Mon 05/24/2021 07:23 AM
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Relevant Documents:
FY20 Annual Report
December 2020 Earnings Statement
Announcement Attaching Purported VG Siddhartha Letter
Synopsis: Independent Investigative Report

India’s largest coffee chain operator, Coffee Day Enterprises Ltd. (CDEL), faces potential bankruptcy proceedings, said two sources with knowledge.

The company has been trying to sell assets to pay down debt, but bank lenders are considering initiating a corporate insolvency resolution process (CIRP) under India’s Insolvency and Bankruptcy Code, after the company defaulted on INR 382 million ($5.1 million) interest payments as of March 31, on bank facilities and non-convertible debentures totalling INR 5.18 billion, said the sources. Continue reading for our Asia Core Credit team's reporting on Coffee Day Enterprises, and request a trial to access legal and financial analysis of hundreds of other performing, stressed and distressed credits in the region. 

The Bangalore-headquartered company, best known in India for its Cafe Coffee Day chain of coffee shops, generated 46% of its consolidated revenue (INR 1.23 billion) from the coffee retail and export business in the third fiscal quarter ended Dec. 31, 2020, and had INR 31.08 billion outstanding debt as of Sept. 30, 2020, according to a Feb. 9 earnings statement. CDEL’s market capitalization was INR 6.11 billion on May 18, 2021, down from INR 40.67 billion in July 2019, according to BSE Ltd. data.

According to sources, CDEL had been in talks with Tata Consumer Products Ltd., a unit of Tata Group to sell its vending machine business for INR 20 billion. The vending machine business is under CDEL’s wholly-owned subsidiary Coffee Day Global Ltd., and sold under the Cafe Coffee Day brand to corporates and hotels, according to CDEL’s annual report for the financial year ended March 31, 2020.

The deal has stalled as Covid-19 led restrictions have slowed sales, and Tata Consumer is only offering between INR 10 billion to INR 15 billion, the sources said.

In addition, the deal faces a further hurdle in that it requires no-objection certificates (NOC) from Coffee Day Global Ltd.’s lenders, and two of them - Yes Bank and Rabobank - have demanded repayment of their loans in return for releasing the NOC, local newspaper Mint reported in December 2020.

In terms of the financial snapshot, cash generated from operations as on March 31, 2020, was negative INR 5.53 billion against positive cash of INR 1.79 billion in the previous year, according to the FY20 annual report. Most of the group debt was secured by share pledges over the shares of its listed and unlisted subsidiaries and personal guarantees by the promoter, which restricted the company’s ability to borrow further, the same report shows.

CDEL and Yes Bank did not respond to requests for comment. Tata Consumer Product and Rabobank declined to comment.

Background to Financial Problems

According to a Nov. 29, 2018 report from rating agency ICRA, the group incurred high capital expenditure for its coffee, real estate, and logistics businesses, which was partly debt-funded leading to pressure on the capital structure.

CDEL also provided loans and advances to group entities and had in turn borrowed high levels of debt compared to its scale of operations, leading to high debt service obligations in the medium term,” the same report shows.

CDEL group debt was INR 72 billion in April 2019. However, proceeds from the sale of Mindtree shares in May 2019 helped reduce the debt, according to CDEL’s annual report for the financial year ended March 31, 2020, and total debt as of July 31, 2019, had fallen to INR 49.70 billion, according to an Aug. 17, 2019 company announcement.

In February 2019, (and following a dispute with the income tax department - see below), CDEL and its subsidiary, Coffee Day Trading Ltd., agreed a deal to sell its entire stake in global IT consulting and services company Mindtree Ltd. to Larsen & Toubro Ltd. The deal was concluded in May 2019, according to a presentation for the fiscal year ended March 31, 2019. Proceeds of INR 21 billion received after tax were used to reduce debt, the same presentation shows.

Founder’s Death

CDEL hit headlines in July 2019 following the reported suicide of founder V.G. Siddhartha.

Siddhartha’s death led to an over 70% decline in the share prices of CDEL and the listed group entity, Sical Logistics Ltd. between July and September 2019. Some lenders invoked share pledges over CDEL, which further impacted the financial flexibility of the group, ICRA detailed in a Sept. 10, 2019 report.

The rating agency in the same report downgraded CDEL’s rating to D from BB+, noting CDEL had delayed debt servicing for August, and that the Sical group of companies, part of the Coffee Day Group, has also delayed debt servicing. ICRA attributed the delays to the weakened liquidity position of the group following Siddhartha’s death, which had reduced financial flexibility and enhanced the group’s refinancing risks.

ICRA noted that the standalone entity and group had high repayment obligations in the near to medium term and was expected to face continued liquidity pressure. ICRA also noted statements in a purported letter from Siddhartha relating to financial transactions outside the knowledge of senior management, auditors and the company’s board.

Following Siddhartha’s death, the board initiated an independent inquiry, helmed by a retired deputy inspector general of the Central Bureau of Investigation (CBI), Ashok Kumar Malhotra, and a subsequent synopsis report dated July 24, 2020, noted outstanding debt of INR 35.35 billion owed to subsidiaries of CDEL as of July 31, 2019. The debt was owed by Mysore Amalgamated Coffee Estates Ltd. (MACEL), an “entity on the personal business side of Late V.G. Siddhartha”. MACEL was paid advances by subsidiary companies of CDEL, the report states.

