Coffee Day Enterprises Ltd Management Discussions.

1. OUTLOOK

Global Economic Outlook

After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of last year, reflecting a confluence of factors affecting major economies. Chinas growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States. The euro area economy lost more momentum than expected as consumer and business confidence weakened and car production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened. Elsewhere, natural disasters hurt activity in Japan. Trade tensions increasingly took a toll on business confidence and, so, financial market sentiment worsened, with financial conditions tightening for vulnerable emerging markets in the spring of 2018 and then in advanced economies later in the year, weighing on global demand. Conditions have eased in 2019 as the US Federal Reserve signaled a more accommodative monetary policy stance and markets became more optimistic about a US-China trade deal, but they remain slightly more restrictive than in the fall.

As a result of these developments, global growth is now projected to slow from 3.6% in 2018 to 3.3% in 2019, before returning to 3.6% in 2020. Growth for 2018 was revised down by 0.1 percentage point relative to the October 2018 World Economic Outlook (WEO), reflecting weakness in the second half of the year, and the forecasts for 2019 and 2020 are now marked down by 0.4 percentage point and 0.1 percentage point, respectively. The current forecast envisages that global growth will level off in the first half of 2019.

The projected pickup in the second half of 2019 is predicted on an ongoing buildup of policy stimulus in China, recent improvements in global financial market sentiment, the waning of some temporary drags on growth in the euro area, and a gradual stabilisation of conditions in stressed emerging market economies, including Argentina and Turkey. Improved momentum for emerging market and developing economies is projected to continue into 2020, primarily reflecting developments in economies currently experiencing macroeconomic distress-a forecast subject to notable uncertainty. By contrast, activity in advanced economies is projected to continue to slow gradually as the impact of US fiscal stimulus fades and growth tends toward the modest potential for the group (Source IMF)

Indian Economic Outlook

THE Indian economy started the fiscal year 2018-19 with a healthy 8.2% growth in the first quarter on the back of domestic resilience. Growth eased to 7.3% in the subsequent quarter due to rising global volatility, largely from financial volatility, normalised monetary policy in advanced economies, externalities from trade disputes, and investment rerouting. Further, the Indian rupee suffered because of the crude price shock, and conditions exacerbated as recovery in some advanced economies caused faster investment outflows.

The Indian economy is likely to sustain the rebound in FY 2018-19-growth is projected to be in the 7.2% to 7.5% range and is estimated to remain upward of 7% for the year ahead. These projections could be attributed to the sustained rise in consumption and a gradual revival in investments, especially with a greater focus on infrastructure development. The improving macroeconomic fundamentals have further been supported by the implementation of reform measures, which has helped foster an environment to boost investments and ease banking sector concerns. Together, these augur well for a healthy growth path for the economy. India has already surpassed France to become the sixth-largest economy.

2. INDUSTRY STRUCTURE AND DEVELOPMENTS

a. Coffee Business:

Market analysis

Fast urbanisation of the mega cities combined with the requirement for pick me-up refreshments to manage current ways of living is probably going to help the market interest for coffee over the figure time frame. This is bolstered by the rise of different bistros and expanded nonessential salary dimensions of customers. Changing tastes of consumers and the dispatch of new coffee brews are anticipated to support the market valuation hugely. Fluctuating costs of coffee beans can hinder the growth of the global coffee market. In any case, the production of natural cafe and other similar beverages is probably going to help the market in keeping up its position in the forecast period. The global coffee market is expected to reach the valuation of USD 102,279.2 million by growing at a CAGR of 4.32% during the forecast period (2018- 2023).

