MUMBAI: Packaged consumer goods firm Marico plans to demerge its services business Kaya into a separate listed firm in a move that could help improve valuations of the parent company that has been weighed down by the weak performance of its services arm.
“Kaya requires a completely different mindset to grow. So we have taken off the Marico hat from Kaya and unshackled it from the Marico rules,” Harsh Mariwala, chairman at Marico, said. “It will have the wealth creation opportunities present in Marico and help establish an entrepreneurial culture that will drive growth.”
The move will also help centralise the leadership structure and offer different career paths and larger roles to the Marico talent pipeline, Mariwala said. Saugata Gupta, who currently heads domestic consumer business, will lead the overall FMCG firm as CEO, while international business head Vijay Subramaniam will take over as CEO of Kaya, effective April 1.
Marico Kaya will be listed separately on the Bombay Stock Exchange and the National Stock Exchange and will have its own board of directors distinct from Marico’s board. The maker of Saffola and Parachute oil will also combine its consumer products business and international business group for operational cost benefits. Analysts consider it a positive move for investors who have been raising concerns about Kaya’s business model for some time now.
“There were some reservations from minority investors on Kaya’s performance for the last 2-3 years and splitting the business should help Marico’s valuations,” Nitin Mathur, consumer research analyst at Espirito Santo Securities, said. “However, re-rating of the stock will happen only if on-ground investments in terms of advertising or marketing will be accounted for separately,” he added.
A decade-old Kaya, which offers skincare solutions through 106 clinics, contributed around 7% to Marico’s consolidated revenue of .`4,000 crore in 2011-12, but had a loss of Rs 29.1crore at the EBIT level. Company officials said there were strong cultural differences between Marico and Kaya that limited the growth prospects for Kaya.
“Kaya is a feminine business; 85% of Marico’s employees are male, which created a macho system that did not understand the requirements of Kaya where 85% of employees are women,” Milind Sarwate, CFO at Marico, said. Officials also said the company is also open to the possibilities of roping in a strategic private equity player into Kaya once its growth plans are in place.
While Marico slowed down Kaya’s expansion in the past two years, the services arm turned in a profit of Rs5.7 crore in the second quarter ended September, but is still a loss making business at an overall level. However, the management is optimistic on its turnaround plans. Since the last few months, Kaya clinics have been selling high-margin products from the portfolio of its acquired firm DermaRx, taking the retail contribution to over 20%. Cost rationalisation through smaller stores and affordable services, along with increased focus on high-margin Derma Rx product sales via clinics, has also helped its same-store sales growth over the past eight quarters.