Following the news of VG Siddartha, the founder of Coffee Day Enterprises Limited being missing and eventually dead has taken a toll on the share prices of the company. Within two days the share prices slipped from Rs. 193 to Rs. 122.75. Over Rs.1,000 crore was wiped off in market capitalization. Mutual funds with exposure in Café Coffee Day (CCD) have significantly lost their valuation. Amidst this turmoil, what should investors that have invested in mutual funds having CCD shares consider? Read on to know the entire story.
Facts of the case
Coffee Day Enterprises Limited is the parent company of the Coffee Day Group that pioneered the coffee culture in the chained café segment in India. VG Siddartha’s Café Coffee Day was India’s answer to Starbucks and Costa Coffee.
As per the reports, VG Siddartha was facing problems and liquidity crunch with regard to the outstanding debt taken in his personal capacity. The debt in question was around Rs. 2,000 crore which was over and above the consolidated borrowings of Café Coffee Day (CCD) group, which stood at Rs.6,547.38 crore as of March 2019.
VG Siddartha was missing from the evening of 30th July 2019 and was found dead after 36 hours of his missing report. His body was recovered from the Nethravathi River near Mangaluru early on 31st July 2019.
The letter was purportedly written by the 58-year-old entrepreneur to the “Coffee Day family” had alleged harassment by the income tax authorities and a private equity partner, which had caused a liquidity crunch in his company. Further, he said in his letter that he has failed as an entrepreneur and seeks forgiveness for his actions.
Despite the claim of serious liquidity crunch by Siddartha in his letter, the group claims to have sufficient assets to cover outstanding debts. As per the regulatory filings, Coffee Day Enterprises Limited debt stands at Rs. 6,547.38 crores while assets are estimated to be worth Rs. 11,259.07 crore, as on 31st March 2019.
Investment Information & Credit Rating Agency Limited (ICRA) has placed a term loan rating of Coffee Day Enterprises Limited on watch with negative implications. ICRA says that it will continue to monitor further developments and gain clarity on the situation before finalizing the rating action. It further said that the recent situation could have a negative impact on the company’s operation but it’s too early to derive at any conclusion. The company is rated at BBB+.
What should investors do?
The stock could remain under pressure for some more time and its price might slip to double digits. The board is evaluating and assessing the situation, formulating appropriate steps to ensure that business operations are unaffected.
But the big question now for the investors is that should they hold on the stock or redeem the same? For investors who have invested in the following mutual funds, this may be a time to take a serious look at your investments
Coffee Day Enterprises Limited’s share price has fallen 44.50% during the period. The share price has fallen 59.93% since the beginning of this year and lost 58.87% during the past one year. Coffee Day Enterprises Limited share price is trading below its 50-day and 200-day moving an average of Rs. 212.10 and Rs. 254.89 on Bombay Stock Exchange (BSE).
Looking at the current scenario, investors should consider diversifying their investments and cover the exposure in this security. The investor should calculate the amount of his/her exposure in the Coffee Day Enterprises Limited and then compare it with their risk profile. If the risk involved is high then a revision might be necessary. As there is no time period in which the matter can be dissolved, holding on the shares may prove to be risky.
Disclaimer: The views expressed in this post are that of the author and not those of Groww