The same report also noted that a “serious liquidity crunch” may have escalated due to the attachment of Mindtree Ltd. shares by the income tax department, citing financial statements during that period. The company used proceeds from the sale of Mindtree shares to reduce debt, according to the annual report.

However, the income tax department denied the allegations, adding that the Mindtree shares were attached to protect its ‘interests of revenue’, according to a Mint report on July 30, 2019.

The synopsis report notes debt levels of approximately INR 72 billion at March 31, 2019 had been brought down by around INR 40 billion as of the report date.

PE Investment

Prior to listing in 2015, CDEL had in 2010 attracted investment from NLS Mauritius, KKR Mauritius and Standard Chartered Private Equity, according to the company’s IPO prospectus. On the date of listing, top shareholders included Siddhartha with 37.41%, NLS with 13.11% and KKR with 12.77%, the prospectus shows.

The prospectus also shows that under a subscription agreement dated March 12, 2010, KKR subscribed for 500,000 shares for INR 884 million and 27,160,000 compulsorily convertible debentures (CCDs) of INR 100 each.

Via a board resolution dated Sep. 28, 2015, all the outstanding CCDs were converted to 17,826,912 equity shares, the prospectus notes. The prospectus further notes that the shareholders agreement “shall automatically terminate and cease to have any force and effect and be deemed to fall away on and from the date of listing of the Equity Shares on the Stock Exchanges”.

KKR Mauritius PE Investments II Ltd. currently holds a 6% equity stake in the company, while NLS Mauritius holds 10.61% stake, according to data from BSE Ltd.

Tax Attachment

In 2017, the income tax department conducted a search of CDEL premises and its subsidiaries for, according to reports, alleged tax irregularities worth INR 6.50 billion, according to the company’s annual report. The income tax department attached 2.2 million Mindtree shares owned by CDEL and 5.3 million shares held by Siddhartha, according to a Jan. 26, 2019, announcement. The shares were later released, according to a Feb. 14, 2019, announcement.

Continued Deleveraging

ICRA in its September 2019 report noted the deleveraging efforts of the Coffee Day group through asset sales and the timeliness and quantum of deleveraging through these efforts remains a sensitivity factor.

The company in 2020 divested its entire stake in Global Village Technology Park to Blackstone Group for a total consideration of INR 27 billion, according to a March 27, 2020, announcement. The company received INR 20 billion in a first tranche payment and repaid lenders to reduce its debt by INR 17 billion, according to a Feb. 6, 2020, announcement.

On Jan. 23, 2020, CDEL also entered into a definitive agreement to sell its wholly-owned subsidiary, Way2Wealth Securities Pvt. Ltd., including certain subsidiaries, to Shriram Ownership Trust, according to the annual report for financial year 2020.

Financials

CDEL’s revenue from operations for the quarter ended Dec. 31, 2020, dropped 51% year on year to INR 2.68 billion against INR 5.42 billion, recorded in the same quarter a year earlier, while for the first nine months of the financial year that ended Dec. 31, 2020, revenue from operations was INR 6.88 billion, down 66% year on year according to CDEL’s Feb. 9 earnings statement.

EBITDA for the quarter ended Dec. 31, 2020, gained 34% YoY to INR 430 million from INR 320 million in the same quarter last year, due to an exceptional gain of INR 155.1 million from the sale of the equity stake in subsidiary way2wealth Securities Pvt. Ltd. However, EBITDA for the first nine months of the fiscal year declined 97% YoY to INR 590 million.

The company reported a loss of INR 920 million in the third quarter ended Dec. 31, 2020, narrowing from INR 1.31 billion in the same quarter in the previous year. For the first nine months, the company reported a net loss of INR 3.22 billion, against a profit of INR 13.09 billion in the same period in the previous year.

CDEL’s capital structure is as below.




























































































































































































































Coffee Day Enterprises


03/31/2020

EBITDA Multiple

(INR in Millions)

Amount

Price

Mkt. Val.

Maturity

Rate

Yield

Book

Market


Debentures

3,020.0


3,020.0




Term Loans

8,553.2


8,553.2




Current Portion of Term Loans

7,638.4


7,638.4




LT Debt in Default

1,888.4


1,888.4




Loans Repayable on Demand

4,956.5


4,956.5




Total Secured Borrowings

26,056.5

26,056.5



LT Maturities of Finance Leases

3.0


3.0




Current Maturities of Finance Leases

11.3


11.3




Lease Liabilities

6,417.7


6,417.7




Total Lease Liabilities

6,432.0

6,432.0



LT Term Loans

776.2


776.2




Others

0.2


0.2




Total Unsecured Borrowings

776.4

776.4



Total Debt

33,264.9

33,264.9



Less: Cash and Equivalents

(926.1)

(926.1)

Net Debt

32,338.8

32,338.8



Plus: Market Capitalization

5,552.4

5,552.4

Enterprise Value

37,891.2

37,891.2



Operating Metrics

LTM Reorg EBITDA

(2,773.8)


Liquidity

Plus: Cash and Equivalents

926.1

Total Liquidity

926.1



 

-- Dipika Lalwani
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