Complex holdings may hit fundraising plans of Coffee Day Enterprises

Investors, especially institutional, were never keen on owning Coffee Day Enterprises stock since its listing in late 2015 despite the company operating a successful coffee retail chain, which had a significant brand recall. 

A complex holding structure and unrelated businesses clubbed under one roof could have been the reasons that prompted investors to shun the stock, experts say. These are likely to impact the company’s ability to raise funds, too, they add. 

“If you see the size of the company, mutual funds hold a miniscule stake in the firm. FIIs (foreign institutional investors) only own very small percentage. So, the management hasn't done a good job at simplifying the business structure and explaining it to investors,” said Shriram Subramanian, founder of corporate governance advisory firm InGovern. 

“Investors have difficulty in understanding the company due to its complex structure.”

According to the shareholding pattern of the company as of June 2019, while mutual funds held 0.12 per cent, foreign portfolio investors had 5.57 per cent stake. 

“Given the size of the company, institutional holding should have been a lot higher. But a mixture of various business, unrelated to each other, have been put under one umbrella without much disclosures about these entities,” said a Mumbai-based trader. 

For instance, the holding entity is home to a range of businesses such as its logistics business Sical; tech park development unit Tanglin; and financial services firm Way2Wealth, among others, making it impossible for an investor to understand where the value is being created, the trader said.

“When a private equity (PE) firm says it holds this much in Coffee Day, it is only related to the listed entity. Nobody actually knows the exposure and stake holding of the PE firms in the group entity,” said an investment banking source. “In this scenario, raising funds from the market is likely to be difficult because financial institutions will be keen to know the overall liability of the firm.” 

The ambiguity has also impacted the performance of the stock. Coffee Day Enterprises shares have never crossed its issue price of Rs 328 per share since its 2015 public listing. The share price of Coffee Day Enterprises has plummeted 42.4 per cent in past three trading sessions to close the trade at Rs 110.50 on Thursday. 

“With a total debt of Rs 6,547 crore in Coffee Day Enterprises, along with the personal liabilities of V G Siddhartha, the company’s capacity to raise capital for debt servicing will be critical at this juncture. In that perspective, a simple structure will definitely help,” said the investment banking source.