Question mark on CCD's relatively high debt since March

Shares of Coffee Day Enterprises fell 20 percent for second straight day on Wednesday, falling to an all-time low, after owner V.G. Siddhartha’s body was recovered from Netravati river in Mangaluru.

But for the stock, the troubles began much earlier. Since 18 March, when the company announced the deal to sell its stake in Mindtree Ltd, Coffee Day shares have been falling at a rapid pace. Including Tuesday’s fall, the shares have more than halved since the announcement of the Mindtree deal.

At first glance, this is odd. The Mindtree deal was supposed to be a lifesaver, since it brought in net cash of Rs 2,100 crore to the company after paying taxes and expenses related to the deal. Coffee Day’s consolidated net debt stood at Rs 3,750 crore at the end of the December quarter, which means the sale proceeds would knock off over half of the company’s net debt.

But as the drop in the stock since mid-March shows, investors had their doubts.

In May, when Coffee Day held a conference call with analysts to discuss March quarter results, it was inundated with questions about the actual reduction in debt post the Mindtree deal. The company said net debt had reduced to Rs 2,400 crore. This seemed at odds with the net inflow of Rs2,100 crore and the existing debt of Rs 3,750 crore.

The company’s explanation was that promoter debt worth Rs 600 crore was transferred to the company in connection with the Mindtree deal at the end of March, which was later settled in May. Due to this, the debt numbers aren’t exactly comparable, it pointed out in the call.

"Coffee Day’s explanations were hardly convincing, and we sold our holdings soon after the call," said a private investor who attended the call, on condition of anonymity.

"One could not also bridge the sudden increase in debt in the March quarter with the increase in assets. Gross block did not increase much; loans given out increased sharply. As such, we felt there were signs of a debt spiral in the March quarter results," added the investor.

There were also question marks on the relatively high debt as well as unusually high cash held by the company’s realty subsidiaries.
"What is the reason for holding cash—so much cash in Tanglin Retail?" asked an analyst. Siddhartha’s reply to this was that the company had planned sizeable capital expenditure.

But the questions about debt continued and the answers were evidently not convincing, as the movement in the stock shows. The Coffee Day stock had fallen 24 percent since the conference call, even before accounting for Tuesday’s sharp drop.

As the chart alongside shows, Coffee Day’s gross debt rose sharply to over Rs 6,500 crore at the end of the March quarter, compared to Rs 4,400 crore six months earlier. Besides, pledges of promoter shares have been at extremely high levels as well, all of which appears to have resulted in a dangerous combination.