Marico Kaya (MaKE)

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Recently De-merged from Marico ltd, Marico Kaya (MaKE) owns the Kaya Skin Clinic Brand. It has 85 Skin clinics spread across 26 cities in India and 18 clinics in the Middle East. The team consists of 160 dermatologists & various other certified beauty therapists. It offers speciality skin care in areas of anti-aging, pigmentation, acne, scar reduction, laser hair reduction and various other beauty enhancement services. It also sells its own range of over 50 skin care products

Pros

1). It is probably the only meaningfully large organised play available in the skin care sector.

2). Itâs a direct play on the rising middle class consumption story

3). For beauty-skin related services, a brand is essential as people are less likely to opt for an unknown entity here

4). Will most likely see a migration trend from the individual local dermatologist to the organised multi-service branded operator

Cons

1). Not too much information is available at the moment since the company is only newly formed

In terms of valuation, the company is available at a 400cr market cap. Revenues are close to 360cr and profits at 35cr. I think paying 10-12 times for this management pedigree and the business sector may not be too expensive. Also because of the de-merger im assuming large institutions will be compelled to sell shares initially

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Dear Akshay,

There is an exceptional profit of around 20 cr,if we exclude that the stock is available at 20 PE multiples.

Other than that I agree with your all comments,after demerger the management can have better focus,this is evident from the first year of operation,this is the first year kaya is reporting profit.Seems like management have taken some initiatives to change the business model and thereby reducing cost.

What I came to know is company is targeting 500cr revenue in next 2-3 years,if it is so is an interesting bet.

Competition remains to be the key challenge especially in middle east market.

Rz

Shanid

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Hi Shanid

Thanks for pointing out about the exceptional item. I could not find much information on the company…So please share if you have anything more, especially on areas like revenue mix (products/services, india/abroad), future strategy etc…I heard that their capacity utilization is close to 55% only, so maybe some operating leverage can kick in too…Also any idea on the balance sheet??? I think on a market cap basis its too small and besides is the only known player in the segment…I think this sort of business should clock a 10% PAT in the future so am not too worried about current profits as it is only just about breaking even and finding its footings

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You can check the kaya website for the basic details like services offered and other info.

I have not much idea about revenue mix and all.The thing is that attracting new customers is a tough job,near term bottom line growth may be there BC of the reason mentioned by you,but cannot say about top line.

Disclosure : not invested,will track few more quarters before a decision.

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Hi Akshay,

the balance sheet and consolidated results are available on Marico kaya website ( BS in the information memorandum)

Also please note that the company has already sold off DIAL Singapore business ( on 9 Jan 2014) for 168 cr and NP of abt 59 cr. and intends to sell KME ( middle east) business in current financial year. After this only Kaya ltd India business will remain.

As per consolidated results from 19 Jan 2013 to 31 mar 2014,

Total rev = 362 cr

if you exclude rev of DIAl ( 72 cr) and KME ( 138 cr) ( discontinuing operations ) , rev of Kaya Ltd or MAKE comes to 152 cr for 14 months.

PBT at consolidated level = 22 cr, assuming tax of abt 5 cr , NP = 17 cr. ( excluding exceptional items)

If we remove NP of DIAL ( 14 cr) and KME ( 6 cr) ,** Loss of Kaya or Make comes to abt 3 cr.**

Please note I have rounded off figures and made assumptions regarding tax. The above calculations excludes exceptional items ( sale of DIAl , write offs. write back etc).

For KAYA LTD last 3 yr rev and NP is as follows :

Fy 11 / 12/ 13 : Rev - 108 / 141 / 143 cr, All three years company has posted loss - FY 13 loss of abt 18 cr.

After sale of DIAl - Current investments of abt 170 cr and cash of abt 14 cr with the company.

As per results , net assets of KME are abt 55 cr.

So after sale of KME, company will have abt 220 cr of cash equivalent, rev of abt 150 cr.

Present Mcap at CMP of 313 rs is abt 400 cr which is NOT cheap.

