Marico Kaya Enterprises: Creating multiple moats

SECTOR: FMCG

Marico Kaya Enterprises

STOCK INFO.

BLOOMBERG

BSE Sensex:8,102

S&P CNX:26,909

MAKA:IN

REUTERS CODE

7 January 2015

Initiating Coverage

(INR CRORES)

Buy

INR967

MRCK.NS

Y/E MARCH

Revenue

EBITDA

EBITDA Margin

NP (Adj.)

EPS (Adj.)

EPS Growth

BV/share

RoCE (%)

Op. RoCE (%)

P/E (x)

P/BV (x)

FY15E

338

9.4%

23.2

334%

176

42.1

5.5

FY16E

401

11.0%

31.5

36%

196

31.0

5.0

FY17E

472

12.4%

38.9

24%

212

122

25.1

4.6

We recommend a BUY on Marico Kaya with a target of INR

1250 - valuing the company at 32x FY17E EPS

Creating multiple moats:

Since Kaya's launch in 2002, the company

has been creating multiple moats around its skin cure business. (i) The

'Kaya' brand is today synonymous to skin cure treatments and is the

only national chain exclusively offering cosmetic dermatology services

in India. (ii) Kaya has developed its proprietary advanced technologies

over the last 12 years which are being carried out under the supervision

of 166 dermatologist doctors across India and Middle East. (iii) Kaya

underwent a decade long gestation period (turned profitable in FY14)

owing to the capital intensive nature of business which would act as a

deterrent for new entrants. (iv) One of the pre-requisites for success

in this business involves a high capacity utilization rate. Being a pioneer

in this business, Kaya enjoys a first mover advantage wherein it has

occupied prime locations in tier 1 cities targeting the affluent class.

This would prevent new entrants to set up shops in areas where Kaya

is already present as that could mean low capacity utilization resulting

in prolonged payback.

Cost efficiencies & operating leverage resulting in significant

margin expansion:

In the last two years, the company's EBITDA

margin expanded by 22% points to 5% in FY14. The margin expansion

is attributed to i) a reduction of dermatologist doctors from 250 few

years ago to 166, ii) 10% cut in rental & clinic overheads, iii) 2%

reduction in backend costs, and iv) reduction in media spends from

11% of sales a few years back to 8%. The business has high operating

leverage which provides continued scope for margin expansion. Almost

70% of the company's expenses are fixed in nature (salaries, rent,

overheads) meaning incremental capacity utilization adds more than

proportionately to the EBITDA. The overall capacity utilization

currently stands at 35%, while a few of the high performing clinics

have a utilization of 55%. Kaya is targeting SSSG of 10-12%, revenue

CAGR of 20% and EBITDA margins of 12% by FY17E.

Valuations & View:

Over the last decade, Kaya has had a long learning

curve and has staged an impressive turnaround over the last eighteen

months. With the company now having de-merged from Marico, we

believe the company will not experiment too much with its business

model and maintain its core focus on skin cure services. The stock is

currently trading at a P/E of 25x FY17E EPS which is a 22% discount

to other consumer stocks. We thus value the company at INR 1250 at

a P/E of 32x FY17E in line with the consumer basket.

KEY FINANCIALS

Shares Outstanding (cr)

Market Cap. (Rs cr)

Market Cap. (US$ m)

Past 3 yrs Sales Growth (%)

Past 3 yrs NP Growth (%)

1.29

1257

210

22%

Loss to Profit

STOCK DATA

52-W High/Low Range (INR)

Major Shareholders (as of September 2014)

Promoter

Non Promoter Corp Holding

Public & Others

Average Daily Turnover(6 months)

Volume

Value (Rs cr)

1/6/12 Month Rel. Performance (%)

1/6/12 Month Abs. Performance (%)

1098/214

60.6

11.3

28.2

88291

4.80

0/280/NA

-5/284/NA

Maximum Buy Price :INR1020

Ravi Shenoy (Ravi.Shenoy@motilaloswal.com); Tel:+912230896865

Marico Kaya Enterprises

Analyzing the industry structure

Bargaining power of buyers - LOW

- Buyers' options restricted to hospitals, individual doctors,

regional clinics and Kaya, the only national brand in

dermatology. Buyers prefer niche brands as they co-relate

this treatment to beauty enhancement rather than a disease.

The organized sector being limited as of now provides

limited options to customers.

- Buyers typically belong to the high income group who

give prime importance to brand & quality of service rather

than price.

Bargaining Power of Suppliers - LOW

- Raw Material forms barely 20% of revenues and

primarily is generic in nature. Further Kaya has been

trying to increase the share of high end services where

the gross margins are even higher.

- Dermatologists are permitted to operate their own

clinics along with their employment at Kaya which

maximizes their earnings and is a win-win situation for

Kaya as well as the Doctor.

Industry Rivalry - LOW

- Intensity of rivalry in the organized segment is low as Kaya's core focus is on cosmetic dermatology services as

against multiple offerings by the only other pan India company - VLCC (dermatology forms 5-7% of VLCC's

sales).

- Kaya is the only niche brand providing dermatology services on a pan India basis. There are 20 odd regional

players with 2-5 outlets and many individual doctors, however their appeal is limited to the periphery of their

locality and do not pose a threat to Kaya's industry positioning.

Threat of New Entrants - LOW

- Access to/development of complex technology/knowhow

& high cost advanced machines/equipment is a major

barrier.

