V G Siddhartha's financials stayed weak after selling his Mindtree stake

Promoter's pledge has been above 70% since December 2018

A complicated holding structure that depressed valuations, and the absence of coffee-stock euphoria seen elsewhere in the world weighed on a promoter group already laden with debt. A recent exit from the information technology segment hasn’t helped enough.

Coffee Day Enterprises has operations in logistics, financial services and office leasing. It hasn’t been able to get premium valuations despite almost 91 per cent of the stores it operated already having broken even, according to a recent earnings call.  

“There is a Chinese company which went public one week back… an 18-month-old company, $125 million revenue, $250 million losses last year and valuation is now at $5 billion,” said promoter V G Siddhartha’s in the last quarterly earnings call. 

He added, “So sir, I don’t know. I don’t know (if) I’m right or wrong. But people are going mad in the coffee business. I’m sure that we'll be build our coffee business, which will be very valuable to all of us.”

This was just two months before he went missing near the Nethravathi river. 

Luckin Coffee, the company he referred to, debuted in the United States in May valued at billions, and has risen further since then.

Meanwhile, Coffee Day shares fell 20 per cent after news of Siddhartha’s disappearance over debt and other concerns.

While the financials of Coffee Day Enterprises (CDE) improved with the sale of Mindtree shares to Larsen & Toubro in May, promoter V G Siddhartha’s pledged shares continue to remain high at 75 per cent of his stake in June.

Soon after the Mindtree sale, Siddhartha told analysts in a conference call that he reduced his personal debt by Rs 600 crore — he owned 3.33 per cent stake in the tech company in individual capacity — apart from reducing the debt of Coffee Day Enterprises.

The Mindtree transaction was concluded on May 3 and the proceeds, net of expenses, and taxes to the tune of Rs 2,100 crore were received. 

The amount was utilised to reduce debt by both CDE and Siddhartha, he said in a conference call with analysts on May 24. In value terms, the promoter stake in CDE stood at nearly Rs 3,500 crore in March 2018. It declined to Rs 2,600 crore in June 2019 even after the Mindtree sale.

CDE lost 20 per cent or Rs 813 crore of its market value on Tuesday on news of Siddhartha’s mysterious disappearance. This has resulted in promoters’ stake falling to Rs 1,750 crore.

The erosion in CDE stock price, which has fallen 44.4 per cent since January this year till July 30 will put pressure on Siddhartha’s personal finances, triggering margin calls on the promoter’s pledged shares. Siddhartha with 53.9 per cent stake in the company had also borrowed more by pledging his shares in CDE as collateral over the years.

CDE, which had seen a substantial rise in its net debt in FY19, will not see much change in its net liabilities despite the Mindtree sale compared with its financial position in March 2018.

According to a report by Maybank Kim Eng dated July 3, CDE’s net debt went up from Rs 2,323 crore reported on March 2018 to Rs 4,068 crore in March 2019. The brokerage expects net debt to fall to Rs 2,358 crore by fiscal ending March 2020.

CDE’s financial ratios show some strain. The company had raised around Rs 1,000 crore in October 2015 through a public issue and had a debt-to-equity ratio of 1.7 times at the end of FY16 which shot up to 2.6 times in FY19.

The current ratio, a measure of liquidity over the short-term, has been on the decline. It was at 1.43 in 2016. This has slipped in subsequent years. The latest March numbers show that it is at 1.01. This is a level at which current assets are just about enough to meet current liabilities.  

At 1.1 times in FY16, its interest coverage ratio was precarious with the company just about able to service its interest expense. This had improved to 1.6 times in FY18. But the FY19 numbers show a decline to 1.47 times.

Luckin Coffee announced a joint-venture to enter foreign markets, including India, on July 22.