Also it appears that from FY12 to FY 14 the Kaya ltd ( indian operations ) revenue is stagnant ( abt 140 cr ) which can be blamed to lack of discretionary spending but still is not a good sign.

Company will have money to invest and set up new clinincs but it will take atleast a couple of years for the business from a new clininc to reach optimum level ( my guess ).

Due to lack of past records, could not calculate company roce.

Please correct me if I have made some mistakes above , also if I am missing the bigger picture which I quite often do.

Also I will ask my wife to find out about Kaya products / clinic from her friends and if other value pickrs can give some feedback. The 3 Kaya skin bar are in Bangalore.

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Hey Manish

That’s some good information…Based on your information let’s try and invert the problem on valuation. A consumer facing industry, a monopoly and the marico management may deserve a multiple of 15-20 (as per my thinking). So for the company to command a valuation of 400cr, its profits should be around only 20-30 cr…Also have suffered in the past by looking at conventional valuation ratios of small growing companies…Though I have no idea if it is a growing company at the moment…Personally I know of quite a few people happily using their services and products for a few years now and for segments like skin care, hair reduction etc I dont know of any other branded player… which is why i see obvious growth of the brand…Of course all this needs to reflect in the numbers, especially revenue growth…The numbers you have mentioned are 108cr, 141cr, 143cr…Any idea on why there was no growth in year 2 to 3 or is it only lack of discretionary spending?? I think its an evolving story and the first conf call or annual report should give a lot of clarity…It would be great to have feedback from others on the stock story and also of personal experiences of using their products and services

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Q1 results have come as nothing less than outstanding, with all parameters, esp SMS growth of 10 and 17 %, India and ME

After that some FII/HNI have been agressively buying it seems. Stock is hitting circuit after circuit. Share Khan has also come up with a report with a taregt of 700. They are saying it is really cheap with 12-14 PE FY16.

I also think in long term it may command min 30 PE in afast growing niche segment.

The story looks really promising, esp on conusmption theme and low base effect. To me it looks like a combination of Page & jubiliant Food

Although there is not much info available after demerger with Marico, no annual reports, but looks worth keeping a close watch.

Wanted to enterfor last few days but not able to due to circuits, for v small exposure, just for tracking

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Marico Kaya is very good turn around in last two quaters. Currently company has more than 85 clinics in india and 18 clinics in middle east. Revenue from india is about 55 % while from middle east market is around 45 %. Company also has nice plan for pushing kaya products through kaya skin bars (4 currently) and third party channels. Company management has guided to add around 3-4 skin clinic in middle east , 10-12 clinic in india and 10-15 skin bars per year going forward. Company don’t have any debt on books and carry more than 150 cr cash which is enough to fund expansion plan for next 3-4 years. Stock price has good run in last 2-3 months and currently quotes at around Rs 1000.

Disc: Invested at around 300 levels.

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The company appears to be in good growing market segment. There is no doubt on management ability. Lately even the management has acquired some share from the market too.

The problem is how to value it. Presently extra ordinary items are distorting the profit numbers. Further presently the company is in growing phase and may not generate high margins due to opening of new outlets, advertising expenses etc. I think we should concentrate on topline numbers and growth in it.

What percentage of profit margin the company can generate can only be guessed at this point of time. In June quarter the operating profit margin was dismal (2%) which improved in September quarter to 9%. Top Indian companies in personal care business (not comparable directly) commands a net profit margin in much excess of 10%. Beauty salon businesses in developed countries are generating a net profit margin of around 8%. On a conservative basis we can expect it to generate a net profit margin of 7.5%. A recent mint article said that VLCC earned a profit of 100 crores on a topline of 700 crores (14%).

In the first half of the current year it has generated a topline of 160 crore. Seasonally second half is better and we can expect it to generate a topline of 400 crore in FY15 with a profit of around 30 crores. Thus at CMP of 1000, it is trading at around 40 times current year earning. It does not appear to be value stock at current market price.

