Marico Ltd has started a restructuring exercise in two parts. The one that will show an impact soon is the separation of its Kaya business. The second change, and one whose impact is likely to be visible only in the longer term, is the joining of the international and domestic consumer businesses under one head, Saugata Gupta, who currently heads the domestic consumer business.

The Kaya business comprises its skincare clinics in India and abroad, and has a fast-growing products business. In the six months ended September, Kaya had earned 172 crore, or about 7% of consolidated revenues, but incurred a segment loss of 1.57 crore. The demerger will not affect financials, and in fact will likely boost margins given that it has not been profitable.

Marico’s decision to separate the Kaya business is not surprising. It has incubated Kaya for a decade now, steering it, providing funds, standing by it in trying times, and patiently explaining to investors that it has a long gestation period. Marico now believes Kaya needs to be run independently. A separate entity will mean independent funding as well.

The demerger will be done in phases, with a 100% subsidiary being formed initially. Eventually Marico’s shareholders will be proportionate owners of the new company. They will get one share of the new entity for every 50 shares held in Marico for 210 a share. Marico has also said its investments in Kaya will be adjusted against the share premium account, thereby not affecting its financials. More clarity will emerge when the details of the scheme become available.

The unmixing is good for Marico, as consumer products and services are very different in nature. A services business requires significant investments in stores, people and working capital. The concept of specialized skincare services, too, requires selling.

Once the existing set of stores becomes profitable, growth can come only by opening new stores, and the investment cycle will start all over again. In other words, a services business will need to be capitalized till it reaches a critical mass, where the business generates enough cash to fund growth.

Marico now has the cash but it also needs to invest in growing its acquisitions and its international business. That’s why the Kaya exit makes sense. And that’s where a joint structure for the domestic and international business comes in, as it can explore common areas—product ideas, talent and cost synergies—to grow the business. Godrej Consumer Products Ltd has already started seeing benefits of this convergence. This is a long process, however, and no immediate benefits are likely.

This may be the best thing to happen for Kaya, too. Though Marico ably supported the company, it could not have supported an aggressive growth plan, as it would reflect on Marico’s returns ratios and affect valuation. In its solo avatar, Kaya can grow aggressively, take risks, and attract like-minded investors. Those of Marico’s investors who do not like that business now have an exit option.

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