The specialised skincare and beauty solutions provider reported an annual profit in FY-14. Though net profit of Rs 18.2 crore was boosted by net exceptional gains of Rs 19 crore (mainly due to sale of its Singapore-based Derma RX Aesthetics (DRX) in January, 2014), profit before exceptional items and tax stood at Rs 4.7 crore. For the quarter ending June, 2014, even in the absence of the more profitable Singapore business, Kaya reported a net profit of Rs 63 lakh. This could have been higher but for the extraordinary item (one-time payment) of Rs 4.8 crore. The numbers may be small, but is significant given that the business was struggling till about a year and a half back.
Marico's specialised skincare business under its subsidiary, Kaya, was demerged in 2013. With Marico standing for FMCG and Kaya services, the businesses required different skill-sets and differed in scale as well. Kaya was about to break even, says the company, and the business needed a more focused management.
Abneesh Roy of Edelweiss Securities says that while Kaya struggled in the last 10 years, he is willing to give the new management the "benefit of doubt" because of the enhanced focus. The Kaya management, on its part, says there is no scope for any doubt.
Harsh Mariwala, chairman of Marico and Kaya, says, the improved performance is not a one-year blip and is for the long term.
A change in focus
The second piece of the strategy is a greater focus on 'cure' - providing specialised skincare solutions for anti-ageing, active acne, pigmentation and hair removal. Until a little over a year ago, Kaya had leaned towards the 'care' segment, where it provided services like facials. "We will continue with both cure and care. The route to our customer will be first cure and then care. Somewhere it had got shifted to care and then cure," says Mariwala. In the last one year, the company has leveraged technology in high-end dermatology services (cure) and launched new products.
Utilisation is the key
Kaya has been able to cut costs to increase profitability by curtailing property rentals and improving utilisation. Since its overheads are fixed, an increase in utilisation adds more to the bottomline, just as with airlines or hotels. Although overheads are high, gross margins are also high at about 80 per cent. So, utilisation of rooms at the clinics plays an important role. Currently, the utilised capacity on commissioned rooms is about 45-48 per cent, which the company can scale up to 60-65 per cent.
From the gross margin perspective, we have moved the needle by 4-5 percentage points. On rentals, we have closed over 50 property deals coming up for renewals where we have managed to hold costs. Overall, at the clinic Ebidta level, we have been able to improve margins by 6-7 percentage points, says S Subramanian, CEO, Kaya India. Going the digital way (online sales through its own portal and tie-ups with Jabong, Snapdeal, Flipkart etc.) has helped the turnaround too.
Products gain ground
While services for cure will continue to account for a large part of the business and forms about 80 per cent of total consolidated revenue, the products segment too is getting its share of attention. Backed by lessons from DRX (learnt over three years) and R&D, the company has developed a portfolio of 55 different packs for skincare, including 10 from DRX. In the last one year, Kaya has developed 10-12 products in-house and plans to take the tally to about 80 in two years.
Kaya Skin Bars, which are dedicated retail outlets, would be ramped up to number 15-20 in a year, from the current three. These would take the share of Kaya's skincare products from 20 per cent to 30-35 per cent over the medium term.
The company would add 10-12 Kaya Skin clinics every year to its current count of 87 stores in the 26 cities it is present in. In West Asia, there are 18 clinics and the plan is to add two-three clinics every year.
But competition from local modern salons and dermatologists, which are 15-20 per cent cheaper, is rising. There also looms the threat of dermatologists working with Kaya taking away its clients when forging out on their own. Especially, since attrition levels are high.
That is where analyst Roy says the cure approach will help. "In cure, there is less competition. Stickiness of customers is higher and branding helps a lot, unlike in care", says Roy. A loyalty programme, which accounts for 80 per cent of the business with about 150,000 customers enrolled, could also fend off local competition.
While there is no national competitor yet, Kaya plans to keep its first-mover advantage by stepping up R&D. The scale also helps rope in vendors with prototype-testing of technology. "Leveraging scale for trial (of equipment) without capital commitment puts us ahead of standalone players. We can also invest more than them; each machine can cost Rs 30-40 lakh," says Mariwala.
So, how fast will these efforts reflect in better return ratios for the company? The West Asian arm is already clocking a return on equity (RoE) of 15 per cent.
"In about three years, we (Indian arm) should be in double-digits (RoE)," says Mariwala. Analysts expect the company's topline to grow at over 20 per cent annually. For its Skin clinics to break even, it takes about 18-24 months, while for a Skin Bar it would be around a year. Since Kaya does not have debt and has a cash surplus of Rs 175 crore (on its balance sheet), there is steam to power its expansion drive.