd.), hospitality (Coffee Day Hotels & Resorts Pvt. Ltd.) and ITITES (16.8% stake in Mindtree Ltd.; MTL). CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 4

5 Company Introduction (Contd.): Revenue Profile: The company operates or have invested in coffee and non-coffee businesses aimed at leveraging India s growth potential in coffee related businesses, IT-ITES technology parks, logistics, financial services, hospitality and IT-ITES sector through its subsidiaries. The following are the business revenue segments through which CDEL derives its revenue: Coffee and related business Leasing of commercial office space Hospitality services Financial services Integrated multimodal logistics Others Segmental Gross Revenue (as of Q1 FY16) 1.2% 26.1% 12.9% 53.9% 1.3% 4.7% Coffee and Related Business Leasing of Commercial Office Space Hospitality Services Financial Services Integrated Multimodal Logistics Others Competitive Strengths: Strong Home-Grown Brand: The company s flagship cafe network CCD has been the pioneer in establishing the coffee culture in the chained segment in India. CDEL s approach of developing a home grown brand CCD with control and ownership has enabled it to build an independent brand without any local or international franchisee concerns, such as royalty payments, restrictions on product offerings or geographical expansion, as compared to some of its competitors in India across the cafe or quick service restaurants segment. In addition, ownership allows the company to control all the operational aspects of the cafe operations, thereby ensuring better quality services with high quality food & beverage offerings, adhering to the international safety standards. This has led to the CCD brand being recognized among the top four most exciting brands and was also ranked the second most trusted brands in the food service retail category in India in Strong brand recognition enabled it to expand into other coffee related businesses, such as the vending machines business, fresh & ground (F&G) outlets and export business. Additionally, the promoter family has a history of operating coffee plantations for over a century, which assist it in developing a deep understanding of coffee business. CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 5

6 Competitive Strengths (Contd.): Wide Cafe Retail Network with Targeted Customer Segments: As of 30 th June 2015, the company s cafe network spans across 219 cities with 1,538 outlets in India. CDEL s cafe network is nearly four times larger than cumulative footprint of the next four competitors. As of 31 st Dec. 2014, in terms of the number of chained cafe outlets, the company had a market share of ~46%. Additionally, there are 561 Coffee Day Xpress Kiosks across 12 cities, 412 F&G outlets and 30,916 vending machines (serving corporate and institutional clients) across India. CDEL s cafe outlets and Coffee Day Xpress Kiosks are strategically located at multiple consumption points such as high streets, malls, petrol stations, highways & other high traffic areas and tourist attractions thereby providing it an access to a wider customer base. The company has developed a multiple format and branding strategy to differentiate addressable customer segments, such as CCD targeting value-conscious youth segment, F&G outlets targeting home and restaurant customers, corporate through the vending machine business. Vertically Integrated Business: CDEL has a highly optimized and vertically integrated coffee business, from procuring, processing and roasting of green coffee beans to the retailing of finished coffee products, and the export of green coffee beans. The green coffee beans are procured primarily through a network of 30 exclusive agents that have deep ties with the coffee plantation community, thereby, enabling it to monitor the quality of green coffee beans from the stage of procurement, to its curing and processing, and maintain the roasting standards at the highest level. Being in the heart of the coffee growing belt in Southern India, the company has developed a strong relationship and build a goodwill with most of the coffee planters in the region. CDEL operates two curing facilities, located at Hassan and Chikkamagaluru. It also owns and operates a manufacturing and assembling facility located in Bengaluru that manufactures the vending machines used at the cafe outlets & Coffee Day Xpress Kiosks and the corporate & institutional clients premises. In