FMA Project

Coffee Day Enterprises

Submitted To : Submitted By: Dr. Shikha Bhatia Anisha Chauhan (PGSF 1404)

Prasanjit Barua (PGSF 1436)

Sarthak Omer(PGSF 1443)

Supriya Singh (PGSF 1456)

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CONTENTS

EXECUTIVE SUMMARY ........................................................................................................................3

Coffee Day Enterprise .........................................................................................................................4

VALUATION CONSIDERATIONS/ASSUMPTIONS .....................................................................................5

VALUATION METHODOLOGY ...............................................................................................................7

VALUATION DETAILS ...........................................................................................................................8

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EXECUTIVE SUMMARY

The purpose of the project titled "Valuation of Coffee Day Enterprise " is driven

by the goal of examining if the theoretical price of Coffee Day Enterprise share is

undervalued, overvalued or equal to the market price. The method of the process in

the project is primary divided in financial statement analysis, ratio analysis and

valuation and recommendation.

In the financial statement analysis, Coffee Day Enterprise has not performed

strong. The financial statement analysis is characterized by finding financial value

drivers with the purpose of using them together with the non- financial drivers to

provide strong budgeting in the valuation. The valuation is done by the FCFE and

FCFF model, and the fair value comes out different as compared to the current

market price.

Seeing that the prices were different has resulted in a creation of different scenarios

which is done to analyze how changes in the cost of equity, cost of debt and the

risk free rate affects the share price through movements in WACC. The scenario

analysis showed that Coffee Day Enterprise share was strongly affected by changes

of the variables in WACC.

On 12 October, a day before the initial public offering (IPO) of Coffee Day

Enterprises (CDEL, also called CCD) was to open, brokerage Prabhudas Lilladher

(PL) had advised investors to avoid the stock, suggesting the issue price was on the

higher side.

They estimated the value per share of CCD at Rs265 which is a significant

discount to offer price band of Rs316-328/share. They believe that unproductive

investments, complicated organization structure and low throughput in the Café

business are a drag. They recommend investors to avoid the stock."

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Coffee Day Enterprise

Our story with coffee in India began in 1993 in 1996, ours was a new vision—one

where coffee was more than just a beverage. It was a cup that brought coffee

aficionados, budding coffee drinkers, and well, friends together over a cup of

freshly brewed coffee. Today, our subsidiary Coffee Day Global Limited has

established the largest footprint of café outlets in India-spread across more than

200 cities.

Our forays into diverse businesses are marked by the same passion with which we

started Coffee Day Global Limited. Our portfolio includes Technology Parks &

SEZs, Logistics, Investments, Financial Services and Hospitality.

We are where coffee is today, and where it’s going next. We bring coffee from the

bean to the cup. Over time we've developed the science of nurturing the yield, how

to roast it-to coax just the right flavour from it-and how to extract that flavour in

the brew. Yet, we do more than please the palate. In every bean, we see the

potential of each day ready to be released.

Coffee is our purpose. It inspires us because we can see the boundless possibilities

in the lives of our guests.

Mr. V G Siddhartha founded Coffee Day in 1993. The company is where it is

today because of the people who made it. Their vision and responsibility towards

making our community better are the driving forces behind this organization.

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VALUATION CONSIDERATIONS/ASSUMPTIONS

OVERVIEW

Our valuation engagement is based on relevant information made available by the

management of Coffee Day Enterprise limited industry related information

collected and analyzed by us. Our report is subject to ‘Assumptions and Limiting

Conditions’ included below in this report. The accompanying report presents the

data, assumptions, approaches and methodologies employed in developing our

recommended share price value.

VALUATION DATE

The valuation date is a specific point in time as of which the valuator’s opinion of

value applies. For this engagement, valuation date is till March 31st 2014.

ASSUMPTIONS AND LIMITING CONDITIONS

The assumptions and limiting conditions under which this engagement has been

performed form a crucial part of this valuation report. The assumptions and

limiting conditions that apply to current business valuation are listed below:

The conclusion of value arrived at herein is as of the date of the valuation

mentioned above. This valuation reflects facts and conditions existing or

reasonable foreseeable at the valuation date.

The company and its representatives warranted to us that the information

supplied to us was complete and accurate to the best of their knowledge and

that the financial information properly reflects the business conditions and

operating results for the respective periods in accordance with generally

accepted accounting principles.

Financial information of the company is included solely to assist in the

development of a value conclusion presented in this report and should not be

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used to obtain credit or for other purpose. Because of the limited purpose of

the information presented, it may be incomplete and contain departures from

generally accepted accounting principles.

We do not provide assurance on the achievability of the results forecasted by

the client because events and circumstances frequently do not occur as

expected; differences between actual and expected results may be material;

and achievement of the forecasted results is dependent on actions, plans, and

assumptions of management.