I personally feel that the company is in a very sweet position. It has a reputed brand and commands a premium. The commodity business of Kaya Skin Bar can also make a dent in the market like VLCC or Shahnaz products. They have various products in skin care, eye care, hair care segment which they are starting to distribute through various channels. Personally I feel that the products are good, and Marico has understanding of distribution channels to distribute the products. If this part of the business clicks, the current market price is a steal. We need to keep a tab on the acceptance of kaya products in the market. If the products are accepted, the company can do very well.

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Check the enclosed link. It provide very good understanding about the business. It would have been great had the management provided break up of extra ordinary items for last three years.

http://www.maricokaya.com/pdf/corporate-presentation.pdf

Rs Cr FY12 FY13 FY14
Sales 214 258 290
PBT (Before EO) -56 -26 4.7
Exception Item 11.7 -22.2 19.0
PAT post exceptional -44.4 -48.4 18.2
EPS (Rs per share) -34 -37 14
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Marico Kaya is a multibagger in the making and can be held for long term capital appreciation. The Company is expected to grow its topline @20-25 cagr for next 7-8 years based on new store addition which will contribute 10-12% and increase in prices and footfalls which will give 10-15% additional revenues.

The Comany is having a very high operating leverage as fixed cost such as rental,staff cost are fixed and at present the capacity utilisation is roughly 35% and in the best performing stores its 55%. So as the SSS goes up the addition to the bottom line is more then proportionate So I am expecting the bottom line to grow at 35-40%CAGR.

Further the Company is working on negative working capital as it receives advance from its customer for the services to be rendered.This amount was 66 crs on 30.9.2014.

There is not going to be any tax liability for next 3 years because the goodwill which is standing in the books will be converted to carried forward loss on amalgation andas a result the company will not be paying any dividend for these years but thereafter I expect the Company to be very liberal in its payout.

Next year the Company is entering the Hair care and restoration segment which will be another vertical.

Further the entry barriers are very high as this business operates on a very high operating leverage and to sustain losses for new entrants is very difficult.

The Company spends 9% of its turnover on Training and R&D.

As the earnings expand the PE will also expand in line with the market expectaion and all in all its a great stock to buy and hold.

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Why do you think the entry barriers are high?? As the market develops, one can expect foreign players to enter…While their number of locations might not be as much but they will give tough competition to kaya on the same location…Assume XYZ skin clinic near a kaya outlet, probably with some celebrity endorsing it… How likely is it then that customers will shift ??or how likely is it to induce a price war at least on basic services??? I have been battling this question for a while…Does kaya have any advantage of being the leader in terms of location??? What are they, if any??

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Manoj, the logic is flawed. Rentals of new stores will be a killer as real estate costs in Indian cities is very very high and also they cannot operate in some bylane. They have to have an outlet on a main street or an affluent locality, which will cost a lot of money.

Infact, the business will have a high component of fixed costs like rent and salaries of experienced beauticians, who command high wages, as there is a shortage of experienced professionals.

I agree that if capacity utilization of existing stores goes up, the PAT will increase at a faster rate. But then the question arises, why is the capacity utilization low, if they are really so good?

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For those of you who are very enthusiastic about Kaya, please check the con call transcripts of Marico for the last ten years. Every quarter, the management said that they had a loss/marginal profit for the quarter, but that they were taking new initiatives to correct. When the Indian operations did not turn profitable, they went and bought some foreign clinics. When that did not improve matters, they moved to a product selling focus. Finally, the Marico management got tired (I think) of a business which was refusing to scale up and was a drain on their focus, so they decided to demerge. I fail to understand how the new entity will change what hasn’t changed for a while. It is clear that Marico is looking for a strategic investor, who will take this off their hands. In the meantime, enjoy the rise in the stock price!!