addition, the company operates two research centers through Coffee Lab and R&D Lab at Bengaluru and Chikkamagaluru, respectively, in order to create unique blends and to ideate and launch new and innovative products aimed at enhancing consumer experience and controlling operating costs. They have also set-up 10 distribution centers across the country that assemble the food products so that the delivery of products is streamlined, coordinated and controlled under frozen or chilled conditions. Thus a central procurement strategy provides it with better economies of scale, together with ensuring consistent quality and taste across all the cafe outlets. Growth Driven by Operational Expertise: The senior management team through their deep rooted understanding of coffee business has strong operational expertise. The company s strong and long-standing relationship with its vendors and landlords helps it to negotiate commercial terms that are advantageous to the company. The senior management is supported by a pan-india business development team that is responsible for identifying locations to set up new cafe outlets. Once a location is identified to set up a cafe outlet, it usually takes an average between 45 days to two months to set up and commence operations at such cafe outlet depending on size of the outlet and accessibility of the location. CDEL has a standardized approach with respect to design, ambience and outlay, which enables it to operate its cafe outlets and kiosks more effectively and efficiently, thereby allowing it to commence cafe operations on time, and within the pre-determined budget. The company s extensive knowledge and experience acquired over the past two decades in setting up cafe outlets enables it to achieve higher average sales per day per cafe across its cafe network in India. Over FY13-15, CDEL has witnessed 11% CAGR rise in average sales per day per café. Additionally, the company reported an increasing trend in same stores sales growth over the same period. CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 6

7 Competitive Strengths (Contd.): Average Sales per Day / per Cafe Same Stores Sales Growth (%) 14,000 13,000 13,198 13,387 10% 8% 8.4% 9.1% 12,000 11,927 6% 6.4% 11,000 10,720 4% 10,000 FY13 FY14 FY15 FY16 (YTD) 2% 3.1% FY13 FY14 FY15 FY16 (YTD) Track Record of Value Creation Through Non-Coffee Businesses: The company either operates and/ or has invested in select non-coffee businesses which aim at leveraging India s growth potential across various sectors. CDEL s non-coffee businesses include IT-ITES technology park development, logistics, financial services, hospitality and investments in IT- ITES companies, which provide a diverse revenue streams. As of 30 June, 2015, the company has 52.8% stake in its publicly listed subsidiary, SLL, which is one of the leading integrated logistics solution providers in India with over five decades of experience. Based on SLL s closing price on 12 th Oct. 2015, SLL had a MCAP of Rs mn. CDEL also hold investments in certain IT-ITES and other technology companies as an early investor. Based on MTL s closing price on 12 th Oct. 2015, MTL had a MCAP of Rs. 117,702.7mn, in which the company has a 16.8% equity holding. The expected growth of the Indian economy and associated strengths in IT-ITES, coupled with a growing middle class with an increased disposable income, will be one of the key drivers for future demand for its products and services offered by the non-coffee businesses. Bottom-line in Red, mainly due to Higher Financial Charge: On the back of growth across all the operating segments, CDEL has reported 24.7% CAGR growth in the top-line to Rs. 24,793.6mn over the period FY Major revenue contributor, the Coffee and Related Business segment (51.4% to the FY15 consolidated gross revenue), increased by 7.6% CAGR over FY11-15, primarily due to 7.6% CAGR growth in the cafe outlets. Revenue contribution from the Integrated Multimodal Logistics in FY15 stood at 33.2% as compared to nil in FY11. Total operating expenditure increased by 23.9% CAGR over FY11-15, however, as a percent of total operating income, total operating expenditure declined by around 220bps leading to an expansion in EBITDA margin, which stood at 15.1% in FY15. EBITDA increased by 29.8% CAGR to Rs. 3,751.8mn over FY With 20.6% CAGR rise in tangible asset, depreciation charge increased by 28.3% CAGR over FY During the same period, total debt almost doubled, leading to 37.3% CAGR in financial charge. As a result, the company reported pre-tax loss over FY On the positive side, 83.6% CAGR rise in profit from the associated companies, mainly lower the magnitude of the net loss on the consolidated level. Despite rise in debt equity ratio from 2.2 in FY11 to 3.4 in FY15, interest coverage ratio was flat over FY11-15 to ~0.3. Liquidity position remained tight during most of the period between FY Return on capital employed improved from 1.1% in FY11 to 2.2% in FY15. CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 7

