“He who is quick to borrow is usually slow to pay”
This quote is perfect to start the evaluation for the company that we are discussing in today's blog- the one for which its debt structure added fuel to the fire. Ever since the subject of corporate finance has been added to enlighten scholars about financial soundness, it has elucidated 3 important decisions that every corporation has to take during its life cycle. There are 3 decisions that every financial manager has to take, Investment Decisions, Financing Decisions, and Dividend Decisions.
When we talk about Financial Decisions, one important aspect, one which probably matters the most is “Capital Structure Decision” – this involves the computation of an optimal mix of various sources of finance that ultimately maximize the value of the firm which is the ultimate goal of the finance manager.
Today, in this blog, we shall discuss the journey of a company that created the café landscape within India but failed miserably later because of its inadequate focus on financing decisions (capital structure decisions). Yes, you guessed the name correctly!
The company is Coffee Day Enterprises Ltd, popularly known as Café Coffee Day (CCD).
About the company
Coffee Day Enterprises is the parent company of the Coffee Day Group, which houses Cafe Coffee Day that pioneered the coffee culture in the chained cafe segment in India. The company opened its first Cafe Coffee Day outlet in Bengaluru in 1996 and had established the largest footprint of cafe outlets in India. As of 2011, it had a network of 1000 + cafe outlets spread across multiple Tier-1 and Tier-2 cities, which currently has reduced to 550 outlets operating in 165 cities under the established and recognized brand name “Cafe Coffee Day” (popularly referred to as “CCD”).
Most of us often believe that Coffee Day only deals in the segment of exporting coffee and its café business, but this is a half-truth. Their foray into diverse businesses is marked by the same passion with which they started Coffee Day Global Limited and their portfolio includes Technology Parks & SEZs, Logistics, Investments, Financial Services, and Hospitality. As of 31st March 2018, Coffee Day Enterprises Limited had 45 subsidiaries, 3 Associate Companies, and 3 Joint Ventures.
Fall of CCD and its promoter collapse
Shares of Coffee Day enterprises saw their worst day ever in their history on 30th July 2019 when share prices dropped 20% and hit the lower circuit limit, as well as a 52-week low of Rs 154.05 apiece on BSE. This happened after the company reported on Tuesday 30th July 2019, that its Managing Director VG Siddhartha has been missing for the past one day and that the company with the help of concerned authorities are tracing him. Later on, Wednesday 31st July 2019 his body was found by a local fisherman who informed the police.
VG Siddhartha left a letter allegedly wrote to the Coffee Day Enterprises board which said
“I have failed to create a profitable business model despite my best efforts. I would never cheat or mislead anybody intentionally; I have failed as an entrepreneur.”
High Debt Fiasco: Its ignorance created avoid
There were multiple reasons that accumulated together and created unsustainable chaos and pain for the promoter due to which he could not maintain his emotional balance. These were the same reasons why CCD could not maintain its financial well-being. Let us look at one such big reason in detail.
The image above depicts the borrowings that Café Coffee Enterprises had during the following years which seem very high. Not only this, but CCD was also ignorant towards the piling of this huge debt, they had a habit of renewing their older short-term borrowings rather than repaying them, hence they piled up like a pack of cards one over the other to be repaid in the future.
The above figures are standalone figures of Coffee Day Enterprises, the consolidated figures are worse. Moreover, there were lots of borrowings that were done by the promoter himself against a guarantee in his personal capacity which will never get reflected neither in standalone nor in the consolidated balance sheet of the company but was finally acknowledged himself by the promoter in his suicide letter.
VG Siddhartha was not only the culprit of huge borrowings but also for money laundering. He was using his multiple companies where he was the owner of a huge stakeholding. One such company was MACEL (Mysore Amalgamated Coffee Estates Limited) which in financial year 18-19 had an asset base of Rs 30 Cr with revenues of 4 Cr and accumulated losses of Rs 80 Cr, despite these figures this entity had borrowings of around 3840 Cr by Coffee Day Global.
Another company associated with VG Siddhartha and in limelight is Alpha Grep, a subsidiary of his brokerage and wealth management company, Way2Wealth, which is under investigation over the HFT (High-Frequency Trading) scandal at NSE since 2015.
All these aspects should have actually attracted much to this company, the auditor’s due diligence who kept them under alert by specifically reporting that they are only responsible for the audit of the parent company and not its other 45 subsidiaries but no one bothered to look back and have an extensive check over the debt of the company and other internal aspects until it was too late.
The above image depicts the fact that a share that was trading in the 260-300 zone lost 90% of its value to trade at 27.60 currently after the suicide of VG Siddhartha unfolded all the truths around its actual failure which were improper debt management and lack of control over financing decisions.
Drowning Man Catches the Straw
Cafe Coffee Day group is one of the splendid examples of brands that have learned their lessons the hard way. Their core business model still is its cash cow. Far too much diversification and the debt fiasco were the concerns that needed savage attention in order to remain competent and hold true to the commitments that they have made to its stakeholders. Thus, giving due consideration to all this, CCD has worked upon the elimination of debt from its capital structure.
According to its latest annual report, CDEL's net debt as of March 31, 2021, was Rs 1,731 crore as against Rs 2,910 crores in FY 2020. Alongside which the group has also appointed Justice Manjunath for the recovery of Rs 3535 crores that were morphed into MACEL (Mysore Amalgamated Coffee Estates Limited). Hopefully with lower debt in its balance sheet and with a focussed vision not diverging into unnecessary businesses CCD might get its golden days back.
“The only man who sticks closer to you in adversity than a friend is a creditor” thus companies should avoid high debt. Choosing debt to fund the capital structure without proper planning of its repayment poses a serious financial risk on a company’s financial health and viability because “Interest on debts grows without rain”.
Stay away from unnecessary debt! A small leak will sink the entire ship.
Happy Investing with Finology One!