61
(^) Outlook BUSINESS / (^) 22 December 2017
CY17 RETURN 34%
net profit# 8 cr
FY 16 , its ASPD improved to # 15 , 200 in H 1 FY 18 from
10 , 000 - # 12 , 000 in H 1 FY 17.
Importantly, sales per store improved aft er the com-
pany revamped its menus, standardised store interi-
ors, rolled out combo meals, introduced WiFi, loyalty
cards and tapped into digital media for marketing.
The company is now attracting more youngsters to
its stores and as much as 46 % of its orders are placed
on its app. The move to launch desserts last year has
paid off and this year it is launching around-the-clock
menu, including breakfast options. These eff orts un-
derpin about a third of CCD’s revenue and earnings
forecasts for the next three years.
DIFFERENT FLAVOURS
Besides café, CCD has interests in technology parks,
offi ce leasing, logistics, fi nancial services, hospital-
ity and IT investments. The fi rm’s wholly-owned sub-
sidiary, Tanglin, develops and manages technology
parks and offers bespoke infrastructure facilities
mainly to IT-ITES enterprises. Tanglin has two tech-
nology parks: Global Village in Bengaluru which has
over 114 acres of land and Tech Bay in Mangaluru
with over 21 acres.
CCD has invested in IT-ITES and other technology
companies, which include Mindtree, a global tech-
nology consulting fi rm, where it holds 16 % stake. It
also holds 53 % in Sical Logistics and 86 % in Way-
2 Wealth Securities, a retail-focused investment
advisory company.
We expect consolidated revenue CAGR of 14 % and
operating profi t CAGR of 15 % for these businesses for
FY 16 - FY 19 , as most of these are self-sustaining and
won’t need additional capital. In our view, execu-
tion and steady earnings delivery could become ma-
jor catalysts. Coff ee and related businesses contrib-
ute 50 % to revenue and 25 % to EBIT. Another 25 %
comes from fi nancial services and CCD’s supply-chain
business. Of the balance, about 20 % is from the
leasing of commercial real estate.
A HOT CUPPA!
Our SOTP valuation pegs CDGL at # 256 a share,
that’s at a 55 % discount to Jubilant FoodWorks’
(Dominos) historical average of 33 x. CCD’s stock is
down 30 % from its issue price ( 2015 listing) along
with other prominent QSR companies, following con-
cerns over a slowdown in discretionary spending. We
think these fears have been more than discounted
and concerns over its conglomerate holding struc-
ture are overblown since the company is not using
cash fl ow of its retail coff ee business to fi nance other
businesses anymore.
Despite profi t at the operating level, CCD booked
net losses in the past owing to high interest and de-
preciation. But we predict an infl ection point in the
current fi scal, with increased contribution from high-
margin businesses such as vending machines ( 44 , 400
machines in H 1 FY 18 ) and higher revenue per store.
These are expected to add 134 bps to CDGL’s operat-
ing margin and increase it to over 17 % in the coming
years. In fact, its operating margin is already superi-
or to that of Jubilant FoodWorks. Higher revenue per
outlet, better operating profi t, better control of wor k-
ing capital and lower interest rates are expected to
aid free cash fl ow. We estimate that CCD’s cash from
coff ee operations will be suffi cient to fund # 150 crore
to # 200 crore of coff ee capex every year over FY 17 -
FY 19. Led by stronger operating performances, the
return on capital employed will improve from 4. 4 %
in FY 16 to 6. 4 %- 8 % in FY 18 - FY 19. Return on equity,
too, is expected to rise from 0. 6 % to 6 - 8. 4 % during
the same period. b
The author does not hold the stock in his personal capacity, but has
recommended it to clients of Maybank Kim Eng Securities
CCD’s average sales per day
is less than its peers as it has
chosen to operate largely in the
aff o rdable segment, with very few
stores in the premium category
ttm p/e (x) 61
roce 6.08%