8 Competitive Strengths (Contd.): Consolidated Financial Performance 25,000 20,000 15,000 10,000 5, % 22, , , % 15.1% 12.1% 14.3% 13.9% 15, % 15% 10% 5% 1.7% 1.2% 10, % 0% -3.4% -3.5% 6, % -5% FY11 FY12 FY13 FY14 FY15 Q1 FY16 Total Operating Income EBITDA Margin (%) Reported PAT Margin (%) % 1.8% 1.1% 1.2% 2.3% -1.8% 1.5% 2.2% -7.0% -8.3% 0.7% -2.0% FY11 FY12 FY13 FY14 FY15 Q1 FY16 Interest Coverage Ratio Current Ratio Debt Equity Ratio RoE (%) RoCE (%) 5% 0% -5% -10% Business Strategies: 1) Expanding the Existing Cafe Chain: Growth in the GDP, per capita income, demographic dynamics, rising urbanization, higher discretionary spending and out-of-home food consumption trends in India is likely to propel the future growth of coffee business in India. The organized cafe chain segment is projected to grow to Rs. 54bn in 2020 from Rs. 18bn in 2014, representing a growth of 20% CAGR. The first mover advantage, goodwill of the brand and existing platform, will enable the company to capitalize on the significant growth opportunity in the cafe and quick service restaurants business in India. CDEL is planning on expand its cafe network, primarily the CCD outlets, in high visibility and high traffic locations in Tier 1 and Tier 2 cities across India. In addition, the company also aims at selectively expanding the Coffee Day Xpress kiosks anticipating huge demand from corporate and institutional clients that prefer a smaller kiosk. CDEL plans to utilize a portion of net proceeds from the issue to open approximately 216 cafe network outlets and 105 Coffee Day Xpress kiosks during FY16 and FY17, respectively. 2) Increase Cafe Revenues by Generating Higher Footfalls and Driving Increased Consumption: The company will continue its strategy of disciplined expansion of its cafe network with a focus on generating higher footfalls per cafe and consequently, higher revenue per cafe. The pricing of its product offerings vis-à-vis some of its key competitors is significantly competitive, which provides the company ample scope to increase menu prices in-line with the customer discretionary spending sentiment. CDEL intends to improve its product-mix to drive greater consumption leading to higher average realization per bill. In addition, it also intends to continue focusing on tailoring the food menu to drive consumption at different points in time of the day, including at non-peak hours like early morning and lunch time, introducing smart combo options, etc. thereby better utilizing its cafe capacities. The company aims to enhance communication with its customers for conveying its value proposition quality food & beverages at affordable and competitive prices. It uses a variety of media to increase cafe traffic and enhance the brand image. CDEL also offer customer loyalty cards, seeking to encourage customers to increase the frequency of their visits to its cafe outlets. The company plans to expand the customer loyalty reward program to improve relationship with its customers and enhance its ability to respond to changes in customer preferences. CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 8

9 Business Strategies: 3) Leverage CCD and Coffee Day Brand to Capitalize on the Growth Opportunities in Coffee Vending and Coffee Retailing Business: The organized coffee vending market in India has been growing at around 32% since 2008, reaching sales of Rs. 19bn in 2014, and is projected to grow to Rs. 63bn in 2020, representing a growth of 22% CAGR. The organized coffee vending market share of bean to cup grew to approximately 26% in 2014 and is projected to reach 32% over 2020 with all forms of coffee vending services offered in India. CDEL intend to grow its vending business by introducing new variants of vending machines and leveraging its distribution network. Further, the company has recently entered into a joint venture agreement with an international company, through