Disc: In a sort of remote way, am also in the same industry

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Yes and the management has been open enough to admit their failures…They were experimenting to see what works for a long time…The niche has been found after years of struggling…The management realized that what really works for them is the cure segment and not beauty…The product business is a high ROE business…Given that the kiosk format requires low investment, the response can be gauged with minimal damage…IMHO the management is what gives one the confidence that they will do something good with this segment…The de-merger has happened after the business model has been sorted and after the company broke even which is the credible and right way to go about it

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Hi Bomi & Akshay,

Thanks for your comments. Precisely for the reason that the rentals are high and since Kaya has taken up prime locations on rent in tier 1 cities already it will be very tough for a new entrant to set up shop near by. Kaya is already known for skin care and the most pertinent point is that this business needs a high utilisation rate for breaking even as the operating leverage is high so for a new entrant its going to be a uphill task to catch up with Kaya as it has a solid 12-13 years lead as it took Kaya 12 years to break even with a cash burnout of 350 crs. It has also developed its propriety advanced technology and experience which it uses for skin treatment.

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**key highlights of the call by Capital Mkt;
**

  • For the quarter, the net sales increased by 22% to Rs 85.4 crore. EBIDTA margin increased from 4% to 13%. The net profit stood at Rs 12.08 crore.
  • Kaya India
  • The net revenue growth was 18% to Rs 44.1 crore. The net profit stood at Rs 5.4 crore as compared to loss of Rs 0.3 crore in Q3 FY14.Same store growth (SSG) in the quarter was 15% against 10% in Q2 FY15 and 9% in Q1 FY15. SSG was driven by investment in technology and improvement in service.Ticket size grew by 10% to Rs 6865.Customer count increased by 2% to 64617.
  • Cure category has grown in contribution from 62% to 66% in Q3 FY15 with a growth of 20% over Q3 FY14. Cure Category collections grew in the quarter with growths both in count and ticket size.
  • Care vertical de-growth has been arrested by launch of 4 New Beauty Facials resulting in 3% growth in Q3 FY 15. The Category has de-grown in contribution from 14% to 13% YoY.Overall product growth is 4%. It has also de-grown in contribution from 23% to 21% YoY.Loyalty member’s contribution increased from 80% in Q3 FY14 to 84% in Q3 FY15.E-Commerce sales growth of 204% over Q3 FY14, contributing around 8% of overall product sales.4 new clinics opened in the quarter taking total to 92 clinics. 7 clinics are added in 9M.3 new Kaya Skin Bar (KSB) opened in the quarter taking total to 7 KSB. 4 KSB are added in 9M.
  • The cost of opening KSB is around Rs 18-20 lakh and revenue from that bar is expected to be around Rs 50 lakh per annum.
  • Kaya Middle East
  • The net revenue growth was 27% to Rs 41.3 crore. The net profit was at Rs 7 crore as against Rs 1.8 crore in Q3 FY14.SSG has been 21%.Customer count increased by 3% to 14929.Ticket size grew by 14% to USD 435. Ticket Size growth is mainly on account of increase in Revenue from Cure category.Cure category has grown by 17% over Q3 FY14 on account of introduction of New Services & category led campaigning.
  • Products portfolio grew by 29% in the quarter on account of introduction of new kaya products in the region.One clinic in Fujairah was added in the quarter, totaling the overall clinic count in Middle East to 19.
  • Other highlights
  • The growth for Q3 is largely volume led.The mgmt expects SSG growth to be in range of 10-12% going forward on back of introduction of new services & products, investment in technology and product mix.
  • The company will open 10-15 clinics in India and 3-4 clinics in Middle East on annualize basis.Hair plant service will take more time to introduce.
  • The mgmt said that in India competition is there but not widespread. It is present in some local pockets,The company will focus more on doctor led services for growth.
  • The company not intends to open KSB in Middle East.It takes 18 â 24 months for Kaya Clinic to breakeven and KSB takes a year.GST impact will be marginal either on upside or downside.The company at present has 85 matured clinics. Last year, only one clinic was added, before that for last 2-3 years, no clinic was added.
