Tale of 2 IPOs

Café Coffee Day underperforms; even as Indigo outperforms…

It was a classic tale of 2 IPOs. Both Café Coffee Day and Indigo had a great pedigree and profit track record. At Rs.1500 crore and Rs.3000 crore respectively, Café Coffee Day and Indigo were significant by any barometer. It is therefore, interesting to understand why Café Coffee Day is down over 15% from its issue price while Indigo is almost 30% up. What explains this radical divergence in performance by these two IPO offerings?

Competition is the key…

If there was one key difference between the two companies, it was the ability to dominate a fairly matured industry. To be fair to Café Coffee Day, the industry is still in its nascent stages and they have managed to become the largest Indian player in the instant coffee segment. Indigo, on the other hand, has emerged in the last 10 years as the largest and most profitable airline player. They already have more than 1/3rd of the airline market and are poised to take their share to 50%. The only other profitable airline in India, GoAir, is miniscule in comparison. This ability of Indigo to dominate a matured industry is one of the key reasons for its outperformance post listing.

For Café Coffee Day, the competition may have just begun. Remember, in India CCD is up against the formidable Starbucks, which is a world leader in instant coffee worldwide. Their tie-up with Tata Coffee in India gives them that extra edge to reach out through a respected brand platform. Imminent competition from Starbucks could be the big challenge for CCD.

No confusing models please…

That was the big drawback for Café Coffee Day. With a typical holding company structure, the investors were buying a lot of subsidiary businesses apart from instant coffee retailing. These include coffee trading, financial services, technology services, logistics business etc. This kind of a thinly spread business model tends to confuse investors and the market tends to value such companies at a discount to their industry averages.

Crude oil prices favored Indigo…

In the final analysis, it was the cheap price of global crude that favored Indigo. Low crude prices has meant low price of aviation turbine fuel (ATF). Since ATF accounts for the biggest chunk of an airline’s cost, it was a straight addition to the bottom-line. With crude likely to stay oversupplied and prices to remain depressed, it could be the beginning of a positive re-rating for airline companies. Café Coffee Day is up against rising costs, thinning margins and tough competition from a global behemoth. The IPO of Indigo was probably timed to perfection. And, that made all the difference! ©

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