which it plans to supply of vending machines to worldwide customers. CDEL plans to drive sales at its F&G outlets that cater to household consumption by introducing additional blends and selectively opening new F&G outlets in new territories across India, where it realizes an increase in consumption of coffee. The company believe that its vending and F&G business would strongly benefits from the increasing proliferation of its cafe network, increasing strength of its Coffee Day and CCD brands, thereby providing it with an increasing pricing flexibility over the years. Citing the expected demand for vending machines, CDEL proposes to utilize a portion of net proceeds of the issue to manufacture and assemble 3,000 and 5,000 vending machines at its facility located at Bengaluru in FY16 and FY17, respectively. 4) Continue to Introduce New Products and Improve Existing Product Offerings in Order to Expand its Market Share: The company has developed a deep understanding of the Indian coffee retail sector through years of experience and dedicated market research on consumer trends and spending patterns. With this knowledge, it intends to continue to maintain its leading position through innovation and introduction of new product across the entire coffee related businesses, thereby providing new experiences to its customers and expanding its market share. CDEL recently launched a single coffee capsule machine Wake-Cup, which is being sold through its cafe network and is targeted for in-house consumption. The company also looks to roll out an e-commerce platform for its customers who prefer to shop online. CDEL also intends to set up a new manufacturing facility for producing instant coffee to capture the growing demand for instant coffee in India as well. The company also plans to increase its roasting capacity from 7,000 tonne to 14,000 tonne per annum in the FY16. CDEL intends to add an in-house tea packaging capacity to improve its operating margins, as currently it outsources tea packaging. CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 9

10 Key Risks and Concerns for the company: Poor Productivity of Existing and New Cafe and Other Outlets: CDEL tracks the productivity and performance of its cafe network outlets, Coffee Day Xpress kiosks and F&G outlets by using a variety of key performance indicators and metrics, such as average sales per day (ASPD) per cafe outlet and same stores sales growth (SSSG). In the past, both ASPD and SSSG witnessed increasing trend. Any unfavorable trend in these performance indicators will be negative for the company. Poor Pricing Power: CDEL s pricing policy is generally based on the cost of operation and raw materials and market analysis, including analysis of customer needs and its competitive position. The company s marketing department evaluates a reasonable price range in light of cost of sales required for a particular product. CDEL reviews its menu pricing across its cafe outlets from time to time, as determined by the market and the price fluctuations of raw materials. Historically, the company has been able to pass on increased raw material and operating costs to its customers in the form of increased menu prices. Inability to pass-on the rising cost of operations to its customers will negatively affect the performance of the company. Unexpected Rise in Cost of Raw Materials: CDEL procures a variety of raw materials for its coffee businesses such as coffee beans, tea bags, milk, food and other items. As a percent of total operating income, cost of raw material stood at 53.1%, 51.1%, 48% and 44.4%, respectively in FY13, FY14, FY15 and FY16 (YTD). The company in the past has experienced a great volatility in raw material cost. Any unexpected movement in the cost would impact the profitability of the company. Unfavorable Movement in Lease Rental Expenses: Most of the CDEL s cafe network outlets, F&G outlets and Coffee Day Xpress kiosks are set-up in leased premises. Typically, the company enters into a long-term lease arrangement, wherein the landlords and developers are locked-in for a minimum period of nine-years, while the company has the flexibility to terminate the lease with three months notice. The company s lease rental expense is generally affected by the availability of suitable locations. Thus unfavorable movement in the lease rental expenses would affect the profitability of the company. Peer Comparison: Taking into consideration the business