SBUX Starbucks Corporation

   By Kenan Machado 
 

MUMBAI--The firm behind India's largest coffee chain, Coffee Day Enterprises Ltd., is seeking to raise 11.5 billion rupees ($176.53 million) in an initial public offering as it seeks to fend off local competition from global brands such as Starbucks Corp. (SBUX).

If successful, the IPO would be India's largest this year, according to data from Dealogic.

The operator of India's ubiquitous Cafe Coffee Day stores is seeking to build its war chest to take on Starbucks as well as India's Barista Coffee Co., U.S.-based International Coffee & Tea LLC., operator of The Coffee Bean & Tea Leaf chain of stores and Australia's Gloria Jean's Coffees International Pty Ltd. in the South Asian country.

Foreign chains, with slick stores and a focus on premium quality, have sought to wean India's high-coffee spenders from Coffee Day, leaving it with college students and young executives who spend less money but more time occupying its cafes' premises. India's cafe market is worth 67 billion rupees and is projected to grow to 151 billion rupees by 2020, according to data from retail consultancy Technopak and cited by Coffee Day.

Coffee Day intends to sell its shares for between 316 rupees to 328 rupees each, starting Oct. 14. It will spend about 1.48 billion rupees from the IPO proceeds to set up new outlets and refurbish existing ones. Another 6.33 billion rupees will be spent on repaying debt. It will also use the funds to manufacture its coffee grinding and dispensing machines which are placed at corporate offices.

Coffee Day pioneered coffee consumption in organized retail in the predominantly tea-drinking Indian market, setting up its first outlet in 1996. Now it faces stiff competition from global chains riding on their international brand recognition.

In metro cities like Mumbai, where real-estate costs can be as high as 45% of store revenue, Coffee Day chose to open small outlets to keep costs low, its founder V G Siddhartha told reporters. But ahead of the IPO, the company closed as many as 156 outlets for reasons varying from a lack of toilets to mass-rapid transport system construction work blocking access to stores, he said.

The Indian coffee producer and retailer will now spend money sprucing up existing outlets and opening larger cafes, Mr. Siddhartha said. Coffee Day currently owns and operates 1,538 stores in India across 219 cities, four times the size of all its competition in organized retail combined, he said.

Despite its size and a 16% compound annual growth rate in coffee revenue, the going hasn't been easy for Coffee Day.

It posted a net loss of 309.99 million rupees for the April to June period on a standalone basis, with net loss for the 2015 financial year that ended March widening to 1.27 billion rupees from 796.78 million rupees a year earlier, its prospectus showed. In 2013 and 2012 it posted a net loss of 738.02 million rupees and 147.29 million rupees respectively. Net profit for the financial year of 2011 stood at 29.61 million rupees.

Local competitor Tata Starbucks Pvt. Ltd., the equal Indian venture between Starbucks and Tata Global Beverages Ltd., a unit of India's Tata conglomerate, has rapidly expanded its presence in India to 76 stores across six cities since entering the country in October 2012. Barista, which started operations in 2000, has 169 outlets including 25 franchised outlets.

In 2009, Coffee Day tested the premium coffee outlet market with Square, outlets with an average size of 1,800 square feet, a turn from the typical 800-square feet cosy and basic Cafe Coffee Day stores catering to college students and young couples. In mid-2010, it launched another group of premium outlets, Lounge, which have an average size of 1,200 square feet and a kitchen counter serving international cuisine. It now operates 42 Lounge outlets across seven cities and seven Square outlets across four cities, directly competing with Starbucks and Barista.

--Write to Kenan Machado at kenan.machado@wsj.com

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(END) Dow Jones Newswires

October 07, 2015 09:21 ET (13:21 GMT)

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