Management Meet Update Institutional Equities Kaya Reuters: KAYA.NS; Bloomberg: KAYA IN We interacted with the management of Kaya at an investor conference held by us recently. Following are the key takeaways: Competitive challenges remain high: Since inception, Kaya consistently faced competition from small standalone clinics/regional players. These unorganised players offer their services at a significant discount. However, it is difficult for small players to match up to Kaya s infrastructure and the range of services offered under a single roof. The management acknowledged that it is expecting the entry of new players in the organised segment, although at a regional level, and believes that this is positive for the industry as it will increase the overall awareness about skin care business in India which is still at a nascent stage. India business could witness break-even over the medium term: The management stated that specific steps are being taken to improve the performance of India business. In terms of services offered, anti-ageing, facial and pigmentation services are growing rapidly and the management believes that it will continue to grow in the same fashion, looking at the market potential. The management is extremely confident about the growth potential in the hair care segment and considers it as a major growth driver going forward. It is also focusing on product business, which accounts for of total turnover, by expanding its reach outside Kaya clinics. Kaya is increasing its presence on social media and focusing more on digital advertising. Also, it is going to renovate 20 top performing clinics in FY18 located at affluent areas to enhance the customer experience to further increase clinic throughput. It is targeting 14%- samestore sales growth or SSG over the next two to three years in India. The management did not give specific guidance on clinic expansion and stated that the company is opportunistically adding new clinics and relocating some of its old clinics. The Middle East (ME) business is somewhat stable and the management expects 8%-1 revenue growth in FY18. Saudi Arabia, which accounts for 2 of ME sales, witnessed a decline in 1QFY18 because of macroeconomic headwinds whereas the UAE business, which has 19 out of 23 clinics in ME, is performing well. To address the Saudi problem, Kaya is working on improving the customer experience and innovation-led products as well as services. No impact on pricing post GST on service business: Goods and Services Tax or GST has no impact on pricing of Kaya s service business. Small unorganised players, who were not registered in the pre-gst period, could witness an increase in pricing which could benefit Kaya to some extent. However, the product portfolio of Kaya, which forms of its revenues, will witness price hike of about 1-12% from September-October 2017 because of 28% GST as against 14%- tax in the pre-gst regime. The management stated that no player has increased the prices so far, but likely to do so by the end of the current quarter. Significant headroom to improve existing margin profile: Slowdown in clinic revenues and sustained increase in personnel and infrastructure costs significantly eroded Kaya s operating margin by 450bps-500bps in India. Kaya s focus on improving the top-line will bring down corporate overheads and advertising expenses which account for around 22% and 9% of revenues, respectively. The management is targeting corporate overheads in the range of 17%-18% over the near to medium term and 14%- in the long run through its cost optimisation intiatives. India business loss at EBITDA level has narrowed during the quarter because of withdrawal of excessive discounts. 30 August 2017 We are participating in AsiaMoney s Brokers Poll 2017. We would be pleased if you vote for us as the feedback helps us align our equity research offerings to meet your requirements. Click Here NOT RATED Sector: Consumer Goods CMP: Rs888 Abhishek Navalgund Research Associate abhishek.navalgund@nirmalbang.com +91-22-3926 8013 Key Data Current Shares O/S (mn) 13.0 Mkt Cap (Rsbn/US$mn) 11.6/180.7 52 Wk H / L (Rs) 1,205/650 Daily Vol. (3M NSE Avg.) 26,251 One Year Indexed Stock Performance 170 160 150 140 130 120 110 100 90 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Price Performance (%) KAYA NIFTY CNX NIFTY INDEX 1 M 6 M 1 Yr Kaya (2.8) 15.8 24.8 Nifty Index (2.2) 10.3 12.0 Source: Bloomberg
