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Stock Analysis: Deep discount or Trap for retail investors? - YouTube
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Hi everyone.
Welcome to today's Video.
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So on today's video I'm going to have
a discussion about
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Cafe Coffee Day Enterprise and what was
the reason why this stock has fallen
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by 85% approximately and whether or not is
this a great buying opportunity fee or is
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it simply a value trap
for retail investors?
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So we are going to do a complete analysis
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and please watch the video
till the very end.
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Please don't understand half the things
and jump into buying this stock very
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important message and also this is not
a buying and selling recommendation.
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Now before I jump into the nitty gritty
of today's video, a very quick shout out
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to our sponsors which is KuKu FM they're
a fabulous audio learning platform.
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You can go and listen
to several audiobooks.
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I'm currently listening to a show which is
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she built the PepsiCo Empire.
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So I'm linking a few things that I'm
listening to KuKu FM in the description
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available a very special offer from them.
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So let's get the videos started.
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And there are three specific parts.
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First and foremost,
I will help you understand what was
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the reason for the fall
of Coffee Day Enterprises.
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The listed company name is
Coffee Day Enterprises.
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Whenever I say Coffee Coffee Day it
simply means Coffee Day Enterprises.
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Ccd is the business name and Coffee Day
Enterprises is the listed company's name.
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Second, what is the specific reason as
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to why the stock is gaining
so much prominence right now?
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Should we believe all these narratives
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and start jumping and taking
positions in this stock?
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Third and finally,
I will tell you that how you should be
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taking positions in this stock
in case you are interested.
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So let's get the analysis started.
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So first let me take you
to Coffee Day Enterprises.
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Talk and help you understand
how they are making money.
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So you will see a bunch of different
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segmentation and what you would
predominantly see is that the majority
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of its revenues are coming
from this and this.
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Right?
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So CCD, Cafe Coffee Day and the listed
name is Coffee Day Enterprises.
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There are two major business lines.
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The first is the coffee business,
coffee plus food business.
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Right.
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So when you go to CCD you drink coffee
and you also order something to eat.
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So they are making roughly 36.
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37% of money from there, right?
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They also have coffee,
vending machines, etc.
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which can be lumped
into this business stream.
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The second major business stream
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for Coffee Day Enterprises is
the integrated logistics devices segment.
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Now what does this exactly mean?
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Let me depict that through an example
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by taking you to one of the companies
that was managed by Cafe Coffee Day.
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So here is a very quick outlook about
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the logistics arm that Cafe Coffee Day
manages or used to manage.
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So let me first and foremost take
you to a very old article about Mr.
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Viji Sidhata,
who unfortunately passed away.
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He used to run Cafe coffee day's business
and back in 2010, he acquired a logistics
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business called as
Secal Logistics Limited.
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So let us very quickly check what
SICAL Logistics actually does.
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So you can see from the website
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of Secal Logistics that they are providing
infrastructure solutions, for example,
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mining and transportation,
integrated logistics.
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So what do they precisely
do in integrated logistics?
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So they do a bunch of different,
different things.
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For example, these are some
of the key projects business coping.
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They are working with NTPL.
And what are they doing?
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This is a contract,
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five year contract for end to end
logistics for miners to power plant.
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Now, this has got nothing
to do with coffee business.
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But this is a very important point about
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the coffee day enterprises or CCD,
that they are just not into selling
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coffees or they were not
just into selling coffees.
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They were also in logistics play and they
were making a large chunk of money.
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So I'll display that split again for you.
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43% of their money was coming
from integrated logistics play.
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Now, with this clarity,
let us start analyzing as to what were
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some of the prominent
reasons why the firm fell.
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I will put up the chart again.
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This is what the chart used to look like.
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That back in 2015,16,17, the stock
price was trading at roughly rs350.
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Now, right now it is
trading at roughly Rs50.
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So much wealth has been eroded.
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What were some of the primary
reasons for this?
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So there are three specific
reasons that I could figure out.
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The first and foremost reason is
that the company tried to grow really fast
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and it was on a path
of unsustainable growth.
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Now, what do I mean by this?
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Now, there are primarily two
ways of growing a business.
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The first way is called as an organic way.
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So let's assume that I'm making T shirts.
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Now, I am selling these T shirts for,
let's say RS100 and all my marketing,
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production, manufacturing,
sourcing, everything included.
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It takes me only Rs30
to manufacture this Tshirt.
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So what is my profit on every
T shirt that I'm selling?
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I am making Rs70.
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Now this becomes my business profit.
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Now, if I'm selling 1000 T shirts,
so 1000 multiplied by 70.
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So I'm making Rs70,000 as profits.
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Now, if I'm able to maintain that sales,
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I will keep on reinvesting
that profit into my company.