The conclusion of value arrived at herein is based on the assumption that the

current level of management expertise and effectiveness would continue to

be maintained.

Since the company’s management has not advised us otherwise, we have

assumed that there is full compliance with all applicable central, state, and

local laws and regulations.

Our compensation is not contingent on an action or event resulting from the

analysis, opinions, or conclusions in, or the use of, this report.

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VALUATION METHODOLOGY

We have valued the company using FCFE and FCFF and this section discusses

this technique in detail.

DISCOUNTED CASH FLOW (DCF) VALUATION

DCF is one of the most popular approaches employed having its roots in the time

value of money concept. DCF approach values a company by discounting the

future expected cash flows. For the purpose of this engagement, we have estimated

future cash flows based on ‘Free Cash Flows to Firm’ (FCFF) approach. The cash

flows for the projected period under FCFF are computed as under:

FCFF = Net Operating Profit After Tax

[+] Non cash expenses (including depreciation &amortization)

[+/-] Changes in working capital

[-] Capital expenditure

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VALUATION DETAILS

Tax Rate 34.0% Secured Loan 316.0% Interest on Secured Loan 8.9% MAT Rate 18.9%

Risk Free Rate

7% Beta

1.50

Equity Risk Premium

12% Cost of Equity

25%

Terminal Growth Rate

6%

DEPRICIATION SCHEDULE

Depreciation % for Gross Block 15% Depreciation % for New Offices 5% Depreciation % for Computer Peripherals 20%

FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

Addition in Fixed Assets

Addition in Gross Block (Fixed Asset)

6,789 2,417 1,092 6,380 8,283 7,336 9,571

Less: Depreciation Charged During the Year

1,018 362 164 957 1,242 1,100 1,436

Total Gross Block 5,771 2,054 928 5,423 7,040 6,236 8,136

Total Depreciation Charged Each

Year 1,018 362 164 957 1,242 1,100 1,436

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RATIO ANALYSIS

FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

Profitability Ratios

EBITDA Margins -5% -9% 6% 16% 22% 25%

EBIT Margins -3% -6% 10% 19% 24% 28%

Net Profit Margin -1% -3% 10% 17% 21% 24%

Return on Investment Ratios

Return on Assets (ROA) 41% 41% 61% 61% 60% 50%

Return on Invested Capital (RoIC) 299% 378% 555% 772% 1042% 1426%

Return on Stockholder's Equity (ROE)

300% 378% 555% 773% 1042% 1427%

Activity Ratios

Working Capital Turnover 3 3 1 1 2 2

Fixed Asset Turnover 1 1 1 1 1 1 Total asset Turnover 0 0 1 1 1 0

Liquidity Ratios

Current Ratio 0.72 1.19 0.89 0.70 0.53 0.51

Quick Ratio 0.38 0.53 0.50 0.45 0.38 0.39

Debt Ratios

Debt-to-Assets Ratio 45.52% 58.43% 76.71% 76.17% 73.30% 61.36%

Debt-to-Capital Ratio 367.9% 598.3% 773.2% 1054.4% 1370.2% 1902.7%

Debt-to-Equity Ratio 15066.9% 20966.1% 25625.5% 33327.3% 40947.5% 52638.3%

Due to high debt and very low Equity in the company, Debt -Equity

Ratio is too high.

The company is highly leverage.

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FAIR VALUATION DETAILS

Free cash flows to firm have been computed based on financial projections for the

period FY 2015 to FY 2018 as provided by the data.

FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18

Net Income (128) (638) (1,416) 3,157 8,221 13,327 19,427

Add:Depreciation 1,018 362 164 957 1,242 1,100 1,436

Add: Interest*(1-Tax Rate) 1,603 2,045 2,263 2,504 2,745 3,016 3,328

Less: Changes in working Capital (1,437) (9,068) 6,115 (3,887) (5,394) (10,499) (7,514)

Less: Capex 6,789 2,417 1,092 6,380 8,283 7,336 9,571

Free Cash Flow to the Firm(FCFF) (2,859) 8,421 (6,196) 4,124 9,319 20,606 22,132

Less: Interest*(1-tax rate) 1,603 2,045 2,263 2,504 2,745 3,016 3,328

Add: Net Borrowing 8,590 789 9,360 7,678 12,772 13,005 19,623

Free Cash Flow to the Equity (FCFE) 4,129 7,165 901 9,298 19,346 30,595 38,427

Terminal Value

2 3 4 5 6 7 8

Present Value of FCFE 1,648 1,907 180 1,485 2,575 3,490 3,836

Total Present Value of FCFE

Total No. of Equity Share

Value Per Share

Change in Working Capital 4,951 (4,117) 1,998 (1,888) (7,282) (17,781) (25,294)

Free Cash Flow of Firm is growing year by year.

Free Cash flow to Equity has growing but at a low rate due to less net

borrowing.

Value per share is 1152.58