Coffee Day Enterprises Ltd Management Discussions.

1. Outlook

Global economic Outlook

Global growth is projected at -4.9 percent in 2020, 1.9 percentage points below the April 2020 World Economic Outlook (WEO) forecast. The COVID-19 pandemic has had a more negative impact on activity in the year 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast. In 2021 global growth is projected at 5.4 percent. Overall, this would leave 2021 GDP some 6‘A percentage points lower than in the pre-COVID-19 projections of January 2020. The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s.

Strong multilateral cooperation remains essential on multiple fronts. Liquidity assistance is urgently needed for countries confronting health crises and external funding shortfalls, including through debt relief and financing through the global financial safety net.

Indian economic Outlook

The Indian economy grew at 4.2 per cent in 2019-20, lower than the 6.1 per cent figure registered in 2018-19, as the Covid-19 pandemic adversely impacted economic activity in the last month of the fiscal year, especially manufacturing, retail, hospitality and construction. The full-year GDP growth is the lowest India has registered in 11 years. The Central Statistics Office had earlier forecast that the economy would grow at 5 per cent in 2019-20. In the January-March quarter, GDP grew at 3.1 per cent as against 5.7 per cent in the corresponding year ago period. These are the first set of GDP numbers showing the impact of the Covid-19 pandemic and the nationwide lockdown, which came Into effect from 25 March, 2020

The IMF, in its latest World Economic Outlook report, said that the Indian economy hit by coronavirus pandemic - is projected to contract by a massive 10.3 per cent this year, but it is likely to bounce back with an impressive 8.8 per cent growth rate in 2021.

If the Indian economy achieves the projected growth rate, it will regain the position of the fastest-growing emerging economy, surpassing Chinas projected growth rate of 8.2 per cent.

2. Industry Structure and Developments

a. Coffee Business:

Market analysis

Indias coffee shipments for the calendar year 2019 fell 5 per cent in value due to lower prices, despite a marginal increase in overall volumes. In dollar value, shipments declined to $794.21 million during 2019, lower than previous years $836.14 million. Also, the exports were marginally lower in domestic currency at Rs 5583.64 crore, as against Rs 5661.37 crore, according to the state-run Coffee Boards latest provisional data.

Total volumes saw a marginal growth at 3.505 lakh tonnes during 2019 as against 3.488 lakh tonnes in the previous year. The increase in volumes was primarily on account of higher re-exports. The Indian companies import cheaper coffee beans from countries such as Vietnam to convert them into value-added products such as instant coffees and re-export them to destinations such as Russia and East Europe. The re-exported coffee during 2019 was higher at 89,193 tonnes (87,260 tonnes in the previous year). The exports of Indian grown coffees during 2019 was down marginally at 2.613 lakh tonnes (2.615 lakh tonnes).

Despite a marginal increase in volumes, the value of shipments dropped on account of lower per unit realisations. The per unit value fell to Rs 1,59,301 per tonne, as against the previous years Rs 1,62,296.

Italy was the largest buyer of Indian coffee, mainly the raw beans with volumes at 72,265 tonnes. Italy accounted for a fifth of Indias total coffee volumes during 2019.

Germany was the second largest buyer, followed by the Russian Federation. Germany bought 37,175 tonnes and accounted for over a tenth of Indias total shipments. The Russian Federation was the largest buyer of instant coffee at 28,573 tonnes

The global market for Coffee Shops is projected to reach US$237.6 billion by 2025, driven by the silent importance and role by them in our society.

Coffee is the second most popular beverage after water. Not surprisingly coffee performs a very important social function and plays a vital role in building social relationships. Since coffee consumption transcends geographic and cultural boundaries, it widely considered as a social lubricant helping people bond, communicate, build relationships and enjoy.

Given the pleasurable experience of coffee consumption, coffee shops have become social places for people to handout, talk, write, read, and study. It provides a cozy intimate living room atmosphere for causal customers reading a book; a connected environment with free-Wi-Fi for busy customers on a laptop; a cheerful environment for socializing friends; offers a romantic environment for dating couples.

Coffee shops have therefore become icons of urban neighborhoods. They create vibrant streetscapes and produce huge pedestrian activity. They have high customer footfall and are highly profitable. They play an important role in community development by encouraging increased social activity.

Urbanization of leisure resulting from lifestyles centered around work and offices has created a need for leisure environment as an alternative to leisure in the streets. Sophisticated, clean, classy, easily accessible and respectable leisure environments began to grow in demand offering the perfect conditions for the rise of coffee shops. Over the decades, rapid urbanization, creation and development of new urban centers have helped boost the coffeehouse culture. Mushrooming of boutique coffee shops have become a trademark of virtually every city neighborhood. The increase in travel and tourism is also fueling the rise of coffeehouses.