operations of CDEL, there are no listed peers for the company in India. At the lower band of Rs. 316 per share, the company s share are available at a P/BVPS multiple of 6.2x, while at higher price band, it is available at 6.5x multiple. Similarly, at lower and higher price band, CDEL s shares are available at EV/EBITDA multiple of 24.8x and 25.5x, respectively. With the repayment or prepayment of loans, the company s total debt is likely to decline by 16.3% (as compared to debt level in Q1 FY16). Moreover, CDEL s debt-equity ratio is expected to remain at elevated level at 3.3:1 as compared to predebt level of 4:0 in Q1 FY16. The company is well placed to gain from the long term consumer story in India, but non essential diversification in non-operating activities, higher debt on books, insignificant RoCE and higher gestation period for cafe breakeven makes it a risky bet. Thus, we recommend investors to Avoid the issue. CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 10

11 Consolidated Financial Statements: Consolidated Profit and Loss Statement Particulars (Rs. mn) FY11 FY12 FY13 FY14 FY15 Q1 FY16 Total Revenue from Operations 10, , , , , ,230.6 Cost of Material Consumed (5,998.4) (6,124.3) (5,976.0) (5,893.4) (6,176.0) (1,515.0) Cost of Integrated Logistic Services 0.0 (3,088.7) (6,024.2) (6,891.1) (6,725.4) (1,200.3) Cost of Traded Commodities Sold (112.2) (473.6) (131.4) 0.0 Changes in Inventories of Finished Goods and Work-In-Progress (48.0) (79.6) (273.9) (129.6) Employee Benefits (923.8) (1,602.7) (2,045.1) (2,263.3) (2,541.7) (767.9) Other Expenses (2,193.2) (2,896.8) (3,762.0) (4,306.1) (5,193.4) (1,595.6) EBITDA 1, , , , , ,022.3 Depreciation and Amortisation Expense (980.9) (1,471.6) (2,026.4) (2,485.4) (2,655.0) (667.3) EBIT , Finance Costs (918.2) (1,234.6) (2,103.7) (2,777.9) (3,262.3) (833.7) Other Income EBT (128.0) (637.8) (1,415.9) (1,472.0) (359.6) Provision for Tax (82.9) (47.8) (101.1) 34.9 (122.8) (44.0) PAT 66.3 (175.8) (738.9) (1,381.0) (1,594.7) (403.6) Share in Profit / (Loss) of Associates MI 29.2 (26.9) (73.6) (137.1) (180.8) (22.0) Reported PAT (214.0) (770.3) (872.3) (200.4) DRHP Consolidated Balance Sheet Particulars (Rs. mn) FY11 FY12 FY13 FY14 FY15 Q1 FY16 Share Capital ,180.9 Reserves and Surplus 6, , , , , ,380.7 Minority Interest 2, , , , , ,139.8 Long-Term Borrowings 14, , , , , ,146.2 Deferred Tax Liabilities (Net) Other Long-Term Liabilities 1, , , , , ,030.1 Long-Term Provisions Short-Term Borrowings 5, , , , , ,596.1 Trade Payables , , , , ,640.3 Other Current Liabilities 2, , , , , ,811.4 Short-Term Provisions Total Liabilities 33, , , , , ,846.7 Goodwill on Consolidation , , , , ,977.0 Tangible Assets 9, , , , , ,400.4 Intangible Assets Capital Work in Progress , , , , ,290.1 Non-Current Investments 1, , , , , ,240.6 Deferred Tax Assets (Net) Long-Term Loans and Advances 5, , , , , ,658.9 Other Non-Current Assets 1, , , , ,234.1 Current Investments Inventories 1, , , , , ,100.8 Trade Receivables 1, , , , , ,902.5 Cash and Bank Balances 10, , , , , ,858.6 Short-Term Loans and Advances 1, , , , , ,988.8 Other Current Assets Total Assets 33, , , , , ,846.7 DRHP CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 11

12 Consolidated Financial Statements (Contd ): Cash Flow Statement Particulars (Rs. mn) FY11 FY12 FY13 FY14 FY15 Q1 FY16 PBT (128.0) (637.8) (1,415.9) (1,472.0) (359.6) Depreciation , , , , Dividend Income (1.3) (12.3) (21.5) (11.4) (4.6) (0.3) Interest Expense , , , , Interest Income (625.4) (601.7) (379.1) (328.1) (412.3) (87.6) Others (48.6) 23.5 (0.7) (255.8) Change in Working Capital (504.6) (24.5) Taxes Paid (228.4) (85.7) (466.3) (170.7) (209.8) (102.6) Cash Flow from Operating Activities 1, , , , , ,632.2 (Purchase) of Fixed Assets (2,978.8) (4,888.7) (5,123.3) (3,241.2) (3,400.7) (1,043.8) Proceeds from Sale of Fixed Assets Change in Investments (8,684.0) 5,330.7 (5,141.8) (721.7) (41.6) 1,005.7 Interest Received Dividends Received Cash Flow Operating Activities (11,047.1) 1,092.6 (9,819.9) (3,413.0) (2,534.9) Issue of Share Capital , , Proceeds from / (Redemption of) Preference Shares (712.3) Proceeds from / (Repayment of) Borrowings 1,524.3 (717.7) 7, , , ,370.7 Preference Dividend Paid (0.0) (138.4) (27.6) (28.9) Interest Paid (848.2) (1,306.8) (1,983.8) (2,724.2) (3,033.4) (785.1) Cash Flow from Financing Activities (2,129.9) 6, (122.4) Net Cash Flow (9,068.7) 1,364.8 (703.9) , ,702.5 Opening Balance of Cash and Bank Balances 9, , , , , ,630.3 Closing Balance of Cash and Bank Balances , , , , ,332.8 DRHP CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 12

