Rejuvenating Kaya?

They started this business 10 years ago and are today hiving it off into a separate entity. The idea is to list the business separately and unlock value. Value? 10 years, consistent losses, it has been a drag on your principal business and you think it can create value now? Well, strange as it may sound, Marico has announced a major restructuring of its business. It has decided to separate the Kaya Skin Clinic business from its core FMCG business. The good part of its restructuring exercise is that it has also carried out some changes in its top management and the role they play. This piece may have begun on a caustic note, but this restructuring is a big positive for Marico's future growth prospects. The markets have already sensed this and the Marico stock closed up almost 2 per cent on the announcement day (January 8, 2013).

The company management has decided to separate the Kaya business with the demerger slated to take effect from April 1, 2013. It would now be a separate entity and would be listed on the BSE and the NSE. Shareholders of Marico would be receiving one share of Kaya (face value Rs 10) at a premium of Rs 200 for holding of every 50 shares of Marico and any balance fraction thereof in cash. The proposed name of the listed entity is Marico Kaya Enterprises (MaKE).

The separation of Kaya’s business from the core FMCG business is a very good move as it was anyways a drag on the overall financial performance of the company. On a consolidated basis for FY2012, Kaya’s business accounted for around 7 per cent of the total turnover of the company. However, it posted a loss of Rs 29 crore during FY12, dragging the overall performance of the company down. This is not a one time performance. In fact, Kaya has consistently posted losses. It is now is on the verge of breaking even. But isn’t 10 years of being in business a long time for achieving break even? Kaya will now be run in an entrepreneurial manner, as an independent business. Will this really create value going ahead? Only time will tell. And as we know, Marico’s time frame for succeeding in this business has been too long.

So, how does this help Marico? This demerger will exclude Kaya's losses from being considered in Marico's business and hence its EPS could rise by around 0.45 paisa owing to this demerger. The benefit of the same would increase the stock price by Rs 18 per share, considering the current TTM P/E of 40x at which Marico is trading.

According to the new developments, Saugata Gupta, who is currently looking after the domestic business will also look after the International business. He would be looking at the overall FMCG business of Marico, while Ajay Pahwa, who is currently the Chief Executive Officer of Kaya, is slated to exit the organization. Vijay Subramaniam, who is currently at Marico’s International business segment, would be taking charge of Kaya's business. Going ahead, both Gupta and Subramaniam would continue to report to Harsh Mariwala directly.

We believe that the overall restructuring done by the management is a positive move. For shareholders, Marico would continue to create wealth going ahead too. Further, shareholders of Marico would be allotted shares of Kaya (in the ratio as decided).  So, where Marico is slated to be value accretive for investors following these restructuring moves, will Kaya too follow its footsteps and deliver results? This is something that we would want to wait until something really becomes visible. Until then holding on to Kaya shares which you get as a part of this restructuring is not a bad deal. After all you aren’t paying anything for it.

Before we conclude, allow us to remind you that we had recommended Marico in our Issue # 1 of 2012 (dated January 1, 2012) at Rs 147 per share, and at the current market price of Rs 230, it has given handsome returns of 56 per cent. Enjoy the benefits of a rising share price of Marico following these developments and watch this space for more on what to do when the time comes.