Market segmentation

The global coffee market is divided on the basis of its variety, form, distribution channel and regional demand. On the basis of its variety, the market is classified into robusta, Arabica and others. Based on its form, the market is segmented into whole, ground and other forms. On the basis of its distribution channel, the market is classified as non-store based and store-based.

b. Logistics Business:

Logistics has been the holding beam for almost every business structure across the world since the rise of the economy. The towering needs of businesses to transport goods and services must be addressed by the logistics sector with best-in-class infrastructure and effective logistics management system. The economic survey of India has projected the logistics sector to rise from the current worth of $160 billion to Rs.215 billion by 2020. In a PPP (Public Private Partnership) model, the government of India efforts to improve Indias ranking in World Bank LPI (Logistics Performance Index) from 35 to 15 in the coming years.

The New Horizons in Indian logistics Market The development in technology and the birth of new industry verticals have created high demands for logistics and delivery of products/services. Not just this but the new set of requirements arisen from the people with busy lifestyles have also added to the increase in logistics demand. Today, if you have done a lot of shopping and still have other plans before heading home, logistics services provider home delivery of your shopped products at your ease of time.

What can be better than having hassle-free timely delivery of the products and services right at the doorstep anywhere in the world?

The growing market with the help of technology and developing infrastructure have made it possible. Developed countries have strengthened their infrastructure and transport system to their full potential in facilitating seamless logistics services in both domestic and cross-border territories.

The globalisation at the fastest pace ever has taken industries with a storm and the movement of goods from the origin point to delivery station has been made effectively fast and secure. Whether it is a small courier or a complete cargo, logistics has made it easier for people to transport their products on time. The rise of e-commerce on the global platform in the recent times has made logistics a major player in the world economy.

The efforts to organise the unorganised logistics sector The government of India has established a separate logistics division in the department of commerce to work for the integrated development of the industryboth in the domestic and the international domain. In fact, the Ministry of Commerce and Industry (MoCI) has proposed framing of a unique dedicated online portal to accentuate logistics services in the country and bringing together the buyers, logistics service providers, and the related government agencies. The Ministry of Transport is also playing a key role in upbringing the logistics sectors by strengthening the land connectivity through various programs like Sagarmala project.

The economic survey presented in the parliament has speculated the Indian logistics Industry to grow at a CAGR of 10.5% crossing the 200 billion USD mark in coming time. With currently 22 million people employed in the industry, logistics is expected to extend employment to over 40 million people by 2020. With such a promising future, the Indian logistics sector has become the new sensation encouraging GoI to frame a dedicated IT backbone for this industry. Even the import-export system has been upgraded reducing the cargo release time to only 2 or 3 days.

The Goods and Service Tax (GST) framed under the center and state list has paved the path for a better logistics sector. The Central Board of Indirect Taxes and Customs (CBIC) under the Ministry of Finance also has brought new provision under CSB IV and CSB V to the Courier Imports and Exports (Electronic Declaration and Processing) Regulations, 2010 providing people 100% GST refunds in the logistics services. Customers can easily move their shipments with minimal paperwork and faster delivery and customs clearances with the new policy change by the GoI. Apart from this, to foster the growth of logistics sectors many start-ups and established enterprises have entered the market equipped with the latest technology, quality warehousing, and functional transport facility to provide world-class services in the Indian market. The recent entry of international logistics players has also ensured the boost of the Indian logistics industry. This will be a sight to behold the glorious rising of logistics industry in coming years, especially marking 2020.

Indian Companies is also supporting customers by offering Return Management, Fulfillment, Warehousing and 3PL services in all major ecommerce markets like USA, Europe, Australia and Middle East countries through their worldwide network. Which is creating a larger scope for Indian sellers to sell their products globally with a competitive edge. Also now Indian logistics companies are creating opportunities for other counties sellers to sell their products in India by providing seamless custom clearance and distribution across the country. Therefore Indian logistic industry is having more opportunities in the future time( Source:BS)

c. Hospitality Business:

Having weathered many adverse situations in the past three years to post consistent growth, the prevailing sentiment in the Indian hospitality industry is of confidence. The industry stakeholders feel that they will be able to maintain the growth trend in 2019 notwithstanding the aberrations of General Elections and its bearings on the policy level. The reason for this confidence emanates not very much on the high expectations on inbound visitors, but on numerous domestic factors including the emergence of an aspirational young millennial travellers, revival in corporate and business travel in the country, and rapidly evolving connectivity factor in the country.