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So I will reinvest this.
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And from a small firm,
I will become a big firm.
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Right?
So this in very simple terms is called as
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organic growth that I'm selling
a very profitable product.
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I'm picking up that money and I'm
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reinvesting into my company
and my company is growing.
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So this is a very organic
way of growing a company.
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The second method is called
as an inorganic method.
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So here what I'm doing is that I'm
borrowing a lot of money from people
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and I'm opening stores after stores
and I'm just expanding my sales and I'm
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undertaking a bunch of business
expansion on borrowed money.
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So that is a very dangerous game that CCD
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played, which eventually
led to its downfall.
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So this is a new flipping
that I was able to find.
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And if you take a look at this,
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what you will see is the Cafe Coffee Day
back in 2018, 2019 nine.
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It used to have 1752
outlets, 1752 outlets.
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During that time, something like Barista
had 200, Mc Cafe at 190,
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Starbucks had close to 150
and Costa Coffee used to have 50 outlets.
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So this can only mean two things.
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One, that Cafe Coffee Day thought that,
you know what, we are going to literally
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monopolize the coffee business and a bunch
of other businesses that we are running.
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We were just so far ahead in the race
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in terms of how much
the business had expanded.
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But there is a massive problem
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with the story and this can be
analyzed from the sales number.
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For example,
if you take a look at the sales from 718
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crores, it went all the way up
to approximately 4100 crores in revenues.
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But if you take a look at the profits,
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the profits are not growing
at a massive scale.
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Despite selling products in the scale
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of 4100 crores, they only
had profits of roughly 106.
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And in majority of the previous years,
this net profit was still negative.
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So essentially the company was
on a path of inorganic growth.
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So this was a major problem for it.
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Now which brings us to the second thought
process of Cafe Coffee Day management.
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They thought, you know what,
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if we keep on playing this Empire building
game, Empire building game simply means
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that you keep on borrowing money
and keep building your business Empire.
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If you keep on doing it at one scale,
you will become so big,
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so big that you will be able to go
and acquire other companies.
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But that is where the twist
in the story happened.
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Which brings us to the second
reason of the downfall.
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Now, in order to build this Empire of 1000
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stores, CCD had to raise a lot
of money, a lot of money.
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And it executed almost
every option it had.
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In order to get this money,
they executed debt financing.
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So debt financing simply means
that you go and borrow money.
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The second option is
that dilute your equity.
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So equity financing simply means
that you are selling your own company.
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The promoters are selling their own shares
in order to raise money for their firm.
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So they were taking more debt also
from the market, which means that they
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were going and borrowing
money from external debtors.
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And at the same time the promoters
are diluting their own holdings.
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I'm not trying to say that this
was done with Malintent.
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All I'm simply trying to say is
that sometimes what happens is that if you
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are trying to build your business,
you might dilute a lot of your equity.
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For example, if I own 100% of a business,
I can make whatever decisions I like.
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But if I have sold 70, 80,
90% of my business and I'm only 10-15.
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20% holder of that business,
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then I have to seek approval
from everyone to make any major decision.
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So this leads to less business control
and this is what CCD suffered from.
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Now I can show you the numbers.
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Also, if you actually check in investors,
you will constantly see that from 2019
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onwards they have been
diluting their equity.
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Why?
Because they were defaulting on their
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loans, they were having
cash flow problems.
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There were a bunch of negative,
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negative things that were
happening with the company.
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So therefore you can see that from 2019
onwards, back in 2019,
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CCD had a lot of stores,
but those stores are not being operated
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profitably so they had
to raise further money.
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The only way to do it was
to get into equity financing.
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Now that sell your equity to raise some
more money to pay off the debtors.
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To cut the long story short,
we have reached a situation where
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the promoters have sold
a large part of their holding.
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FIIs have also cut down their holding from
roughly 6% to three and a half percent.
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Now DIIs have completely sold off their
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holdings and we are just stuck with public
and retail shareholding has gone up
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from 40% to roughly 81.55%. Now just
a very quick point here,
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that what is the issue with not
having control over your business.
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So you can see from this chart that back
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in 2020 CCD or Coffee Day Enterprises,
it tried to sell one of its business arms
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but it was unable to do it
to Tata Consumer Products because their
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debtors people who had lending
the money said no to that deal.
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And by the way, this included yes bank.
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So the problem is that when you have no
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control over your business you can't
make these type of strategic decisions.
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Also now comes the third and the most
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important reason as to what led
to the downfall of Cafe Coffee Day.
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Now the answer can be figured
out by looking at the Roce.
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Now here you can see
that the Roc is negative now.
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But even at its peak,
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coffee business was not a very
high margin profitable business.