  • The cash on book is around Rs 180 crore.
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Following are the key highlights of the call by Capital Mkt:
For Q4 FY15, the consolidated net sales grew by 12% to Rs 86.91 crore. Same store growth (SSG) is 8%. The operating margin declined by 50 bps to 9.4%. The net profit grew by 15% to Rs 7.18 crore. Like to Like net profit excluding expansion is Rs 8.4 crore, growth of 24%
In Q4, Collection improved by 12% to Rs 96.1 crore.OPM in Q4 is impacted by New clinics / KSB openings.For FY15, the consolidated net sales stood at Rs 331.52 crore and the net profit stood at Rs 32.53 crore.
Kaya has added 15 clinics and 11 Kaya Skin Bar outlets in India & 1 in Middle East in FY15.The advances from customer have increased from Rs 66 crore in FY14 to Rs 70 crore in FY15.
Kaya India
The net revenue growth was 15% to Rs 45.9 crore. Net revenue SSG is 12%. The net profit before EO stood at Rs 3.9 crore as compared to Rs 3.3 crore in Q4 FY14.Collection improved by 14% to Rs 54.1 crore. Collection SSG is 10%.Like to Like operating margin was just at 4% on account of higher depreciation due to medical Technology investments.Ticket size grew by 9% to Rs 8319 on account of Category promotions in Feb. 2015.Customer count increased by 5% to 64175 led by both Cure and Care category growth.Cure category has grown by 15% (SSG: 12%) in Q4 FY15 with an increase in mix from 65% to 65.5%. It contribution to India’s revenue was 65%.Care vertical grew by 27% (SSG: 23%) backed by PAN India Introduction of New Beauty Facials. It contribution to India’s revenue was 16%.
Overall product growth is 3%. It has de-grown in contribution from 21% to 19% YoY. Product contribution will go up to 25-30% with launches of skin bar.Loyalty contribution was at 81.8% in Q4 FY15 as compared to FY14 average of 79.3%. Member base increased by 53% over FY14 to 1.79 Lakh.
E-Commerce sales was Rs 0.60 crore, growth of 49% over Q4 FY14, contributing around 6% of overall product sales.8 new clinics opened in the quarter taking total to 100 clinics.7 new Kaya Skin Bar (KSB) opened in the quarter. The focus is on Bangalore. The mgmt said that it will add 1 – 2 cities and create awareness of KSB.
Kaya Middle East (KME)
The net revenue growth was 9% to Rs 41 crore. Net revenue SSG is 5% at constant currency. The net profit before EO stood at Rs 4.2 crore as compared to Rs 4.1 crore in Q4 FY14.Collection improved by 10% to Rs 42.1 crore. Collection SSG is 6% at constant currency.SSG is low due to base effect and also due to loss few days due to internal training program.Customer count remained flat at 15409.
Ticket size grew by 6% to USD 427 mainly on account new service introduction and category led campaigning.Cure category has grown by 6% over Q4 FY14 backed by Introduction of New services. It contribution to Middle East revenue was 78%.Care category has grown by 4% over Q4 FY14. It contribution to Middle East revenue was 11%.Products portfolio grew by 9% in Q4 FY15 on account of introduction of new Kaya Products in the region. It contribution to Middle East revenue was 11%
Other highlights
32% of total count in Kaya India and 38% in KME are new customers.85% of the clinics are cash positive at the beginning of the FY15. Fair numbers of clinic are showing breakeven which were opened in Q2 – Q3.EBITDA margin at store level is 35% in India, while margin at company level is 6% due to corporate overhead which takes away 20% and A&P takes away 8%.Similarly, EBITDA margin at store level is 38% in Middle East while margin at company level is 17% due to corporate overhead which takes away 15% and variable overheads take away 6%.Promotional campaign in Q4 led to higher other expenses QoQ thereby impacting margin. The company do promotional campaign twice in a year – January - February month and July – August month.
The mgmt intends to add 10-15 clinics and 20+ skin bars in India each year.The mgmt plans to add 2 new clinics each year in Middle East.The mgmt expects SSG of 10-12% in India and 8-9% in Middle East.The company receives 49% of revenue in H1 and remaining 51% in H2.

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Q2 Results continued to be mediocre. EBIDTA margin has seen slight improvement to 3.8% sequentially from 2.1%. Y-o-Y sales growth at 5% with both India and KME growth slowing down. 35 new Kaya Skin Bars opened this quarter though. No. of customers contracted in Kaya India while they grew marginally in KME.
In short, the struggle for the company continues.