It is a fact that the appetite to travel and aspiration for certain lifestyles have taken strong roots and that is expected to further deepen in the middle-class Indian in the coming years. The improving connectivity factor in the form of good roads, express highways, regional air connectivity, etc. will certainly boost travel from cities to the hinterland in the coming years. In an encouraging development, for the first time since the UDAN scheme of Regional connectivity was launched, special bidding for connecting destinations of tourism importance has been rolled out by the government recently, which would definitely address issues of connectivity although not immediately but gradually between tourism destinations

On the policy front also, there are indications of some positive changes on the GST front. The Prime Minister and the Finance Minister had given ample indication of some moderation in GST slabs. The government also seems to have seized the complexities that exist in the e-Tourist Visa infrastructure. If the latest strategic document put forth by the highest Planning body, NITI Aayog is to be believed, there are proposals to extend Infrastructure status with highly favourable investment cap to the tourism industry in the country.

Moreover, the updated CRZ Notification 2018 is also in favour of tourism development on the coastal areas which has been out of bounds for tourism in the country for long (Source: Hospitality Biz)

3. RISKS CONCERNS AND THREATS

Financial risk

If the Companys cash flow proves inadequate to meet its financial obligations, its status as a going concern might be invoked.

Competition risk

With growing westernisation and increase in the penetration of global players and growing popularity of individual themed cafes, it might be a challenge for the Company to maintain its existing consumer base.

Regulatory risks

Operating in the food industry space is subject to various regulatory risks with respect to failure of compliance to quality standards and various regulations imposed by the government policies. Failure to meet with the standards might result in legal implications and loss of business.

Climatic risks

Bad monsoon might result in lower production of coffee leading to soaring high coffee prices. Passing it to the customers would incur menu costs and loss in price sensitive segment of consumer base. Thus, inadequate monsoon might result in falling revenues and profit.

Economic risk

Sluggish growth of the economy impacts the spending power reducing consumption. Overall macroeconomic instability results in a lower demand. Thus fluctuations in the economic scenario possess a major risk to the business of the Company. Performance of the backward and forward linked industries is of vital importance for the logistics sector to perform.

Social and political risk

Government policies play a major role in determining the fate of an industry. Relaxation of various regulations and simplification of tax regime give the much needed push to the concerned sectors. Change in orientation with change in government possesses a threat to the business.

4. SEGMENT WISE PERFORMANCE

Companys financial overview

Statement of profit and loss analysis

Net Revenue

Net revenues increased by 13% to Rs.4,264 crore in FY 2018-19, compared with Rs.3,788 crore reported in FY 2017-18.

Operating profit

Operating profit (EBITDA) increased by 15% to 961 crore in during FY 2018-19 from 835 crore in FY 2017-18, the increase is because of improved financial performance of our cafe business, leasing business. Increase in EBITDA is also attributable to exceptional gain of 98 crore (2017-18 Rs.53.2 crore on account of sale of equity stake in Global Edge Software Limited) on account of fair valuation of equity stake in Global Edge Software Limited and partial sale of equity share in Mindtree.

Depreciation

Depreciation for the year under review stood at Rs.292 crore, compared with Rs.260 crore recorded in the previous year, up 12% on a y-o-y basis.

Finance costs

Finance cost for the year under review increased by 31% from Rs.349 crore to Rs.456 crore because of increase in the gross debt.

Net profit

Consolidated net profit for the year under review attributable to share holders of the Company stood at Rs. 128 crore over Rs.106 crore in the previous financial year thereby representing a growth of 21%.

Balance Sheet analysis Net worth

The Companys net worth stood at Rs.3,166 crore as on March 31, 2019, increasing by 5%, compared with Rs.3,015 crore as on March 31, 2018. The net worth comprised of paid-up equity share capital amounting to Rs.211.3 crore as on March 31, 2019 (211,251,719 equity shares of Rs.10 each fully paid up) and Non-controlling interests of Rs.637 crore. The Companys reserves and surplus stood at Rs.2,318 crore as at March 31, 2019.

