Milind Sarwate, group CFO, Marico, in an interview on CNBC-TV18, explains that the growth prospects of flagship brand would improve after the restructuring process. Sarwate hopes for greater returns from 'Kaya Bar' and is not looking at an outright sale of the Kaya business post restructuring
There will be no outright sale but we will look at strategic partners over a period of time and not immediately
Milind Sarwate, group CFO, Marico , in an interview on CNBC-TV18, explains that the growth prospects of flagship brand would improve after the restructuring process. Sarwate hopes for greater returns from 'Kaya Bar' and is not looking at an outright sale of the Kaya business post restructuring. He expects better chances of price discovery are possible in a separate entity. He is looking at listing of MaKE (Marico Kaya Enterprises Ltd) by mid-July 2013.
Kaya contributed approximately 7 percent to the company's topline and the return on capital employed for the group was 23 percent last fiscal. The return on capital employed (ex-Kaya) stood at 27 percent last fiscal. Kaya’s India business has started earning profits in terms of cash levels.
Below is an edited transcript of the interview on CNBC-TV18.
Q: Now that Kaya is going to be in a separate entity post restructuring, what is the growth trajectory you see for the retail business? What sort of equity infusion might the company need going forward?
A: I feel that the growth prospects of Kaya as a business would only get better once it is hived off as a separate company. There are a couple of issues which we wanted to highlight and one of them is that as regards culture, clearly a retail business requires a different kind of focus and organisational approach. It needs to be more entrepreneurial.
We have to keep in mind that Kaya although it is one entity, there are over 100 clinics all over India, Southeast Asia and the Middle East. So, this calls for a entrepreneurial culture which may not have been feasible in a larger corporate group. The other reason was that we wanted to make sure that the focus of the entire team is more on growth rather than in terms of adhering to the group.
Coming to growth prospects, we feel that India is currently going through some kind of a slowdown and as a result, discretionary expenditure has received a setback. Kaya has not been an exception although we have recorded same-store growth for the past six-seven quarters in a row.
The trajectory of the growth has been falling and that has been a matter of concern. But we are sure that as all cycles go even, this cycle would turn. If the tide turns and we recapture the growth trajectory for the country as a whole, I am sure Kaya will only gain.
The other big growth driver is product play. About ten days ago, we launched a new offering called Kaya Skin Bar, which is a smaller version of the Kaya Clinic which is very product heavy. Kaya Skin Bar is a low cost version and occupies less space. We are confident that the return on capital employed through the new offering is going to be much higher than the earlier offerings and it will enable us to expand the Kaya franchise all over the country in a much better manner.
Q: Will you look for talent over to manage Kaya which is very different from a fast moving consumer goods (FMCG) company. Are you considering strategic partners or outright sale with Marico being a minority partner?
A: There is a no-no for outright sale. We could have done that, but we never did it. We do not want to do it. But we would consider the option if there is a specific value-add by a strategic partner although even that would take some time because we wish to first consolidate after the completion of this process of restructuring.
We could have taken a strategic partner even while continuing the earlier configuration. But the answer for your specific question is there will be no outright sale but we will look at strategic partners over a period of time and not immediately.
Q: Was the lack of right valuations for a 'different' kind of business for Marico one of the triggers?
A: Yes and no. When we set up Kaya, it added that zing or luster to the Marico group about eight-to-ten years ago. Over time, the Indian FMCG scenario changed and the sector has become both a value and a growth sector and resulted in FMCG valuations touching the roof. So the Kaya valuation may not have necessarily added value to that valuation. In a separate company, the chances of a better price discovery are higher and that could be one of the reasons we see value in restructuring.
Q: When will Marico Kaya be listed?
A: We expect that the entire process to be over by mid-June. If you add another 15-20 days for contingencies, then we should be ready to list by the start of July. Our target is to list Marico Kaya Enterprises Limited by mid-July. We are calling it MaKE internally.
Q: How exactly will Marico’s results look like post the restructuring?
A: Kaya's contribution has been typically around 7 percent of Marico’s turnover. In 2012, as against a topline of around Rs 4,000 crore for the whole group, Kaya’s contribution was Rs 278 crore.
Kaya's growth rates have been higher than Marico in the first half. Overall, the group grew by about 20 percent and Kaya grew by about 33-34 percent. Notwithstanding that, on a lower base the 7 percent stands. So 7 percent of our turnover will go away. In terms of margins, Kaya was barely positive at the operating level.
On quarter-to-quarter it has moved from being positive to negative. So there would be an improvement because operating margins, otherwise, have been around 16 percent for the FMCG business on certain occasions. On the balance, including the international business, it has been around 13-14 percent and could marginally go up.
In terms of capital employed, while Kaya took 7 percent of turnover, it took almost double of that as capital. Almost one-sixth of the capital for the group came from Kaya. We expect that the return on capital employed for the FMCG business to show a statistical jump. I think in the first-half, the return of the overall group was around 23 percent and excluding Kaya it was about 27 percent.
Q: You spoke about discretionary spending taking a beating across the board. What kinds of products in Marico reflected that besides Kaya?
A: Not so much because bulk of Marico’s offerings in the product space have been daily necessities and low-unit price packs. But some of our larger rupee-value packs for e.g. a large pack of Saffola, which is one of the costlier cooking oils, that would have come off the fringes in some manner. So, some impact was seen. If you look at our FMCG portfolio, it is fairly robust. I won’t say it is 100 percent cyclical-proof, but by-and-large it has been stable at all times.
Q: Are you seeing it bottom out or are do see any improvement in discretionary or consumer spends? Would you say that the 6-percent growth in Saffola was the worst and now things will take at least a slight upturn or go below?
A: I can’t talk much about the quarterly results. But one of the key factors which impacted Saffola was the uncertainty around sales in the Canteen Stores Department (CSD). The moment it is resolved it result in higher sales in Saffola. So I do not think there are any basic concerns though the growth rates may taper off from quarter-to-quarter.
Q: I only want to know from a macro standpoint whether things have picked up on the consumption front.
A: I am not so sure. I think there is an excess of negative news around us. So if you look at buying behaviour of discretionary spenders, I think it may not yet have turned the corner maybe the New Year will bring in something new.
Q: Focusing on restructuring, what exactly do Kaya’s fundamentals look like? Do you expect a sustainable break-even on the bottom-line for Kaya and for it to become a profit-making entity?
A: I feel that we may have made a mistake in the past by repeatedly assuring a break-even. Our fundamental business model offers a sustainable topline which has been growing consistently over the past six-seven quarters.
Kaya should report profitability in one-to-two years’. However, Kaya is not one business in geographical terms. It is spread across India, Southeast Asia and the Middle East. The Southeast Asia business is very profitable even at the profit-after-tax level. The Middle-East business is still losing money and the India business turned marginally cash positive.
Overall, I think it would take anywhere between one and two years for Kaya to show a respectable performance. If we are not selling this business, we want to cultivate and reap the rewards over a period of time.
Marico stock price
On January 23, 2015, Marico closed at Rs 358.30, down Rs 3.25, or 0.9 percent. The 52-week high of the share was Rs 369.20 and the 52-week low was Rs 200.10.
The company's trailing 12-month (TTM) EPS was at Rs 9.17 per share as per the quarter ended September 2014. The stock's price-to-earnings (P/E) ratio was 39.07. The latest book value of the company is Rs 30.60 per share. At current value, the price-to-book value of the company is 11.71.
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