Transparency in investor communication has its benefits. Marico Ltd, which deals in consumer and personal care products and services, can testify to that. In June, it informed investors the excise department was proposing to levy duty on its 200ml packs of Parachute coconut oil, treating it as hair oil and not vegetable oil. Now, with barely a fortnight left for the quarter to end, it has given an update on the Kaya Skin Clinic business.
Marico was confident of the Kaya business making profits by the end of fiscal 2010. The business is a promising one, contributing about 7% of Marico’s consolidated revenue in the September quarter. It grew by 25%, but still incurred a loss of Rs2.1 crore as Marico opens new stores every year. Although older stores are profitable, the new ones drag down overall profitability. But this is an imperative in a service business, where growth takes precedence over profit in the investment stage.
Marico’s update on Kaya allays fears about the impact of the Dubai financial crisis on its business. No material impact is seen on its business spread across 13 clinics in West Asia. In India, however, it is a different story. Kaya’s skin treatment packages depend on discretionary spending patterns and the uncertain economic environment seems to have affected it. Two other events further hit revenue growth. The swine flu outbreak weakened demand in some key markets and the imposition of service tax on its packages starting September made its treatments more expensive.
Graphics: Sandeep Bhatnagar / Mint
In the September quarter, Kaya’s same-store sales growth in India declined by 5% and the overall business incurred a loss of Rs2 crore. But Marico, confident of the business making profits by the year-end, invested in a promotional campaign to get customers back. This did not work and same-store sales declined further in October and November.
Marico is now projecting India-specific same-store sales for fiscal 2010 to decline by 5-7%. This may lead to the Kaya business incurring a loss of Rs10 crore for the year. Since it opened the clinics in 2002, this is the first major setback for the business and a revelation on how closely it is linked with economic prosperity.
But investors were not bothered by this development, with the share price rising by about 1% when the Nifty fell by 0.7%. This could be due to the relatively low contribution of this business and the relative strength of its other businesses such as edible oils, expected to see good margins due to lower oil prices. Or it could also be a response to the firm’s transparent approach to a negative development.