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.

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.