Loan profile

The total loan funds stood at Rs.7,214 crore which comprises of long-term borrowings of Rs.3,324 crore and short-term borrowings of Rs.3,890 crore and the Companys net debt as on March 31, 2019 stood at Rs.4,796 crore.

Liabilities

Non-current liabilities (excluding borrowings) stood at Rs.184 crore, comprising of other financial liabilities Rs.111 crore, deferred tax liabilities Rs.21 crore, other non-current liabilities Rs.34 crore and provisions amounting to Rs.18 crore.

Current liabilities (excluding current borrowings of Rs.3,890 crore and current maturities of long-term borrowings amounting to Rs.667 crore) stood at Rs.695 crore, comprising of other financial liabilities (excluding current maturities of long-term borrowings) of Rs.439 crore, trade payables of Rs.142 crore, other current liabilities Rs.53 crore, current tax liabilities Rs.55 crore and provisions amounting to Rs.6 crore.

Total assets

The Companys total assets increased to Rs.11,259 crore in 2018-19 from 8,853 crore in 2017-18, representing an increase of 27%. Capital work-in-progress (WIP) and Investment property under development for the year decreased by 3% to Rs.1,220 crore in 2018-19, compared with Rs.1,262 crore in 2017-18 decrease is on accounts of capitalisation of constructed commercial office space. This decrease is offset by addition made in our subsidiary engaged in the business of leasing of commercial office space and additions by integrated multimodal logistics business.

Investments

The Companys investments (current and non-current) including equity accounted investees during the year under review increased to 864 crore from Rs.716 crore in the previous year, an increase of 21% over the previous year.

Current and Non-current assets Inventories increased by 17% to Rs.112 crore during the year under review from 96 crore in FY 2017-18. Inventories comprise of raw material inventory of Rs.74 crore, stores and spares worth Rs.15 crore, finished goods inventory of Rs.19 crore and work in progress of Rs.4 crore.

Trade receivables of the Company stood at Rs.571 crore in FY 2018-19, increase of 19% over the previous year.

The Company had on its books cash and bank balances including deposits worth Rs.2,418 crore as on March 31, 2019 as compared to Rs.1,726 crore in March 31, 2018.

Tax assets increased by 57% to Rs.159 crore during the year under review from Rs.101 crore. Total tax assets for FY 2018-19 comprise of deferred tax assets, (net) Rs.77 crore and current tax assets, (net) 82 crore.

Other financial assets stood at Rs.123 crore as compared to Rs.146 crore in the previous year.

Details of significant changes (i.e., change of 25% or more as compared to the immediately previous financial year) in the key financial ratios, along with detailed explanations thereof, including:

SI NO Particulars 2019 2018
1 Debtors turnover 8.12 8.52
2 Inventory turnover * 9.58 8.16
3 Interest coverage ratio 1.47 1.64
4 Current ratio 1.01 1.14
5 Debt equity ratio (Refer note 1) 2.28 1.67
6 Operating profit margin (%) 22.54% 22.03%
7 Net profit margin (%) 3.45% 3.91%
8 Return on Net Worth(%) 4.69% 4.81%

inventory turnover ratio pertains to Coffee business.

Note: 1

The change is primarily attributable to borrowings from Standard Chartered Bank amounting to Rs.3,000 crore towards consolidation of debt into single lender for towards Mindtree stake sale.

There is no significant change (i.e. change of 25% or more as compared to the immediately previous financial year) in the key financial ratios except as mentioned in note.1.

Operational overview

Coffee Day Enterprises is present across the following sectors:

Coffee, logistics, financial services, leasing, commercial space and hospitality. However, 48% of the consolidated net revenue of the Company was contributed by the coffee business during the year under review, followed by 34% from the logistics business and 12% from financial services.

