 "Coffee Day Enterprises' prospects improve")
The Coffee Day Enterprises (CDEL) stock has surged 17 per cent in the past month, outpacing S&P BSE Sensex which grew two per cent in this period. A large part of this was driven by a 15 per cent rally in the stock on April 27 on account of a report by leading foreign brokerage Citi re-instating its positive view on the stock. However, even after this rise, the stock is trading below its listing price of Rs 313 apiece and provides an attractive entry point, say analysts.
“CDEL’s current stock price factors risks linked with the holding company structure and business model. Profitability is likely to improve as CDEL executes initiatives to raise sales after a phase of store rationalisation and business mix improvement,” writes Aditya Mathur of Citi in a report dated April 26.
This optimism is also reflected in overall street sentiment. According to Bloomberg consensus estimates, CDEL is likely to post a consolidated net profit of Rs 68 crore in financial year 2016-17 (FY17) as against a net loss of Rs 30 crore in FY16. This metric is likely to grow by 101 per cent in FY18 to Rs 138 crore. Lower interest cost on account of debt repayment is one factor that will boost earnings. Improvement in average sales per day per café due to new additions and healthy traction in the high margin coffee vending business are others.“CDEL’s current stock price factors risks linked with the holding company structure and business model. Profitability is likely to improve as CDEL executes initiatives to raise sales after a phase of store rationalisation and business mix improvement,” writes Aditya Mathur of Citi in a report dated April 26.
The coffee business, which forms a little over half of CDEL’s sum of the parts valuations (SOTP), will benefit from new café openings (100-105 per year) as well as new initiatives such as a mobile app that will enable promotions/ads and improve customer connect. The company plans to install about 5,000 to 5,500 coffee vending machines per year, aiding strong revenue and margin growth.
Amongst other businesses, Mindtree (24 per cent of SOTP) and technology parks (16 per cent of SOTP) continue to grow at a decent pace. CDEL’s logistics arm Sical (six per cent of SOTP) has also seen an uptick in new mining/integrated logistics contracts recently.
Any delay in ramping up average sales per day per café along with any negative surprise in non-coffee businesses are key downside risks. While the holding company structure carries its own risks, most analysts believe these are adequately captured at current levels.
Most analysts remain positive on the company and expect upside of about 18 per cent from current levels.