Coffee shops today enjoy high profitability not only due to the robust coffee culture but also due to the effervescent innovation in coffee types offered. Cafe Latte, Caffe Americano, Cappuccino, Espresso, Flat White, Long Black, Macchiato, Mochaccino, Irish Coffee, Vienna, Affogato are among the numerous other flavors and varieties of coffee offered in coffee shops across the world. Coffee is the only beverage that emulates different traditions and cultures of countries worldwide, from Cafe Cubano in Cuba, Yuanyang from Hong Kong, Vietnamese Ca Phe Sua Da, Greek Frappe, Turkish coffee to Italian macchiato. The growing success of coffee shops is increasingly attracting the attention of restaurants so much so that creating a coffee shop vibes has become a favorite strategy for restaurant owners to get a steady stream of sales and customers.

The United States and Europe represent large markets worldwide with a combined share of 69.8% supported by the well-established coffee culture in these regions. China ranks as the fastest growing market with a 7.8% CAGR over the analysis period led by economic reforms, global connectivity and the resulting globalization of lifestyles of the Chinese and naturally increase in coffee consumption in a country steeped in the tea culture.

Lifestyles of the Chinese are no longer locally determined rather they are globally influenced which bodes well for the coffee shop culture. Top-tier cities in China are already witnessing a rapid rise in coffee shops with over 7500 shops in Shanghai; 6000 shops in Beijing; and over 4000 in Guangzhou and Shenzhen. For a beverage which was so rare that it was only served in luxury hotels, coffee is now becoming mainstream in China supported by not just the appeal of the drink but mostly importantly for the coffee shop experience that goes beyond just the coffee.

The global coffee market is anticipated to reach US$134.25 billion in 2024, growing at a CAGR of 5.32% for the period spanning 2020-2024.

Factors such as increasing out of home coffee consuming population, rapid urbanization, rising e- commerce retail sales, accelerating disposable income, increasing instant coffee preference, growing demand for specialty coffee and increasing green coffee consumption in emerging economies are expected to drive the market. However, growth of the industry would be challenged by weather uncertainties, retail consolidations and stringent regulations. A few notable trends include growing penetration of premium coffee shops, high demand for cold brew over iced coffee, inclining desire for functional coffee and increasing gourmet coffee sale in America.

There are two sources of coffee i.e. Arabica (oldest type of coffee, to be cultivated initially in Ethiopia (Africa) and Robusta (its initial roots in countries located in central & western sub-Saharan Africa). Arabica coffee is the first-ever cultivated coffee species and hence it is dominant in the market over Robusta coffee.

In 2020, the outbreak of COVID-19 pandemic has created a unfavorable impact on the global market as the production, exports and imports of coffee & related products have decreased significantly.

The fastest-growing regional market is the Asia-Pacific due to a rise in the demand for coffee by the working population, growing presence of a large number of coffee chains and increasing e-commerce retail sector. The U.S. represents one of the largest markets and is already well-penetrated at developed market levels.

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 start-ups in India gained a substantial foothold after the onset of eCommerce, and there are several new companies that are gaining traction in the industry. Online platforms have increased competition and lowered freight costs with real-time data availability and a transparent value chain. It is imperative for logistics service providers to innovate and adapt to the transforming logistics landscape.

Increasing investments and trade points toward a healthy outlook for the Indian freight sector. Port capacity is expected to grow at a CAGR of 5% to 6% by 2022, thereby, adding a capacity of 275 to 325 MT. Indian Railways aims to increase its freight traffic from 1.1 billion tons in 2017 to 3.3 billion tons in 2030. Freight traffic on airports in India has the potential to reach 17 million tones by FY40. Lack of supporting infrastructure, automated material handling systems, and high manual process interference are some key areas where the Indian air cargo industry lags its global peers.

Grant of infrastructure status to logistics, the introduction of the E-Way Bill, and GST implementation are set to streamline the logistics sector in India. Setting up of a logistics division under the Department of Commerce, technology upgrades, and development of dedicated freight corridors and logistics parks are also major moves to upgrade the logistics landscape.

c. Hospitality Business

The Indian tourism and hospitality industry has emerged as one of the key drivers of growth among the services sector in India. Tourism in India has significant potential considering the rich cultural and historical heritage, variety in ecology, terrains and places of natural beauty spread across the country. Tourism is also a potentially large employment generator besides being a significant source of foreign exchange for the country. In FY20, 39 million jobs were created in the tourism sector in India; this accounted for 8.0% of the total employment in the country. The number is expected to rise by two% annum to 52.3 million jobs by 2028.