13 Financial Statements (Contd ): Consolidated Financial Ratios Particulars (Rs. mn) FY11 FY12 FY13 FY14 FY15 Q1 FY16 Revenue Growth Rate (%) 52.8% 34.1% 8.9% 8.4% -74.9% EBIDTA Growth Rate (%) 43.0% 58.3% 6.5% 17.6% -72.8% EBIDTA Margin (%) 12.9% 12.1% 14.3% 13.9% 15.1% 16.4% EBIT Growth Rate (%) 22.9% 130.6% -27.4% 55.7% -67.6% EBIT Margin (%) 3.3% 2.7% 4.6% 3.1% 4.4% 5.7% Reported PAT Growth Rate (%) 10.2% % 259.9% 13.2% -77.0% Reported PAT Margin (%) 1.7% 1.2% -1.0% -3.4% -3.5% -3.2% Liquidity Ratios Current Ratio Quick Ratio Interest Coverage Ratio Debt to Equity Ratio Net Debt to EBITDA Net Debt to Equity Turnover Ratios Inventory Turnover Ratio Receivable Turnover Ratio Accounts Payable Turnover Ratio Fixed Asset Turnover Ratio Total Asset Turnover Ratio Working Capital Turnover Ratio Return Ratios RoE (%) 2.0% 1.8% -1.8% -7.0% -8.3% -2.0% RoA (%) 0.5% 0.4% -0.4% -1.4% -1.5% -0.3% RoCE (%) 1.1% 1.2% 2.3% 1.5% 2.2% 0.7% Per Share Data Restated EPS (1.0) (3.7) (4.2) (1.0) Restated BVPS Restated Cash EPS Restated Operatiing Cash Flow per Share * Represents per share calculation based on number of shares o/s post issue; DRHP CHOICE INSTITUTIONAL RESEARCH IPO UPDATE 13

14 IPO Update Choice s Rating Rationale The price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral. Institutional Equity Team Name Designation id Contact No. Ajay Kejriwal President ajay@choiceindia.com Sumeet Bagadia Head of Research sumeet.bagadia@choiceindia.com Amit Singh VP - Institutional Sales amit.singh@choiceindia.com Devendra Gaikwad Sr. Manager - Institutional Sales devendra.gaikwad@choiceindia.com Rajnath Yadav Research Analyst rajnath.yadav@choiceindia.com Satish Kumar Research Analyst satish.kumar@choiceindia.com Kunal Parmar Research Associate kunal.parmar@choiceindia.com es Ritesh Patel Research Associate ritesh.patel@choiceindia.com Amit Pathania Research Associate amit.pathania@choiceindia.com Vikas Chaudhari Research Associate vikas.chaudhari@choiceindia.com Trirashmi Ghoderao Research Advisor trirashmi.ghoderao@choiceindia.com Neeraj Yadav Research Advisor Neeraj.yadav@choiceindia.com Disclaimer This is solely for information of clients of Choice Broking and does not construe to be an investment advice. It is also not intended as an offer or solicitation for the purchase and sale of any financial instruments. Any action taken by you on the basis of the information contained herein is your responsibility alone and Choice Broking its subsidiaries or its employees or associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained in this recommendation, but Choice Broking or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this recommendation or any action taken on basis of this information. This report is based on the fundamental analysis with a view to forecast future price. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Choice Broking has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Choice Broking makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. The information and any disclosures provided herein are in summary form and have been prepared for informational purposes. The recommendations and suggested price levels are intended purely for stock market investment purposes. The recommendations are valid for the day of the report and will remain valid till the target period. The information and any disclosures provided herein may be considered confidential. Any use, distribution, modification, copying, forwarding or disclosure by any person is strictly prohibited. The information and any disclosures provided herein do not constitute a solicitation or offer to purchase or sell any security or other financial product or instrument. The current performance may be unaudited. Past performance does not guarantee future returns. There can be no assurance that investments will achieve any targeted rates of return, and there is no guarantee against the loss of your entire investment. POTENTIAL CONFLICT OF INTEREST DISCLOSURE (as on date of report) Disclosure of interest statement Analyst interest of the stock /Instrument(s): - No. Firm interest of the stock / Instrument (s): - No CHOICE INSTITUTIONAL RESEARCH RESEARCH Choice Equity Broking Pvt. Ltd. Choice House, Shree Shakambhari Corporate Park, Plt No: , J.B. Nagar, Andheri (East), Mumbai IPO UPDATE 14