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Is Coffee Days Brew Hot Enough To Invest Today

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Good morning! Do you begin your day with a cup of coffee?

Wondering why are we asking about coffee? Well, today we talk about one of the renowned coffee brands in India – Coffee Day Enterprises Ltd. (CDEL) famous for its brand Café Coffee Day. 

Last week, CDEL garnered everyone’s attention as the company’s share price soared ~70% in just 7 days. This was discussed across social and mainstream media.

Many connected it with the company’s massive debt reduction despite the pandemic. Some felt that it’s because of all the rumours surrounding a possible sale of CCD to Coca-Cola. 

Well no one really knows the reason behind a sudden surge in CDEL’s share price.  

V G Siddhartha introduces coffee culture

Founded in 1993, CDEL is a brainchild of late founder V G Siddhartha, the man who introduced coffee culture in India. He was born in 1960 to a coffee plantation owner Gangaiah Hegde in Chikkamagalur, Karnataka. His family has been in the coffee business for almost 130 years. In 1993, he purchased a coffee unit in Hasaan, and established Amalgamated Bean Company Trading. Two years later, it became India’s largest green coffee exporter. 

In 1996, he set up his first coffee outlet, naming it Café Coffee Day. The first CCD opened at Brigade Road in Bengaluru. Two decades later, the brand now operates more than 1000 outlets, making CCD country’s one of the largest retail coffee chain. It runs cafés in Austria, Malaysia and Egypt.

Moreover, the company had 49 subsidiaries. However, many of them were unrelated to CCD’s core business and were involved across real estate (Tanglin Development Ltd), logistics (Sical Logistics), hospitality and even stock broking & wealth advisory (Way2Wealth).

Beginning of the end

A difficult phase began in the CDEL founder’s in 2017. The coffee mogul found himself caught in the crosshairs of a tax evasion case. The Income Tax (IT) department raided twenty properties that belonged to him in Bengaluru, Chennai, and Mumbai. 

At the same time, his father slipped into coma. Amidst this, the Coca-Cola deal to buy Café Coffee Day fell through and he was very upset that the information was leaked to the press. The short term loan he needed to rescue his organization didn’t come through. 

In his last letter to shareholders, Siddhartha claimed that he was responsible for all the transactions in CDEL. In that letter, the CCD founder wrote that he could not “take any more pressure from one of the private equity partners forcing me to buy back shares, a transaction I had partially completed six months ago by borrowing a large sum of money from a friend”

In August 2019, Siddhartha was found dead. When he died, the company had a debt burden of over 7,000 crore. 

A glimmer of hope – V G Siddhartha’s wife takes charge

A year after Siddhartha’s demise, the CDEL’s board appointed his wife Malavika Hegade as the company’s Chief Executive Officer (CEO). 

The board did not want to appoint anyone from outside as the new CEO of the company. The company was contesting with several problems internally. There were concerns around the debt mountain, disinvestment plan of the Sical logistics and a deal worth Rs. 2,700 crore with Blackstone among others. 

An outsider would find it difficult to address these unresolved issues while looking after the day-to-day operations. Thus, the board decided to appoint Malavika who knew the company as well as its people. 

Look at financials and the shareholding pattern

 

The above graphs tell you there is no turnaround in the company. In fact, the revenues have been plunging since 2019. An exceptional jump in profits witnessed during the COVID-19 is a result of CDEL’s stake sale in Mindtree. 

No doubt the new CEO managed to bring down the debt significantly in the last two years. However, the money didn’t come from the business operations. CDEL offloaded its non-core businesses to pay off their creditors. It sold a tech park in Bangalore to a private equity firm Blackstone Group for Rs. 2,700 crore. The deal was completed in early 2020.  The stake sale in Mindtree brought in around Rs. 1,800 crores in 2019.

Moreover, CDEL’s shareholding pattern has not changed significantly over the past few quarters. Per the latest shareholding pattern, 81.55% stake is held by retail investors, FIIs have 3.56% share, the promoters hold 14.88% from which ~50% shares are pledged and the remaining 0.01% is held by others.

So what contributed to the recent CDEL’s share rally?

Well, even the company does not have an answer to it. As the share price surged, CDEL released a statement-

We hereby inform/confirm you that to the best of our knowledge that we do not have any events, information etc that have a bearing on the operation/performance of the company or any other price sensitive information. Therefore, the movement in price of shares of the Company is purely due to market conditions and absolutely market driven and the Management of the Company is in no way connected with any such movement in price of share.

It’s clear that nothing has changed for the company in the last two weeks.

Let us know what you think must have helped CDEL.


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