Investors lost around Rs 800 crore in market cap as shares of Coffee Day Enterprises dived 20 percent on July 30, a day after the founder VG Siddhartha went missing.
A huge search operation is on near Mangaluru, where the 60-year-old businessman got down from his car in the evening and asked his driver to wait for him but didn’t return.
In a letter purportedly written to shareholders on July 27, Siddhartha said pressure from one of the private equity partners and lenders had led to liquidity crunch and made him to “succumb to the situation”.
The average market capitalisation of Coffee Day Enterprises fell from Rs 4,067 crore recorded on July 29 to Rs 3,254 crore on July 3o, a decline of little over Rs 800 crore in a single trading session.
Shares closed lower by about 20 percent at Rs 154 on the BSE. The stock has fallen by about 30 percent in 2019, and about 26 percent in the last year.
The stock has been trending at 52-week low for some time now and experts are of the opinion that it is well on track to slip below 100 and enter two-digit level, as the letter underscores company’s troubles.
“CCD shares have been hitting 52-week lows for quite some time in the last couple of months. Now, the unfortunate event of founder missing and in the light of the alleged letter left by him clearly underlines the crisis in the company. The letter in the media reveals that VG Siddhartha was under tremendous pressure from other lenders,” Romesh Tiwari, Head of Research, CapitalAim told Moneycontrol.
He said reports indicated that CCD was severely affected by the slowdown in the economy and liquidity crunch. “We may see the stock to slide further to double digits, if the clarity regarding its financials is not declared. The case reminds us of the notorious case of Satyam fiasco. Investors should avoid this stock until the whole situation is out and clear,” he said.
A sudden fall in stock price in not new to D-Street, especially at a time when fingers are pointed at the fundamentals of the company.
The CCD founder also spoke of a liquidity crunch due to harassment from a previous Director General of Income Tax with regard to the Mindtree deal. Siddhartha had recently sold 20.3 percent stake in Mindtree to L&T.
None of his team, auditors, and senior management were aware of these transactions, Siddhartha said in the ‘letter’, taking complete responsibility for the situation.
Coffee Day Enterprises provides integrated logistics solution through subsidiary Sical Logistics. Services like broking, wealth management, portfolio management etc are provide by subsidiary Way2Wealth Securities Private Limited.
The big question facing investors: should they catch the falling knife or exit in case they hold Coffee Day?
The answer is not that simple and largely lies in the type and extent of risk you could take as an investor/trader.
Any amount invested at current levels should be from the idle cash and not leveraged because the trade could go either way for a horizon of more than a year, say experts.
Investors who are holding the stocks should remain invested and watch for further developments. They could choose to exit the stock on rallies, suggest experts.
Analysts advise investors to watch out for the outcome of the board meeting and financial results for the June quarter scheduled to be out on August 8 2019.
“Tuesday’s fall in the stock price is purely on negative sentiment, as the founder of the company has gone missing. Here investor should hold the stock, as the missing founder doesn't mean that the company will close,” Sanjeev Jain, VP Equity Research, Sunness Capital India, told Moneycontrol.
Investors must watch the company's board-level business steps, he said. “It would be early to say on the liquidity issue until the full picture is clear. The company's fundamental are not impressive, as from the last several quarters there is no improvement in its bottom line due to higher interest outgo,” Jain said.
The stock hit a lower circuit of 20 percent on Tuesday. After such a massive drop, we usually see a fall in liquidity as there are more sellers than buyers.
“Well, the situation is where we can see panic. May be sudden suction where liquidity is completely out and that's what we are seeing with stock price hitting the lower circuit. This is complete panic and now the ripple effects are seen for its lenders as well,” Mustafa Nadeem, CEO, Epic Research, told Moneycontrol.
The stock, in the short term to medium term, could see this behaviour till things become clearer and management issues a statement, Nadeem said. “Traders should definitely exit the stock if they find any opportunity, as this is now going to be a long tedious process and by that time investors may feel some pain,” he said.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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