Note: Kaya has implemented Ind AS starting from FY18. Hence, as per SEBI circular to that effect dated 5th July 2017 the company has not reported consolidated numbers for 1QFY18. Hence, ME and consolidated numbers could not be plotted in the tables/graphs below. Exhibit 1: Margin and growth profile Particulars March 2016 June 2016 September 2016 December 2016 March 20-17 June 2017 EBITDA margin % - overall 4 2 5 (1) 3 N.A. PAT margin % - overall 1-3 (3) 0.2 N.A. India margins (%) EBITDA - India (4) (10) (4) (12) (10) (6) PAT - India (5) (6) (4) (13) (11) (6) ME region (%) EBITDA - ME region 11 12 13 9 13 N.A. PAT - ME region 7 8 9 5 10 N.A. SSG growth (%) Overall SSG 10 11 13 (1) 6 N.A. India SSG - 8 5 (7) 4 9 ME region SSG 20 14 20 6 7 N.A. Customer count (%) Customer count - India (3) 2 8 (2) 10 2 Customer count ME region 22 15 7 (2) (5) N.A. Ticket size (%) Ticket size - India 4 5-3 (2) 4 Ticket size ME region (6) - 3 3 13 N.A. Overall revenue growth (%) 17 16 16 2 11 N.A. Revenue growth India (%) 8 13 8 (4) 4 5 Revenue growth ME region (%) 28 20 24 8 17 N.A. Exhibit 2: Revenue growth trend 3 2 2 Exhibit 3: EBITDA margin trend 2 1 1-1 Overall India ME -1 - Overall EBITDA % India EBITDA % ME EBITDA % Exhibit 4: SSG trend 2 2 1-1 Overall India ME 2 Kaya
Exhibit 5: Peer comparison Company CMP (Rs) Mkt. cap. (US$mn) P/Sales (x) EV/EBITDA (x) P/E (x) Sales FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E CAGR % EBITDA CAGR % EPS CAGR % Kaya 884 180 2.5 2.5 2.2 63.9 93.6 49.1 N.R. 205.5 80.3 12.6 12.5 N.A. Hindustan Unilever 1,200 40,679 8.0 7.1 6.3 30.8 35.1 30.2 57.9 51.3 43.5 12.4 15.3 15.5 Dabur India 313 8,629 7.2 6.6 5.9 32.3 33.9 29.7 43.1 39.3 34.4 10.6 10.8 12.1 Emami 1,077 3,829 9.8 8.9 7.6 32.3 30.5 26.1 71.9 39.7 33.7 13.8 12.0 46.0 Source: Bloomberg, Nirmal Bang Institutional Research 3 Kaya
Financials (consolidated) Exhibit 6: Income statement Net sales 2,903 3,323 3,699 4,102 Growth (%) N.A 14.5 11.3 10.9 COGS 318 354 393 370 Staff costs 1,017 1,061 1,287 1,473 Rent 376 406 473 520 Advertising and sales promotion 225 235 260 286 Other expenses 850 939 1153 1304 Total expenditure 2,786 2,995 3,566 3,952 EBITDA 117 328 133 150 Growth (%) N.A 179.6 (59.4) 12.7 EBITDA margin (%) 4.0 9.9 3.6 3.7 Other income 35 154 124 103 Exceptional items (373) (48) - - Interest costs 2 0.2 0.2 53.6 Depreciation 95 116 169 201 Profit before tax (317) 318 88 (2) Growth (%) N.A (200.2) (72.3) (101.9) Tax - - - - Effective tax rate (%) 0.1 - - - Net profit from continuing (317) 318 88 (1.7) operations Profit from discontinuing 691 - - - operations Total 374 318 88 (2) Growth (%) N.A (200) (72) (101.9) Minority interest - - 1 6 Adjusted PAT 374 318 87 (8.1) Growth (%) N.A (15.0) (72.5) (109.3) Exhibit 8: Balance sheet Equity 178 129 129 130 Reserves 650 2,217 2,384 2,375 Net worth 828 2,346 2,513 2,505 Minority interest - - 5 15 Total loans 1,132 - - 301 Deferred tax liability - - - - Other Long term liabilities 76 94 126 175 Total liabilities 3,290 3,727 4,065 4,311 Gross block 1,583 1,821 2,232 3,644 Depreciation/Impairment 1,562 1,291 1,440 1,456 Net block 21 530 792 2,188 Capital work-in-progress 6 32 24 15 Goodwill on consolidation 551 591 701 - Total Non current assets 1,048 1,375 1,759 2,458 Inventories 247 335 529 502 Debtors 4 4 15 20 Cash 142 276 278 156 Current investments 1,685 1,519 882 715 Total current assets 2,242 2,352 2,306 1,853 Creditors 173 287 376 345 Other current liabilities 1,081 1,000 1,045 934 Total current liabilities 1,254 1,287 1,421 1425 Net current assets 988 1,065 885 427 Total assets 3,290 3,727 4,065 4,311 Exhibit 7: Cash flow PBT 461 318 88 (2) Depreciation 95 116 169 201 Adjustments (167) (144) (108) (95) (Inc.)/dec. in working capital 547 12 (99) (165) Tax paid (18) (9) (2) 1 Cash flow from operations 918 292 47 (60) Capital expenditure (-) (163) (359) (421) (254) Free cash flow 755 (66) (374) (314) (Purchase)/sale of investments (1244) 330 728 234 Other investment income 1 3 4 (73) Cash flow from investing activities (115) (165) (63) (408) Proceeds of share capital - - - 38 Increase/ (decrease) in loan funds (708) - - 301 Interest paid (23) - - (5) Cash from financial activities (730) - - 334 Opening cash balance 252 142 276 278 Closing cash balance 142 276 278 153 Change in cash balance (110) 135 1 (125) Exhibit 9: Key ratios Y/E March FY14 FY15 FY16 FY17 Per share (Rs) EPS 21 25 7 (1) Book value 47 182 195 192 Valuation (x) P/E N.A N.A 127.1 N.R. P/sales N.A N.A 3.0 2.5 P/BV N.A N.A 4.4 4.0 EV/EBITDA N.A N.A 74.7 63.9 EV/sales N.A N.A 2.7 2.3 Return ratios (%) RoCE 1.1 9.0 (1.4) (1.8) RoE 45.2 13.6 3.5 (0.3) Margins (%) EBITDA 4.0 9.9 3.6 3.7 EBIT 0.8 6.4 (1.0) (1.2) PBT (10.8) 9.1 2.3 (0.0) PAT 12.7 9.1 2.3 (0.2) Turnover ratios Asset turnover ratio (x) 0.9 0.9 0.9 1.0 Avg. collection period (days) - - 1 2 Avg. inventory period (days) 31 32 43 46 Avg. payment period (days) 22 25 33 32 Solvency ratios (x) Debt-equity 1.4 - - 0.1 Growth (%) Sales N.A 14.5 11.3 10.9 EBITDA N.A 179.6 (59.4) 12.7 PAT N.A (15.0) (72.5) (109.3) 4 Kaya
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