- High fixed cost model (rent, employees, doctors,

overheads) resulting in longer gestation period shall

prevent new entrants.

Threat of Substitutes - LOW

- Technology Obsolescence.

- Pharma/FMCG companies may come out with

innovative products at cheaper prices in the long run.

Negative working capital business; cash rich company:

Kaya clinics operate on negative working capital

of 50 days as clients are required to make advance payments for packages and services to be offered over the

near term. Advances from customers stood at INR66cr (20% of sales) as on Sep 2014. Kaya divested its

Singaporean subsidiary Derma Rx in Jan 2014 for INR1.7b which made the company cash surplus. Kaya thus

has net cash of INR1.85b which is sufficient to meet its capex needs for the next 4-5 years. The company is

looking to add 10-15 clinics and 15-20 skin bars in India; and 2-4 clinics in the Middle East every year. The cost

of setting up a clinic is INR 0.8-1.0cr half of which goes towards machinery and technology. Thus the company

would incur a capex of INR30cr per annum.

Possesses key attributes of becoming a wealth creator:

We believe Kaya's business model possesses

many attributes of becoming a wealth creator. (i) Kaya is the pioneer and the market leader (only organized

pure play) in the skin cure service industry which is in a nascent stage of evolution. (ii) Kaya has a highly

scalable business. With more people graduating to the affluent category as well as growing consciousness

among working women provides a huge opportunity. (iii) The business has high operating leverage which

provides continued scope for margin expansion. As there are no precedents to Kaya in this business, it is

difficult to arrive at sustainable margin levels once the industry matures, however one thing that is certain is that

margin expansion shall continue till there is an increase in capacity utilization. (iv) The company is backed by

strong leadership/management with Mr. Harsh Mariwalla at helm. With his track record of building Marico

from scratch we believe Kaya is treading the path of building a sustainable and profitable business model.

7 January 2014

Marico Kaya Enterprises

IVRCL: Financials and Valuation

Marico Kaya Enterprises Financials & Valuation

INCOME STATEMENT

Y/E MARCH

FY13

(INRCR)

FY14 FY15E FY16E FY17E

RATIOS

Y/E MARCH

FY13

FY14

FY15E FY16E FY17E

Revenues

Growth

COGS

Gross Profit

GP Margin

Employee Cost

Other Expenses

EBITDA

EBITDA Margin

Depreciation

Other Income

PBIT

E/O. Inc/(Loss)

Interest Cost

PBT

Tax

Rate

Adjusted PAT

Growth

259

291

338 401

472

21% 12% 16% 18% 18%

200

237

277 328

386

77.4% 81.4% 81.8% 81.8% 81.8%

101

116

129 153

179

114

107

116 131

148

-14

-5.6% 4.6% 9.4% 11.0% 12.4%

-36

(10)

-48

0% 11%

-38

-17% -118% 334% 36% 24%

Adjusted EPS (INR)

Book Value

Div Per Share

Dividend Payout

Net Debt / Equity

P/E

P/BV

EV/EBITDA

EV/Sales

Dividend Yield

ROCE

Operating ROCE

Op ROCE on G.Block

EBITDA Margin

PAT Margin

Debtor days

Inventory days

Creditor days

Customer Advances

W.Cap cycle

CASH FLOW

-30

2.0

40.9

4.9

-25%

-39%

-17%

-5.6%

-14.8%

136

112

-58

264

-0.5

182.6

3.7

93.4

4.3

4.6%

2.4%

155

122

-50

176

-0.8

42.1

5.5

39.5

3.7

196

37%

-0.8

31.0

5.0

28.6

3.1

1.0%

212

60%

-0.8

25.1

4.6

21.4

2.7

2.1%

13% 16% 20%

53% 76% 122%

19% 24% 31%

9.4% 11.0% 12.4%

8.8% 10.1% 10.6%

156

153

154

126

-52

(INRCR)

BALANCE SHEET

Y/E MARCH

FY13

FY14

(INRCR)

FY15E FY16E FY17E

Y/E MARCH

FY13

FY14 FY15E FY16E FY17E

Share Capital

Reserves

Networth

Loans

SOURCES OF FUNDS

113

144

327

340

105

198

185

134

-62

340

214

227

140

171

119

-41

227

240

253

177

113

199

151

-66

253

260

273

216

131

229

189

-97

273

Gross Fixed Assets

150

Less: Depreciation

118

Net Fixed Assets

Capital WIP

Goodwill

Investments

104

Cash

Curr. Assets (ex cash)

Creditors and Prov.

102

Net Curr. Assets (ex cash) -45

Less Net Def. Tax Liab

APPLICATION OF FUNDS144

EBITDA

Adjustments

(Inc)/Dec in W.Cap

Pre Tax OCF

Tax Paid

CF from Operations

(Inc)/Dec in FA

Invst/Loan: Subsidiary

Other Investments

Interest Received

CF from Investing act.

Capital fm rights issue

Inc/(Dec) in Debt

Interest Paid

Divd Paid (incl Tax)

CF from Financing act.

Inc/(Dec) in Cash

Add: Opening Balance

Closing Balance

-14

(13)

(81)

(31)

132

(67)

(2)

(8)

-6

(13)

161

181

(71)

(0)

(71)

133

185

(7)

(35)

(14)

(39)

(14)

185

171

(37)

(26)

(15)

171

199

-4

(39)

(26)

(30)

199

229

7 January 2014

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Marico Kaya Enterprises

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