coffee day

Coffee Day Enterprises operates in 6 segments: Coffee and related; Logistics; Financial services; Leasing of commercial office space; Hospitality services; and Investment operations. It operates Cafe Coffee Day chain across India. 

The total business had revenues of Rs.37 b in 2018, an increase of 21% over 2017. Revenues have been growing in double digits for the last 3 years, 2018 being the best year of growth. The financial services revenues were Rs.5.7 b and that of leasing were Rs.1.4 b. Investment operations were Rs.530 m. 

The company had book debt of Rs.50 b and operating lease debt of Rs.1.8 b in March 2018. Because it also operates in financial services business, I am not going to look at its operating profits. That will not be meaningful because for financial services, debt is like a raw material, and interest costs are part of its operations as opposed to other businesses.

Earnings for 2018 were Rs.1 b. But after adjustment for the exceptional item (sale of stake in Global Edge Software) of Rs.532 m, it is actually an increase of 13% over 2017. Earnings per share were Rs.2.51 excluding the exceptional item compared to Rs.2.28 of 2017. Return on equity is less than 5%. There aren't free cash flows generated by the business. 

But the stock is trading at Rs.291.75 implying over 100 times 2018 earnings. Who are its buyers? 

The company owned 28,056,012 shares in Mindtree representing 17.08% ownership as of December 2018.

Coffee Day Trading is a subsidiary of Coffee Day Enterprises. In March 2019, the news is that the company and its promoter have signed a definitive agreement to sell their entire stake (20.41%) to L&T for a consideration of Rs.32.69 b. The price per share works out to Rs.975; and the stock is currently trading at Rs.950. 

As per this report, the total investment in Mindtree was Rs.3.4 b: Rs.440 m in 1999 for 6.60% stake; Rs.850 m (5.57%) and Rs.400 m (2.05%) in 2011; Rs.1.71 b in 2012 (6.84%). 

If the transaction does go through, the company will have a cash flow of Rs.27 b, handy enough to reduce debt. And the promoter will reap over Rs.5 b.

Coffee Day came out with an IPO in October 2015 at Rs.328 per share, and the stock commenced listing in November 2015.

The stock is yet to recover from its IPO price. But the question is: Is the business worth Rs.62 b?