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How can I prove this to you?
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Let me take you to some numbers
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for the most profitable coffee business
in the world which is of Starbucks.
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It has the strongest coffee brand,
the type of products that they sell.
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For example, I'm a black coffee lover
and I drink a lot of black coffee.
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If I were to go and drink black coffee
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at Starbucks, it costs Rs350,
which is madness.
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And with Starbucks they also
control their own franchises.
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So that way they are able
to improve their profitability.
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Now, despite all this,
take a look at this.
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Here are the sales numbers for Starbucks.
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And this is just for reference purpose.
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You can see that now despite such high
sales number, look at the profit margin.
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So this number States 30 million.
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This number States
approximately 30 million.
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Now look at the earnings
before interest and taxation.
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So here you can see that it almost becomes
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one six which is 15% to 16% profit margin
on the entire sales of the company.
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Now this profit margin is
very low to begin with.
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Now if a company whose brand value is not
as strong as Starbucks,
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which cannot price its product compared
to Starbucks, which does not have control
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over its own franchises,
it is a recipe for disaster.
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So which brings us to the second half
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of today's video which is that why is
this stock price surging all of a sudden?
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It is giving spike after spike.
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Should we take an entry now?
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Okay, so let us have that discussion.
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So the reasons why the stock price is
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bouncing back, there are
three specific reasons.
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So one is that there has
been a leadership change.
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So Malavika Hegde ji,
who is the wife of the late founder,
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she has taken over the business and she
is exhibiting excellent leadership.
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For example, she has been able
to bring down the debt of the company.
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I will show you the balance
sheet in a minute.
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So that is a step in the right direction.
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Second, she has been able to bring
together new investors into the company.
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So that is another good
play that she is making.
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And third, and finally,
she has been able to create a little bit
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of maneuvering room in the sense
that by working with existing set
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of people who have given debt to CCD,
she has been able to get some Leeways
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from these debtors in order
to run the company.
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So these are all steps
in the right direction.
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No doubt about that.
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Second reason why the stock price is
surging is because of the fact that people
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think that, you know what, the stock
price just cannot go any lower than this.
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Almost all the bad stuff that could have
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happened with this stock
has already happened.
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I somewhat agree with that.
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Now third and finally is
that CCD is a great brand.
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For example, almost all of us would have
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heard CCD and most of us
would have had a CCD coffee.
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So the brand value itself is
very strong to begin with.
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That was one of the reasons why
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Tata Consumer Product wanted to acquire
this form because of the brand value.
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So this brand value does not go away.
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But what should be our final verdict?
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Because there are definite pros and cons.
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Now before I share my final verdict
with you, whether or not you should be
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investing in coffee day enterprises or not
investing in it, let me just very quickly
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share the final output
on the borrowings part.
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If you go on the balance sheet,
you will clearly see that the borrowings
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went up and up and up until 2019 and over
time they have started to come down.
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Now this is somewhat of a mixed signal.
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It's not as if that just because
borrowings are coming down.
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You should go and jump and buy this stock.
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No, nothing like that because a lot
of businesses are being sold.
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For example, at the start of the video I
told you that CCD businesses are twofold.
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One is selling coffee and food
and another is the logistics play.
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Now, one of its prominent arms
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which was SICAL logistics is now
underbid to be sold to others.
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So then what is the final verdict?
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Should you be buying CCD?
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Should you not be buying CCD?
What should you be doing?
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So there are no clear answers here.
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Unfortunately, there are pros and cons.
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However, the pro is that the borrowings
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are going down and the brand value is very
high and it looks to me that everything
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bad that could have happened
with the stock has already happened.
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But the major problem still remains
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that there are no avenues for the firm
to make sustainable money.
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So maybe even the current valuation
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of Rs50 might not stand for the simple
fact that the coffee business for them is
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not very profitable for them and their
cash churning arm, which is the logistics
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arm, it is also getting stripped out
and sold to pay off the existing debt.
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So what would I be doing?
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I would just wait for the entire business
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restructuring to happen because
the company is currently going through
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a massive business restructuring and it
would be too early for me to jump in.
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I'm completely okay buying this stock
when it reaches 150 in case it ever does.
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But I will only invest in this business
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once there is enough clarity that what
is the next chapter of growth for CCTV.
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But I wish Malavika Hegde ji the best.
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She's doing an amazing job and I'm sure
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that she will be able to take this company
to new height and I really,
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really hope and wish that a great
brand like CCD survives.
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So let me know your thoughts whether
or not you would be investing.
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What are some pros and cons
that you see in this business?
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And please don't forget to hit the like
can subscribe button and check the links
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in the description box to get
a very special offer from KuKu FM.
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Thank you so much and I
will see you tomorrow..
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