May 28 (Bloomberg) -- Cafe Coffee Day has started talks with investment banks for a possible initial public offering of India’s biggest cafe chain in Mumbai next year, people with knowledge of the matter said.
The company, which is backed by KKR & Co., may seek a valuation of about $1 billion, according to three of the people, who asked not to be identified as the deliberations are confidential. It plans to file a draft prospectus with India’s market regulator later this year, two of the people said.
The offering may help Cafe Coffee Day extend its lead in India over rivals including Starbucks Corp., which opened its first store in the nation in October 2012 through a joint venture with Tata Group. Cafe Coffee Day has 1,650 outlets in the country, more than three times all its competitors combined, according to a September report from consultant Technopak Advisors Pvt.
KKR, the private-equity firm run by billionaires Henry Kravis and George Roberts, invested in Cafe Coffee Day’s holding company in 2010 together with Standard Chartered Plc’s private-equity unit and New York-based New Silk Route Partners, according to a KKR press release at the time.
The owners haven’t made a final decision on whether to list just the coffee chain or its parent company Amalgamated Bean Coffee Trading Co., which also owns coffee plantations and luxury resorts in India, three of the people said.
The S&P BSE Sensex has climbed to records as India’s strongest electoral mandate in 30 years puts new prime minister Narendra Modi in a position to pass measures to bolster Asia’s third-biggest economy. The benchmark gauge has risen 9.5 percent this month, poised for the biggest monthly rally since January 2012.
Increased confidence in the rupee has attracted $14.6 billion of inflows into local stocks and bonds this year. The rupee touched an 11-month high on May 23, after Modi’s Bharatiya Janata Party won 282 of 543 parliamentary seats in the world’s biggest-ever vote.
K. Ramakrishnan, president of marketing at the coffee chain, directed queries on financial matters to Chairman V. G. Siddhartha. Siddhartha’s office didn’t answer phone calls or reply to an e-mail seeking comment.
Amalgamated Bean sources coffee from 23,000 acres of plantations, and reported a loss of 47 million rupees from sales of 12 billion rupees ($203 million) in the year ended March 31 2013, according to most recent company filings. Retail sales, that includes revenue from the coffee chain, amounted to 8.1 billion rupees.
Cafe Coffee Day is the leader in India’s specialist coffee shop sector with a 65 percent market share, according to Euromonitor data. The market is likely to grow to 20 billion rupees ($339 million) in 2018, from 16.4 billion rupees at the end of last year, according to Euromonitor. The company’s outlets range from kiosks at corporate canteens to 1,500 square feet outlets stocking artisanal coffee for connoisseurs.
“The climate is quite ready for an IPO story to unfold across sectors, and Cafe Coffee Day is a known brand, and a good play in the consumption space,” Ankur Bisen, senior vice president for retail at Technopak.
Consultant Ernst & Young projects India’s middle class, comprising people earning between $10 to $100 a day, will grow to 200 million by 2020 from around 50 million last year.
Asia’s third-largest economy will hit its “sweet spot” -- a point when significant number of persons start earning over $10 a day -- in 2017, according to the E&Y report published in April 2013.
Cafe Coffee Day plans to add 350 outlets by the end of next year for a total of 2,000, Ramakrishnan said in a May 24 interview at the company’s headquarters in Bengaluru, the southern Indian city known formerly as Bangalore. At least 65 percent will be in high-street locations in the main residential and shopping districts in a city, he said.
Barista Lavazza, owned by Turin, Italy-based Lavazza SpA, was India’s second-largest coffee chain as of September, followed by London-based Costa Coffee, according to the Technopak report. Starbucks Corp., which opened its first outlet in October 2012, has 46 outlets.
The nation’s food service industry is projected to grow to $175 billion in 2018 from $100 billion last year, as rising disposable incomes and growing urbanization leads people to eat out more often, CLSA Asia-Pacific Markets, said in a July 2013 report.
Even as the potential for long-term growth remains, restaurants and fast-food chains have struggled with declining sales growth as an economy that’s growing at almost the slowest pace in a decade combined with rising cost of food has led consumers to eat out less. Local companies running the Dominos Pizza Inc. and McDonald’s Corp. franchisees have reported falling sales at existing stores and have introduced budget offerings to lure customers.
“There is definitely a tightness, and frequency is something that we’re noticing a small issue with,” Ramakrishnan said. “People who used to go to cafes 4 times a month, now they are going 3 or 3.5 times.”
The slowing growth has meant that food chains are keen to enter the coffee business, as coffee chains want to function like fast-food restaurants, Ramakrishnan said. Westlife Development Ltd., which runs McDonald’s Corp. restaurants in western and southern India, opened its first McCafe outlet last year and plans to have 150 locations within five years, vice chairman Amit Jatia said Feb. 24.
“The hunger guys want to come into leisure, and the leisure guys are wanting to go into hunger,” Ramakrishnan said. “ I think these lines will blur,” he said, referring to the distinction between restaurant chains and coffee shops.