Coffee business

Gross Revenue from the Companys consolidated coffee business stood at Rs.2000 crore in 2018-19, contributing 43% to the consolidated topline, representing an decline of 0.8% over 2017-18. The reason for decline is due reduction in the export business mainly because of seasonal impact. Revenue from the retail division increased by 4% from Rs.1590 crore in 2017-18 to Rs.1653 crore over 2018-19. Consolidated net profit of CDGL increased by 10% from Rs.37 crore in 2017-18 to Rs.41 crore in 2018-19.

Coffee Day Global Limiteds flagship cafe chain brand Cafe Coffee Day (CCD) owns 1752 cafes in 243 cities and 537 CCD Value Express kiosks. The coffee beans and powder are marketed through 373 Fresh and Ground Coffee retail stores. There are 56,799 vending machines that dispense coffee in corporate workplaces and hotels under the brand. The division serves more than 1.6 billion cups of coffee per annum. Internationally, CCDs are present in Vienna, Czech Republic, Malaysia Nepal and Egypt.

2014-15 2015-16 2016-17 2017-18 2018-19
No. of cafes 1518 1,607 1,682 1,722 1,752
No. of cities of presence 215 231 241 245 243
No. of CCD Value Express kiosks 579 579 537 532 537
No. of vending machines 29,760 35,441 41,845 47,750 56,799

Highlights, 2018-19

Retail Gross Revenue at Rs.1653 crore; up 4% YoY Retail EBIDTA at Rs.329 crore; up 10%

Net Profit after Tax at Rs.41 crore: up 10% YoY

Logistics business

The Company is present in the logistics sector through its subsidiary Sical Logistics Limited (SLL) in which we own a majority equity share of 55.18%. The Company is in existence for more than six decades with significant experience in the logistics sector and is listed on the Bombay Stock Exchange and National Stock Exchange with a Market capitalisation of 807 crore as on March 31, 2019.The Company is focused on port handling, road and rail, logistics, container freight stations, mining and transportation.

Revenue from our integrated logistics business stood at Rs.1,525 crore in FY 2018-19, representing an increase of 28% over FY 2017-18, the increase in revenues can be attributed to new contracts and increased volumes in mining and transportation and growth in other business verticals. EBITDA during the year stood at Rs.173 crore in FY 2018-19.

Financial services business

Way2Wealth, one of our group companies is present in the financial services sector through its subsidiary Way2Wealth Securities Private Limited, in which we hold an 85.53% equity stake. Way2Wealth group is engaged in wealth management, broking, portfolio management and investment advisory services.

Net Revenue from our financial services business stood at Rs.527 crore in FY 2018-19, whereas EBITDA during the year was Rs.34 crore. Significant revenue contributions can be attributed to growth in revenues from institutional, treasury and market operations through quantitative techniques.

Technology parks business

Our wholly-owned subsidiary, Tanglin Developments Limited, was set up for the development of technology parks and Special Economic Zones, offering bespoke facilities for information technology and IT-enabled services. The Company is developing and operating a Special Economic Zone/technology park in Global Village situated in Bengaluru, Karnataka and Tech Bay situated in Mangaluru, Karnataka.

Our technology parks division contributed 4% to the Companys top line. Revenues from this division increased by 7% from Rs.146 crore in FY 2017-18 to Rs.156 crore in FY 2018-19. Occupancy levels stood at close to 3.9 million square feet as at March 31, 2019. Anchor tenants, Mindtree and Accenture, currently occupy over 2 mn sq. ft. An additional 6L sq. ft is ready and awaiting occupancy certificate.

Hospitality business

The Company owns and operates luxury boutique resorts, one directly through our Company, and two through our wholly-owned subsidiary, Coffee Day Hotels & Resorts Private Limited (CDHRPL), under the brand The Serai. These resorts are located at Chikmagalur, Bandipur and Kabini, all in Karnataka.

The Company also with management control holds equity interest in a luxury resort in the Andaman and Nicobar islands.

