Kaya shares get a boost from women seeking laser treatments3 min read . Updated: 30 Dec 2014, 09:53 AM IST
Operating profit is set to grow to about 10% in the next two to three years from 7% this fiscal year
Mumbai: Marico Kaya Enterprises Ltd (Maka), the Indian skin clinic operator whose value has surged fourfold within six months of its listing, is looking to boost earnings by introducing premium skin creams, shampoos and conditioners.
Operating profit at the company, which gets 30% of its India revenue from laser hair removal procedures, is set to grow to about 10% in the next two to three years from 7% this fiscal year as it expands its more profitable products business, chief executive officer S. Subramanian said in an interview.
Rising income in the world’s second-most populous country is fueling demand for beauty products and non-surgical cosmetic procedures in the Indian beauty-care market estimated at $7 billion in 2015 by PriceWaterhouseCoopers. More affluent women are realizing the benefits of laser procedures that eliminate the need for periodic waxing, Subramanian said.
“Consumers are more aware today, and they are more discerning about their skin," he said at the company’s Mumbai headquarters. “Given the fact that these are underpenetrated segments, there’s a large scope to expand."
Shares of the Mumbai-based company have rallied to ₹ 943.90 since their debut in Mumbai on 1 July, when they closed at ₹ 237.50, according to data compiled by Bloomberg. That compares with a 7.8% advance in the benchmark S&P BSE Sensex in the same period.
Earnings as a percentage of sales before interest, depreciation and amortization (Ebitda) for companies that offer only skincare services is typically between 8% and 10%, according to the PwC report. For those that offer these services and also sell their own branded products, the margin tends to be between 15% and 25%.
Marico Kaya split from parent Marico Ltd in 2013, and it has focused on building a service-based business that’s different from its parent, which is India’s biggest maker of hair oil. Marico Kaya also runs 18 skin clinics in the Middle East.
“Kaya is the only national dermatology chain in India and operates on negative working capital as clients opt for advance payments," said Anita Gandhi, executive director at Arihant Capital Markets Ltd, (ACM) a Mumbai-based brokerage. “With more women entering the workforce, the spending trend is likely to increase, which is very positive for the company."
The company’s flagship clinics are about 1,200 square feet (111 square meters) each, and located in upscale neighborhoods in 26 cities and towns. They provide treatments ranging from a ₹ 2,800 therapeutic facial cleanse to an anti-aging skin procedure called Thermage costing about ₹ 1 lakh. About 70% of its sales come from repeat customers, Subramanian said.
Marico Kaya plans to add as many as 12 clinics to the existing 90 in India, Subramanian said.
Customers are getting younger and younger, he said. Laser-based permanent hair removal procedure for legs, armpits and other body parts are the single biggest revenue contributor, he said. Removing the hair from both legs can take up to five sittings, and costs about ₹ 45,000.
“In the last two years, I’ve seen the age drop by almost 4-5 years," Subramanian said. “Today, we even have moms coming in with their teen daughters. But as a practice, we do not entertain them until they are 18."
The biggest risk to Marico Kaya’s earnings is a slowdown in consumer spending, said Dharmesh Pancholi, an analyst at Sharekhan Ltd in Mumbai, who is advising clients to lock in the profits after the share rally.
“It’s getting investor attention because of its unique business model, scarcity premium and probability of higher growth trajectory," he said in an e-mail. “Given the slow recovery in the consumer discretionary space and the premium valuation of the stock, Marico Kaya factors in all the near-term positives."
The company has no debt.
Besides hair removal, its clinics cater to growing demand for skin lightening and acne treatment.
In addition to the clinics, the company runs 6 retailing outlets to sell its lineup of skin and haircare products. As part of its focus on expanding its product business, it plans to add 20 more outlets next year, and also sell its Kaya range of cosmetics at pharmacy chains, Subramanian said.
“The product business is fundamentally a higher margin play, so we want to increase share in that," he said. Bloomberg