India’s Coming IPO Rush

By P.R. Sanjai, Swaraj Singh Dhanjal
Mint, New Delhi.


One is a young airline, founded in 2006, which has made a name as much for its service quality as its pure and simple low-cost model (essentially, it means charging for everything, but doing so with a smile).

The other is a pioneering coffee chain, founded in 1996 by a stock broker-turned-coffee entrepreneur, which has built scale in the notoriously difficult food retail business in India.

Both are market leaders.

Which is why the soon-to-be launched initial public offerings (IPOs) of InterGlobe Aviation Ltd, operator of IndiGo airline, and Coffee Day Enterprises Ltd (CDEL), which runs the Café Coffee Day chain, have set Indian markets buzzing.

There’s more. Their IPOs come amid a raft of IPO filings by companies such as Matrix Cellular (International) Services Ltd, which sells overseas SIM cards to Indians travelling abroad, RBL Bank (formerly Ratnakar Bank Ltd). And media reports claim airport operator GVK Power and Infrastructure Ltd, e-commerce retailer Infibeam and staffing company TeamLease Services Pvt. Ltd are considering share sales.

Many of these companies showcase a new India and India’s new economy.

Some reflect the new Indian consumption story.

Some highlight the services boom.

And at least a few–Indigo, Coffee Day, and TeamLease among them–are marquee names.

The IPOs come a year after a business-friendly Bharatiya Janata Party-led government took over in New Delhi, prompting expectations of an immediate surge in IPOs.

That wasn’t to be, largely because of regulatory uncertainties (especially regarding tax laws) that have dented investor confidence and concerns over the economy and the earnings of companies.

While some investors, including commodities trading guru and hedge fund manager Jim Rogers, have been scathing about the government–he said in an April interview that this government was long on talk and short on delivery–others, such as CLSA economist Rajeev Malik, have said the government is doing the right thing by focusing on the building blocks of an economic recovery.

InterGlobe and its existing investors plan to sell around 10% of its equity to raise around Rs.2,500 crore, the company said on Tuesday, 30 June, less than a week after Coffee Day Enterprises announced plans to raise Rs.1,150 crore, in share sales that could presage a revival of the IPO market.

In its filing to stock market regulator Securities and Exchange Board of India (Sebi), InterGlobe, founded by low-profile travel and aviation services entrepreneur Rahul Bhatia and Rakesh Gangwal, a former chief executive of US Airways, said it will issue fresh shares worth Rs.1,272.20 crore and that some existing shareholders will sell up to 30.146 million shares for around the same value.

The share sale will raise Rs.2,500 crore, making it the largest IPO by an Indian airline.

IndiGo president Aditya Ghosh confirmed that the airline had filed a prospectus, but did not divulge details.

IndiGo, also India’s largest no-frills airline, has been the only profitable Indian carrier for the past seven years, winning a reputation for its service quality and on-time performance in an industry laden under a mountain of debt and accumulated losses.

Kapil Kaul, chief executive officer (South Asia) at consulting firm Capa Centre for Aviation, said IndiGo’s IPO will help positively re-rate the airline industry and make way for one or two more airline IPOs.

“IndiGo’s IPO will be the first big listing after Jet Airways’ 2005 IPO. I expect IndiGo’s IPO to bring retail investors back to the airline sector. Airline IPOs since 1990s have hurt investors, especially small investors, significantly, and IndiGo’s IPO is expected to restore confidence,” Kaul said.

Jet Airways (India) Ltd, then India’s largest private airline, raised Rs.1,900 crore in its 2005 IPO. The carrier, which is part-owned by Etihad Airways PJSC, now has a market capitalization of $494 million, while SpiceJet Ltd is valued at $172 million.

IndiGo said in a statement that the proceeds from the sale of new shares would be used to retire some outstanding lease liabilities and fund the acquisition of aircraft and the purchase of ground support equipment.

According to its share sale prospectus, IndiGo will use Rs.1,165.66 crore to retire liabilities and acquire aircraft. It will spend Rs.33.36 crore for equipment acquisition.

Some existing investors will also cash out.

IndiGo’s net worth was Rs.953.46 crore as of 31 December 2014. IndiGo reported a net profit of Rs.720.8 crore for the nine months ended 31 December on a revenue of Rs.10,359.7 crore.

