Coffee Day will receive a consideration of up to  ₹2,749 crore for selling its stake in Mindtree to Larsen and Toubro Ltd. (Naveen Kumar Saini/Mint)
Coffee Day will receive a consideration of up to 2,749 crore for selling its stake in Mindtree to Larsen and Toubro Ltd. (Naveen Kumar Saini/Mint)

The Mindtree stake sale is not the caffeine kick Coffee Day needs

  • Coffee Day shares have fallen 7% despite the Mindtree stake sale to L&T coming at a better-than-expected valuation
  • A good outcome of the deal with L&T will be if the Mindtree stake sale is a stepping stone towards Coffee Day's restructuring

Coffee Day Enterprises Ltd’s shares should have got a boost after the company said it will sell its stake in Mindtree Ltd. But that hasn’t been the case. The stock has fallen 7% since the deal was announced on 18 March after market hours. This is despite the fact that the deal has come in at a better-than-expected valuation.

Coffee Day will receive a consideration of up to 2,749 crore for selling its stake in Mindtree to Larsen and Toubro Ltd (L&T). It’s not clear what the tax implications of the stake sale will be, although it’s clear that realized valuations are far higher than what analysts were factoring in Coffee Day's sum-of-the-parts valuation (see chart above).

“The stock’s lukewarm response to the deal announced could also be because people want to understand the strategy CDEL will adopt to split the business into coffee and non-coffee segments," said Jigar Shah, CEO of Maybank Kim Eng Securities India Pvt. Ltd.

From an investor’s perspective, a good outcome will be if the Mindtree stake sale is one of the stepping stones that will assist Coffee Day's restructuring plan, which includes separating the coffee business. The company can also use these funds to pare down its debt. In its December quarter earnings conference call, Coffee Day said consolidated net debt stood at 3,750 crore and holding firm debt was 975 crore. The company had also said it will use the Mindtree stake sale proceeds to bring the holding firm debt to zero.

Accordingly, Coffee Day investors can expect some relief on the interest costs front. On a consolidated basis, for the nine months ended December (9MFY19), finance costs as a percentage of Ebitda (earnings before interest, tax, depreciation and amortization) was a whopping 69%.

The company can be expected to use the remaining funds for expansion, especially in the coffee retailing business. As on December, Coffee Day had 1,751 outlets, spread across 243 cities in India. The coffee retailing business is on a good wicket with same-store sales growth for 9MFY19 at about 11%. During this time, average sales per day increased by 3%. But investors aren’t giving it brownie points yet. The stock has underperformed the Nifty 500 index so far in FY19.

“We believe Coffee Day’s sharp valuation differential with other listed quick service restaurant companies will narrow once it removes the conglomerate structure," pointed out a note from Maybank on 25 February. Needless to say, developments on restructuring will be crucial from an investor’s point of view.

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