According to WTTC, India ranked 10th among 185 countries in terms of travel & tourisms total contribution to GDP in 2019. During 2019, contribution of travel & tourism to GDP was 6.8% of the total economy, ~ Rs 13,68,100 crore (US$ 194.30 billion).

Some of the major initiatives planned by the Government of India to boost the tourism and hospitality sector of India are as follows:

• Ministry of Tourism launched Dekho Apna Desh webinar series to provide information on many destinations and sheer depth and expanse on the culture and heritage of India.

• Ministry of Tourism launched Audio Guide facility App called Audio Odigos for 12 sites in India (including iconic sites).

• Prime Minister, Mr Narendra Modi urged people to visit 15 domestic tourist destinations in India by 2022.

• Statue of Sardar Vallabhbhai Patel, also known as ‘Statue of Unity, was inaugurated in October 2018. It is the highest standing statue in the world at a height of 182 metre. It is expected to boost the tourism sector in the country and put it on the world tourism map.

• Government of India is working to achieve one% share in worlds international tourist arrivals by 2020 and 2% share by 2025.

• Under Budget 2020-21, the Government of India has allotted Rs 1,200 crore (US$ 171.70 million) for development of tourist circuits under Swadesh Darshan for eight Northeast states.

• Under Budget 2020-21, the Government of India has allotted Rs 207.55 crore (US$ 29.70 million) for development of tourist circuits under PRASHAD scheme.

• In 2019, Government reduced GST on hotel rooms with tariffs of Rs 1,001 (US$ 14.32) to Rs 7,500 (US$ 107.31) per night to 12% and those above Rs 7,501 (US$ 107.32) to 18% to increase Indias competitiveness as a tourism destination.

• In September 2019, Japan joined a band of Asian countries, including Taiwan and Korea among others, to enter Indias tourism market.

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 westernization 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 decreased by 28% to Rs.2,552 Crores in FY 2019-20, compared with Rs.3,569 Crores reported in FY 2018-19 mainly due to liquidity issues in the group after the demise of our Chairman and also lockdown due to COVID 19.

Operating profit

Operating profit (EBITDA) increased by 104% to Rs.1,650 Crores in during FY 2019-20 from Rs.809 Crores in FY 2018-19. Increase in EBITDA includes exceptional gain amounting to Rs. 1,975 Crores primarily on account of sale of equity stake held in Mindtree Limited. The regular EBITDA has impacted due to liquidity crunch.

Depreciation

Depreciation for the year under review stood at Rs.430 Crores, compared with Rs.269 Crores recorded in the previous year, up 60% on a y-o-y basis. Increase depreciation includes Rs.121 on account of applications of IND AS 116.

Finance costs

Finance cost for the year under review increased by 47% from Rs.353 Crores to Rs.519 Crores. Increase finance cost includes Rs.84 on account of applications of IND AS 116.

Net profit

Consolidated net profit for the year under review attributable to share holders of the company stood at Rs.1884 Crores over Rs.127 Crores in the previous financial year thereby representing a growth of 1377%. Net profit for the year includes exceptional gain amounting to Rs. 1,828 Crores primarily on account of sale of equity stake held in Mindtree Limited and gain amounting to Rs. 1190 Crores on account of sale of global village property held by Tanglin Developments Limited.

Balance Sheet analysis

Net worth

The Companys net worth stood at Rs.4,937 Crores as on 31st March, 2020, increasing by 56%, compared with Rs.3,166 Crores as on 31st March, 2019. The net worth comprised of paid-up equity share capital amounting to Rs.211.3 Crores as on 31st March, 2020 (211,251,719 equity shares of Rs. 10 each fully paid up) and Non-controlling interests of Rs.634 Crores. The Companys reserves and surplus stood at Rs.4,092 Crores as at 31st March, 2019.

Loan profile

The total loan funds stood at Rs.3,013 Crores which comprises of long-term borrowings of Rs.2,189 Crores and short-term borrowings of Rs.824 Crores and the Companys net debt as on 31st March, 2020 stood at Rs.2,910 Crores.

Liabilities

Non-current liabilities (excluding borrowings) stood at Rs.683 Crores, comprising of other financial liabilities Rs.666 Crores, deferred tax liabilities Rs.9 Crores, and provisions amounting to Rs.8 Crores.

Current liabilities (excluding current borrowings of Rs.824 Crores and current maturities of longterm borrowings amounting to Rs.954 Crores) stood at Rs.894 Crores, comprising of other financial liabilities (excluding current maturities of long-term borrowings) of Rs.412 Crores, trade payables of Rs.367 Crores, other current liabilities Rs.26 Crores, current tax liabilities Rs.81 Crores and provisions amounting to Rs.8 Crores.

