On the face of it, demerging a Rs 280-crore division into a separate unit may hardly seem to make sense, but Marico, the maker of brands such as Parachute and Saffola and promoter of services business Kaya, has had its reasons for doing so. Shareholder pressure to desist from funding the loss-making Kaya, set up a decade ago, had been mounting on Marico for long, say observers of the Mumbai-headquartered company founded in 1987.
Marico’s exposure to Kaya in terms of interest-free loans and equity put together was around Rs 180 crore as on September 30, 2012. Interest-free loans alone, say market experts, constituted the bulk of the funding to Kaya at Rs 108 crore. There were external debts too taken from banks such as Standard Chartered and Citi to the tune of Rs 87 crore, which will be carried into the books of the new entity – Marico Kaya Enterprises (MaKE) — that will come into existence effective April 1, 2013. This entity will be listed by June-July this year.
But the pressure to reduce its overall exposure to Kaya was clearly growing, say experts.
While Kaya’s growth in topline has been in double-digits in the last few years, its inability to break even so far had been a cause for concern. (See chart on Kaya’s financial numbers).
| BUSINESS SNAPSHOT: KAYA | ||||
| FY10 | FY11 | FY12 | YTD (‘12-13) | |
| No of Stores | 101 | 103 | 107 | 110 |
| Revenue (Rs crore) | 182.1 | 241.2 | 279.3 | 173 |
| Revenue/store (Rs cr/store) | 1.8 | 2.34 | 2.61 | 3.15 |
| PBIT (Rs crore) | -26.6 | -24.9 | -26 | -1.6 |
| Source: Enam | ||||
Company executives blame this on the uncertain environment and the lowering in particular of discretionary spends. The last few quarters have been particularly tough for companies that dabble in discretionary categories. This is true for both fast moving consumer goods (FMCG) and retail.
Kaya has struggled to drive footfalls at its less than 100 outlets in India (it has a total of 110 outlets if national and international operations are taken into account) at a time when consumers have cringed to spend due to inflationary pressures. While the wholesale price index (WPI) has been moderating, the consumer price index has been hovering at the 10 per cent mark in December.
Kaya has done it all — from driving promos and offers at regular intervals to shutting loss-making outlets to keeping head count under check. Even then, say experts the retail business is a tough one to crack especially in those categories where spend levels are little high.
Targeted mainly at working women (though in recent years, Kaya has seen a good number of men walk in as well for its services), spend levels at a Kaya Skin Clinic depending on the service and frequency can start from as low as Rs 1,000 going up to Rs 1 lakh for a full-body laser and other high-end packages.
In an earlier conversation with Business Standard, Kaya’s outgoing CEO Ajay Pahwa had said that the division was conceived keeping in mind the need for good-quality skin services amongst the vast majority of middle-class women who were beginning to demand something better than what their average neighbourhood parlours or salons could offer them. “Kaya sits between the high-end dermatalogist-led clinics at one end and the neighbourhood parlour at the other end. You have beauty services as well as solutions that address specific skin needs that are available at Kaya. The treatment is arrived at with the help of a dermatalogist. And the rates are also quite affordable,” he pointed out.
While the regular Kaya Skin Clinics will continue to follow this business model, the soon-to-be-demerged division is now putting in place a more “scalable” plan of action, which will see it set up smaller outlets called Kaya Skin Bars that will focus more on offering products than services. The idea is to cut losses and drive penetration of the brand in the country at a time when the skin solutions space is increasingly getting competitive. In five years, Pahwa had said, the gameplan was to have approximately 150-200 of these smaller-format stores – more than double the number that Kaya has seen in the last ten years.
At the same time, Kaya is expected to break-even in the next few years. By some estimates this could be as early as FY14 or FY15. Milind Sarwate, chief of finance, HR and strategy, Marico, says, “The division has begun making cash profits since last year and we will see break-even happening soon.”
Most view these measures as a means to clean up its books prior to attracting external investment. Marico has not denied the potential that the demerger has to unlock value (read induction of a strategic investor into the business).
Citi Research in its report recently on Marico’s restructuring and Kaya’s consequent demerger had said, “The hive-off of the loss making/ capital intensive Kaya business from Marico gives investors a cleaner FMCG company. It also provides a value creation opportunity for shareholders.”
Company observers say that the induction of a strategic partner into the Kaya business will be critical to the division’s next level of growth. This acquires significance as Marico gets set to maintain an “arm’s length” with Kaya, converting its interest-free loans of Rs 108 crore into equity prior to the demerger. Support therefore from an external partner will be critical, say experts. The demerger also comes at a time when 100 per cent foreign direct investment has been permitted in single-brand retail in India. With international retail majors keen to take advantage of this window, Kaya is readying itself for a new innings.
