Return on equity (ROE) could increase almost four times to 25 per cent in FY20 and the coffee maker’s net profit is expected to triple to about Rs 300 crore from Rs 106 crore in FY18, with huge savings in interest costs.
“This is a big positive for CCD because it will cut net debt by 80 per cent and pave the way for restructuring into the cafe and non-cafe segments, with clear capital allocation,” said Jigar Shah of KIM ENG Securities. “It also increases the focus on the high-growth, high-potential consumer business.”
“CCD, with a good business model, is likely to reduce its debt by 50 per cent after the Mindtree stake sale, which in fact will save the company a huge sum in terms of interest outgo,” said A K Prabhakar, head of research, IDBI Capital. “We expect strong net profit growth on increased margins, with a fall in debt levels.”
At the end of December 2018, Coffee Day Enterprises along with its group company Coffee Day Trading held 17.68 per cent of Mindtree, while promoter family member Siddhartha held 3.33 per cent stake.
The company continued to close unviable legacy stores, which also increased profitability. It might close 50-70 stores next year out of 1,750 as part of its strategy to improve the brand image and appeal to the millennials.
Technical analysts also expect the stock to break out.
“CCD has provided a clear breakout from the down trendline resistance, with increase in volumes indicating a trend reversal from sideways to up,” said Jay Anand Thakkar, Assistant Vice President - Equity Research, Anand Rathi. “The daily and weekly momentum indicators are in bull zone. On the lower side, the stock has crucial support at Rs 267 and there is resistance at Rs 325, which is also the short-term target.”
On Thursday, the stock ended at Rs 296.05 on the BSE.
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