Public party - Part 4

Then there is Teamlease, the Bangalore-based recruitment consultant, who is the leader (5% market share by employees) in the formal flexi-staffing industry. 

Its revenue has grown at 31% CAGR over FY11-15. The bottomline, too, turned the corner during this period. But the EBITDA margin stood at a poor 1.2% in FY15, with employee expenses eating into 97% of the revenue. Analysts though, estimate revenue growth of 26% CAGR over FY15-18.   

Margins, however, are unlikely to rise given the competitive, fragmented and low-entry-barrier nature of the sector. The seasonal nature of the segment is an added pain point as demand fluctuates with commercial activity and economic conditions. 

The stock at the issue price of Rs.850 got a valuation of 44x its FY15 earnings. On one-year forward basis (FY17 earnings), it is valued at 31x. Global peers like Adecco SA-REG and Randstad Holding NV, however, trade at 10x their estimated FY17 earnings. 

Aftertaste

And while in some cases investors are yet to wake up and smell the coffee, in some cases too many beans might have turned the cup bitter. Take Coffee Day Enterprises (CDEL), the holding company, with stakes in coffee and non-coffee businesses such as logistics, financial services, information technology and hospitality. It has sub-divisions in the coffee business, too, with cafés falling under Coffee Day Global (CDGL) and the trading business under CDEL and Coffee Day Trading. 

It is this complicated holding structure that is impacting the stock. While the company’s consolidated topline grew at a healthy 25% CAGR in FY11-15, it has been incurring losses for the past three years. In FY16, though, it flipped over, reporting a profit of Rs.18 crore, thanks to a number of initiatives. 

Coffee Day Global shut down unprofitable, small and poorly located stores in FY15. When it comes to cafés, the company has the largest footprint (over 1,600 stores in FY16) spread over 219 cities under the Café Coffee Day (CCD) brand and a market share of approximately 46%. 

While coffee and allied businesses (52% of sales in FY15) have been growing at a steady pace of 7.6%, the company is working on increasing its sales further. For FY16, CCD’s average sales per day per café was around Rs.13,000. It is looking to take this to Rs.20,000 over the next three years. With regards to vending machines, the management says they already control over 90% of the market. 

Cafés and vending sub-segments are both accretive for CDGL’s overall margins. Analysts estimate café segment’s gross margin in the high-60s and EBITDA margin in the 20s. For the vending segment, it is in the early-50s and mid-30s, respectively. 

Meanwhile, in Q4FY16, CDEL’s net revenues grew 21% YoY to Rs.870 crore, driven mainly by strong growth in the financial services and logistics segments, which rose 71% and 23% YoY. The company’s net sales are expected to grow at 12.5% CAGR over FY15-18, while operating margins are expected to improve 330 basis points to 18.4% during the same period.

At the upper price band of Rs.328, the company was valued at of 23.6x EV/EBITDA during its IPO. The enterprise value comprised of assumed market cap of Rs.6,756 crore and debt of Rs.4,496 crore. As per the EV on August 1, the stock is valued at 14.3x FY16 EV/EBITDA. 

For Coffee Day, capital misallocation, management focus and operational issues including inter-company/segment transactions are some of risks posed by the conglomerate structure. But to his credit, the promoter did not sell a single share in the IPO, unlike most others.