Coffee Day Enterprises: Rising prospects

Good performance in the quarter ended March is likely to continue in FY17 as well, say experts

Coffee business’s improving health aided Coffee Day Enterprises Ltd (CDEL, the holding company)’s March quarter (Q4) results. Falling interest costs and higher Other Income enabled the coffee business (under subsidiary Coffee Day Global or CDG) to report a net profit of Rs 5 crore versus a loss of Rs 7 crore in the March 2015 quarter. Ebitda margin in the coffee business grew a modest 12 basis points to 12.3 per cent in the March 2016 quarter.

Ebitda is earnings before interest, taxes, depreciation, and amortisation. Over the previous quarter, Ebitda margin contracted 574 basis points on 1,623-basis-point surge in material costs to 55.6 per cent of sales. Analysts expect it to expand 100 basis points to 16.8 per cent in FY17 over FY16.

This business has been profitable at the Ebitda level for a while now, but a turnaround at the net profit level is a key positive for the CDEL stock as CDG contributes 64 per cent to CDEL’s consolidated net profit and accounts for half of its revenues. Analysts expect CDG’s performance to improve visibly in FY17.

  Additions to its food and beverages menu, expansion of stores, launch of app, as well as growth of home-delivery channel, will drive retail business. Improvement in average sales per day per café and momentum in the high-margin coffee-vending business are other drivers. The company plans 5,000 to 6,000 coffee-vending machines per year, which should aid revenue and margin growth.

Most analysts are positive on CDEL and expect a gain of 16 per cent from current levels (after holding company discount for the CDEL stock).

CDEL’s consolidated revenues grew a robust 21 per cent year-on-year to Rs 853 crore and net profit stood at Rs 19 crore in the March 2016 quarter versus a loss of Rs 14 crore in the March 2015 quarter. Analysts say earnings will grow quickly as money from the Initial Public Offering is used to reduce debt.

Amongst CDEL's other businesses, Mindtree and technology parks continue to grow at a decent pace. CDEL’s Sical Logistics has seen an uptick in mining and integrated logistics contracts recently.

Downside risks include lower-than-expected ramp-up in sales per day per café and non-coffee businesses throwing up any negative surprise. In either event, stock valuations will be impacted and dividend payouts from subsidiaries to the holding company will also be affected. For now, most analysts believe the downside risk is minimal and adequately captured.