Lessons for Retail Investors to be learnt from Cafe Coffee Day Financial Analysis

Introduction

In this article, we are going to discuss VG Siddhartha – Cafe Coffee Day Founder news and its analysis from a financial perspective. Lets also see the lessons to be learnt from the story for Retail Investors.

VG Siddhartha – Cafe Coffee Day Founder Story (Financial Angle)

VG Siddhartha CCD Founder Story from Financial Angle
Cafe Coffee Day Stock and Company Financial Analysis

Current news of VG Siddhartha

  • VG Siddhartha, popularly known as the Coffee King of India, left everyone baffled after he went missing from a river bridge near Mangaluru on Monday night, July 29, 2019.
  • You must have already read the news – The body of Cafe Coffee Day founder VG Siddhartha has been found by local fishermen in the Nethravathi river early wednesday morning, July 31.
  • The CCD owner reportedly wrote a letter to the CafĂ© Coffee Day family stating the reasons that drove him to take the extreme step.
    • In the letter, whose authenticity is under suspicion, the CCD promoter said that it was getting difficult for him to continue under the prevailing conditions and that the pressure had become too much on him.
    • He referred to Private Equity player that had forced him to buy back shares for which he had borrowed money from a friend.
    • He also alleged harassment at the hands of a former Income Tax official.

Business Outlook

  • Mr Siddhartha’s family has been in the coffee business for more than 130 years.
  • On taking it over, VG Siddhartha set up the Cafe Coffee Day chain in 1996 and also became one of the world’s biggest coffee traders, as well the as owner of Asia’s biggest coffee plantation.
  • He owned about 30,000 acres of plantations and his Amalgamated Bean Company (ABC) is India’s largest exporter of green coffee.
  • Cafe Coffee Day has more than 1,700 stores, mainly in India, but also in Malaysia, Egypt, Czech Republic and Austria. 
  • The IPO of Coffee Day Enterprises Ltd was launched in 2015 and the company was listed on BSE and NSE on November 2, 2015. The intensions behind IPO was mainly Raising the funds for :
    • Repayment of existing debts to reduce the debt pressure
    • Expansions and opening of new outlets
  • Siddhartha and his group firms held a 53.93% stake in the company, of which 75.70% was pledged as of June 30.

Coffee Day Enterprises’ Debt Ratio Analysis

  1. The company was having a total debt of Rs.6,328 Cr and the total funds raised through IPO was Rs.1,150 Cr which can be used for repayment of debts.
    • The company was raising funds through short-term debts, launching commercial papers and continue to for their successive renewals. So there were no proper plans for repayment of debts.
    • As on March 2019, the company’s total revenue was Rs.4,264 Cr. and net profit was almost Rs.143 Cr. It means profitability of the business was also going well.
    • However, even after 4 years, Cafe Coffee Day had total borrowings of Rs 6,547 Cr as of March 31, 2019, up 30% from the previous financial year.
  2. In between, VG Siddhartha had sold his stake in mindtree the details of which will be released in June 2019 results.
  3. Debt to Equity :
    • D/E ratio of the company is 2.59. It means for every Rs.100 raised through equity, the promoters have raised a debt of Rs.259.
    • Thus, D/E ratio of the company is far more than 1, which is not a poistive sign for the company.
  4. Interest Coverage Ratio :
    • Whenever D/E ratio is more than 1, we should analyse company’s interest coverage ratio. In general, interest coverage ratio of the company should be kept above 2.5, but it is having ratio 1.25 which is too lower than the allowable limit.
    • Because interest coverage ratio below 2.5 states that the company is paying only interest payment part and not in a position to repay the principal repayment from its operating profits or EBITDA.
    • We should keep a track of company’s interest coverage ratio trend, whether it is increasing or going down in successive quarters. In case of Coffee Day Enterprises, interest coverage ratio was consistently going down Q-o-Q, which signalled the rising debt pressure for the company.

Liquidity Crunch after NBFC crisis

  • After IL&FS crisis, fund raising had become a tough process. CCD is severely affected by the slowdown in the economy and liquidity crunch after NBFC crisis.
  • In addition to it, VG Siddhartha’s offices were raided by income tax officers in September 2017. All these reasons invited a big trouble for CCD for raising new funds from lenders.
  • Key Lenders : VG Siddhartha had borrowed from Aditya Birla Finance, Kotak Mahindra Bank, AK Capital, STCI Finance, APAC, RBL Bank and SSG Asia against pledged shares of the listed firm.  Apart from NBFCs, banks like Axis Bank, Yes Bank and RBL Bank is having exposures to Coffee Day Enterprises.
  • For liquidity problems reason, VG Siddhartha was in a great need of cash and thus sold his stake in Mindtree to L&T for around Rs.2,100 Cr. Details of the deal will be included in company’s June 2019 results.
  • After income tax raid, many private equity investors have shown disinterest for the company and ask regarding the buyback of their shares. So VG Siddhartha was carrying a lot of pressure of buyback of shares.
  • The Coffee Day enterprises Ltd stock has fallen 20-30 percent in successive 2 sessions 29 and 30 July.
  • Though having Rs.12,000 Cr worth assets with VG Siddhartha, the debt repayment of worth Rs.6,547 Cr could not be managed due to failure in creating liquidity. VG Siddhartha set an Asset-rich but poor-liquidity example. He owned about 30,000 acres of coffee plantations. If almost 70-80 percent of the working capital is going into the assets like real estate investment then it is a matter of liquidity concern for the company.
  • The business should execute and follow the asset light model like RIL in case of Reliance Jio. The working capital should be managed by properly so as to retain sufficient liquidity with the company.

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