The bankers to the IndiGo issue are Citigroup Global Markets India Pvt. Ltd, JP Morgan India Pvt. Ltd and Morgan Stanley India Co. Pvt. Ltd. The other bankers to the issue are Barclays Bank Plc., Kotak Mahindra Capital Co. Ltd and UBS Securities India Pvt. Ltd.

On 26 June, Coffee Day, founded by V.G. Siddhartha, filed for its IPO.

CDEL plans to use the IPO proceeds to set up new outlets and kiosks, refurbish existing outlets, manufacture and assemble vending machines, and set up a new coffee roasting plant, along with a coffee and tea-packing facility.

A large portion of the funds raised will also go towards repayment of loans of the firm and its subsidiaries.

CDEL owns Coffee Day Global Ltd (formerly known as Amalgamated Bean Coffee Trading Co. Ltd), the company that runs the cafe chain. CDEL also owns Coffee Day Hotels and Resorts Pvt. Ltd, Global Technology Ventures Ltd and Tanglin Development Ltd.
The firm operates its coffee shops under three formats–Café Coffee Day, Café Coffee Day The Lounge and Café Coffee Day The Square.

Under the flagship format of Café Coffee Day, it operates 1,423 outlets across 209 cities in India and 16 international outlets across Austria, the Czech Republic and Malaysia.

According to Dhanraj Bhagat, partner at Grant Thornton India Llp, the consumer story remains strong in India given a huge middle-class population, changing lifestyles and an increase in the number of nuclear families.

However, he cautions that scalability remains a big challenge in the industry, especially in the food and beverage space. “To gain scale, you will have to open more outlets across different geographies. But when companies start doing that, then sometimes the business arithmetic starts to go wrong,” said Bhagat.

Companies have to be very nimble in their strategy, shutting outlets that are not doing well, so that the overall business doesn’t get dragged down because of a few bad stores, he said.

Also, over the years, competition in the café business has intensified, with international chains such as Starbucks Corp. and Coffee Bean and Tea Leaf entering the market.

“Competition also comes from very localized chains, which might be present in just one city but their brand is well established in that geography,” said Bhagat.

CDEL reported a consolidated revenue of Rs.1,808.6 crore for the period from 1 April to 31 December 2014 on a loss of Rs.75.2 crore. In fiscal 2014, the firm reported a revenue of Rs.2,352.7 crore on a loss of Rs.77 crore.

Kotak Mahindra Capital Co. Ltd, Morgan Stanley India Co. Pvt. Ltd, Citigroup Global Markets India Pvt. Ltd, Axis Capital Ltd, Yes Bank Ltd and Edelweiss Financial Services Ltd are managing the IPO.

The new share sales could spark a revival of the IPO market, which has seen seven companies raise a combined Rs.3,449.10 from the stock market, year-to-date.

Last week itself, apart from Coffee Day, which filed its final offer document with the Registrar of Companies, Matrix Cellular (International) Services Ltd, which sells overseas phone cards, and RBL Bank filed their draft offer documents with markets regulator Sebi.

Media reports have said GVK Power and Infrastructure could file documents for a share sale of around $250 million for its airport unit that runs the Bengaluru and Mumbai airports.

On Tuesday, 30 June, online shopping platform Infibeam filed with Sebi to raise an estimated Rs.450 crore through an IPO, becoming the first e-commerce firm to tap the IPO route, Press Trust of India news agency reported.

Both IndiGo and Coffee Day are very recognizable brands that cater to a large number of customers.

Still, some analysts are wary about the timing of the IPOs, which will also serve as a test of investor appetite for the Indian consumption story.

“If the markets correct sharply due to the Greece crisis as well as domestic political heat, it’s just not the IndiGo IPO, the other big-ticket IPOs, too, will get affected as the mood in the IPO market sentiment is directly dependent on the secondary market,” said Ambareesh Baliga, an independent market analyst.

“If the markets continue to hold, then, possibly, IndiGo could get a good response as it is dubbed the only highly profitable airline, but one needs to look at the fine print in the prospectus to understand how they are able to achieve what the other listed players have been unable to in the last so many years,” Baliga said.

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