Total assets

The Companys total assets decreased to Rs.9,528 Crores in 2019-20 from Rs.11,259 Crores in 201819, representing decrease of 15%. Capital work-in-progress (WIP) and Investment property under development for the year increased by 6% to Rs.1,287 Crores in 2019-20, compared with Rs.1,220 Crores in 2018-19. This increase is on account additions by integrated multimodal logistics business.

Investments

The Companys investments (current and non-current) including equity accounted investees during the year under review decreased to Rs.493 Crores from Rs.864 Crores in the previous year, decrease of 43% over the previous year.

Current and Non-current assets

Inventories decreased by 33% to Rs.76 Crores during the year under review from Rs.112 Crores in FY 2018-19. Inventories comprise of raw material inventory of Rs.53 Crores, stores and spares worth Rs.17 Crores and finished goods inventory of Rs.6 Crores.

Trade receivables of the Company stood at Rs.287 Crores in FY2019-20, decrease of 50% over the previous year.

The Company had on its books cash and bank balances including deposits worth Rs.103 Crores as on 31st March, 2020 as compared to Rs.2,418 Crores in 31st March, 2019.

Tax assets increased by 113% to Rs.340 Crores during the year under review from Rs.159 Crores. Total tax assets for FY 2019-20 comprise of deferred tax assets, (net) Rs.241 Crores and current tax assets, (net) Rs.99 Crores.

Other financial assets stood at Rs.1,167 Crores as compared to Rs.123 Crores 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:

Particulars 2020 2019
1 Debtors turnover 5.95 8.12
2 Inventory turnover * 7.67 9.58
3 Interest coverage ratio(Refer note 1) 2.35 1.47
4 Current ratio (Refer note 2) 1.60 1.01
5 Debt equity ratio (Refer note 2) 0.61 2.28
6 Operating profit margin (%) (Refer note 3) 64.66% 22.54%
7 Net profit margin (%) (Refer note 3) 72.42% 3.45%
8 Return on Net Worth(%)(Refer note 3) 37.45% 4.69%

*Inventory turnover ratio pertains to Coffee business.

Note:

1. Increase in interest coverage ratio due to onetime gain amounting to Rs. 1,975 Crores primarily on account of sale of equity stake held in Mindtree Limited.

2. Increase in current and debt equity ratio due repayment of loans by the group.

3. Increase in Operating profit margin, net profit margin and return on net worth includes gain amounting to Rs. 1,828 Crores primarily on account of sale of equity stake held in Mindtree Limited and gain amounting to Rs. 1190 Crores on account of sale of global village property held by Tanglin Developments Limited.

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 and hospitality. However, 59% of the consolidated net revenue of the Company was contributed by the coffee business during the year under review, followed by 38% from the logistics business and 3% from other operations.

Coffee business

Gross Revenue from the Companys consolidated coffee business stood at Rs.1,509 Crores in 201920, contributing 59% to the consolidated topline, representing an decline of 2.00% over 2018-19. The reason for decline is due to temporary closure of export business and liquidity issue of the group. Revenue from the retail division decreased by 16% from Rs.1,653 Crores in 2018-19 to Rs.1,417 Crores over 2019-20. Consolidated net profit of CDGL decreased by 885% from Rs.41 Crores in 2018-19 to Rs.-319 Crores in 2019-20.

Coffee Day Global Limiteds flagship cafe chain brand Cafe Coffee Day (CCD) owns 1,192 cafes in 208 cities and 412 CCD Value Express kiosks. The coffee beans and powder are marketed through 370 Fresh and Ground Coffee retail stores. There are 58,697 vending machines that dispense coffee in corporate workplaces and hotels under the brand.

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
No. of cafes 1518 1,607 1,682 1,722 1,752 1,192
No. of cities of presence 215 231 241 245 243 208
No. of CCD Value Express kiosks 579 579 537 532 537 412
No. of vending machines 29,760 35,441 41,845 47,750 56,799 58,697

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 36.10%. 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. 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.1006 Crores in FY 2019-20, representing decrease of 34% over FY 2018-19. EBITDA during the year stood at Rs.(6) Crores in FY 2019-20.

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 3% from Rs.32 Crores in FY 2018-19 to Rs.33 Crores in FY 2019-20.

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 organizations 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 unauthorized use, executing transactions with proper authorization 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. Venkatesh & Co, 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 computerization of key process controls through the Systems to maximize automated control transactions across key functions.

The Internal Audit function endeavors to make meaningful contributions to the Organizations 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 31st March, 2020, 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.

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 labor issues.