Revenue from our hospitality business increased by 7% from Rs.30 crore in FY 2017-18 to Rs.32 crore in FY 2018-19.

Note: All information presented in Indian rupee has been rounded off to the nearest crore unless otherwise indicated.

5. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has intended to increase transparency and accountability in an organisations process of designing and implementing a system of Internal Control. The framework requires a Company to identify and analyze risks and manage appropriate responses. The Company has successfully laid down the framework and ensured its effectiveness. The Companys Internal Controls are commensurate with its size and the nature of its operations. These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorised use, executing transactions with proper authorisation and ensuring compliance of Corporate Policies.

The Company has a well-defined delegation of power with authority limits for approving revenue as well as expenditure. Processes for formulating and reviewing annual and long term business plans have been laid down.

M/s. B.S.R & Associates LLP, the Statutory Auditors of the Company have audited the Financial Statements included in this Annual Report and have issued a report on the Internal Control over financial reporting (as defined in section 143 of the Companies Act, 2013).

The Company has appointed ABS & Co, Chartered Accountants to oversee and carry out Internal Audits. The Audit is based on an Internal Audit Plan, which is reviewed each year in consultation with the Audit Committee, the conduct of Internal Audit is oriented towards the review of Internal Controls and risks Additionally, there has been a continued focus on IT enablement and computerisation of key process controls through the Systems to maximise automated control transactions across key functions.

The Internal Audit function endeavors to make meaningful contributions to the Organisations overall governance, Risk Management and Internal Controls. The Audit Committee reviews reports submitted by Internal Auditors. Suggestions for improvement are considered and the Audit Committee follows up on corrective actions taken by the Management. The Audit Committee also meets the Companys Statutory Auditors to ascertain, inter alia, their views on the adequacy of Internal Control Systems and keeps the Board of Directors informed of its major observations periodically. Based on its evaluation (as provided under Section 177 of the Companies Act, 2013 and applicable clause of SEBI Listing Regulations), the Audit Committee has concluded that as of March 31, 2019, the Internal Financial Controls were adequate and operating effectively.

6. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES/ INDUSTRIAL RELATIONS FRONT AND NUMBER OF PEOPLE EMPLOYED

At a Group level, we have built a reputation of being able to attract and retain key talent.

People & Culture

Our employees make a difference to our customers. Delivering customer promise across the Group is a critical component of our success. It therefore becomes imperative that our employees deliver the best in class service. We are very passionate and determined about being one of the best in the industry verticals we operate and are committed to be a leading employer in our space.

As at March 31, 2019, the Group employed 20,135 employees. The sub functions within our HR team include recruitment, training and development, compensation and culture.

Recruitment

We have strengthened our entry level and middle management lateral hiring process across our businesses. We have established relationships with over 75 premier universities, colleges and management schools in India. We get almost 10 times the application for each Management / Sales Trainee we hire at campus. We have a robust process to hire middle & senior management staff through need-based hiring. Our selection process has innovative practical project built in for senior level leadership hiring, so as to test their ability to lead a P&L or make change happen.

Training and development

Building skills for entry level staff has been a significant effort, and we continue to work with skilling institutions / NGOs, our own Skilling centres as well with several state government skilling programs. At management level, we have our well established Trainee programs across businesses or direct induction at mid-levels through a well-designed induction program for lateral hires.

Some of our popular programs have included the Sales Trainee program at Vending business, OT / LDP program at CCD, Management Trainee program at Retail Logistics to name a few. We have also partnered with five other well-known companies and formed an Exchange Consortium and have offered Leadership Development / learning opportunities for our Senior Leaders. We also continue to invest and grow our diversity staff including the hearing challenged.

Compensation

Our employees across various business receive competitive salaries and benefits within the industries they operate. We have started introducing a Variable Pay program selectively so as to drive a Performance culture. The Group Retention Policy Program is selectively used to attract and retain key talent. Increasingly we will use sales incentive / performance bonus to drive a performance culture.

There were no days lost due to any industrial strife or labour issues.