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Kaya Clinic Fundamental Analysis
Porinju Veliyath is one of the most successful fund managers who runs a Portfolio Management Service under name Equity Intelligence. He usually invests in undervalued small cap companies, His company has an amazing track record of giving 32% CAGR return to investors.
Being fascinated by his analytical skills of identifying multibaggers early, I was eager to analyze some of his holdings and understand the strategy and psychology behind his stock picking. One of his picks was Kaya Clinic.
Kaya Clinic was formed after de-merging from Marico and came up with its IPO in 2015.
Business Model of Kaya Clinic:
Kaya Clinic has two different business segments, First, it has its own chain of clinics engaged in one to one consultation business. Here, the company provides personalized hair and skin treatment solutions to its clients which includes non evasive surgeries such as, laser skin and hair treatment, skin therapy, anti aging treatment, anti pigmentation . Kaya Clinic has more than 100 clinics across the country and a team of 160 dermatologists.
The second business segment is the products business, which provides cosmetic products for skin and hair care such as daily essentials, anti aging, sunscreens, and many more. Company has more than 70 products in 15 different ranges. Company sells its products via multi brand store such as Shopper’s Stop, New U, and many more.
Kaya is also aware of the growing significance of online selling and thus has recently partnered with many e-tailers such as Amazon, Flipkart, Jabong, Myntra and many others to sell its products online. The online market is growing at 67% and is currently contributing 22% of the total product sales of the company.
Kaya Clinic also has international presence with Middle East being one of the largest international market. Kaya has presence in UAE,Kuwait,Qatar and Oman. Kaya Clinic has more than 30 clinics in this region and is opening new stores every year. Company expects its Middle East business to grow at 20% CAGR in the coming years.
Kaya Clinic Financial Statement Analysis:
Since Kaya Clinic was recently de-merged and listed in the stocks exchange, there isn’t much historical financial data available to analyze. To compensate for the lack of it, we will go through a detailed analysis of its past performance and try to derive conclusions about what can be expected out of the company in the future.
Since Kaya is a Holding company for many of its domestic and international subsidiaries, it is important to analyze company’s consolidated financial statement instead of Standalone. If you are unfamiliar with the topic of Holding companies, I would suggest you to read the following post:
Also Read: Holding Companies: All You Need To Know
Kaya Clinic Balance Sheet Analysis:
Balance sheet is the snapshot of all the things that a company owns and owes. Balance sheet shows us how much a company is worth and how much an investor is paying for its future growth, a crucial financial to understand the true value of the company. A strong balance sheet has low debt, sufficient cash and other reserves to meet short and long term obligations.
Equity Capital and Net worth Analysis:
Company has a strong balance sheet with Equity share Capital of Rs. 13.03 crores. Since 2015, there has been no significant equity dilution, despite suffering losses, a sign of strong balance sheets for the company.
The Reserves and Surplus (also called as retained earnings) of the company stands at Rs. 197.21 crores. there has been a decline in total reserves from previous year of Rs. 215.6 crores as company is suffering losses (more on why company is losing money and why its not a matter of concern in the Profit and Loss statement analysis)
Long Term Liquidity:
Talking about company’s liabilities, the total consolidated debt of Rs. 13.54 crores on its subsidiary, down from Rs. 19.44 crores last year. Company holds Rs. 20 crores in cash, sufficient to pay all its long term debt obligations.
Short term liquidity of a company is measured by looking at its current assets and liabilities. Total Current Assets of the company is at Rs.73.52 crores while the total liabilities are at Rs. 73 crores. Since Current assets exceed liabilities, it shows that company has sufficient funds to meets its short term obligations.
Kaya Clinic Profit and Loss Statement Analysis:
Profit and Loss statement is a record of incomes and expenses of a company during a financial years. It helps us understand how company is doing financially, the warning signs and what can be expected from the company’s business in the future.
Total Operating Revenue:
Company earned a Total Operating Revenue of Rs. 399.85 crores down 2.5% from its previous year of Rs. 408.86 crores. The decline in revenue was mainly due to 7% decline in its UAE business, the India business however, has seen a growth of 4% during the financial year.
Expenses are important part of a profit and loss statement. A company with high revenue generation ability may be suffering losses due to high operating expenses. However, expenses are not always bad, especially if it is supposed to generate higher revenue in the future. An investor needs to learn the difference between expenses as a apart of company’s operations and expenses which will become an investment in the future.
Out of all the expenses incurred by Kaya Clinic, the two major heads are Employee cost, which includes expenses incurred on staff employed in their clinic(such as salaries and commissions of dermatologists, doctors, experts and other staff members.). The total employee cost forms 37% of the Net revenue.
The other expenses is a larger head of expenses, at Rs. 210.84 crores, forming almost 52% of the Net Revenue. Out of these expenses, almost 54% of the expenses includes Rent (Rs. 54.5 crores), Payment to Consultants (Rs. 20.95 crores), Advertisement and promotions (Rs. 28.22 crores), and repairs and maintenance (Rs. 11.02 crores)
As I mentioned earlier, an investor must be able to understand the difference between good expenses and bad expenses. In case of Kaya, expenses such as rent, consultation fees are fixed costs, which are difficult to cut down. These expenses are dragging down the overall profit of the company.
Company is expanding its business and opening new clinics across the country as well as in the Middle East, and renovating the old ones to give them a fresh, premium look. As a result, company has incurred huge expenses on building repair and renovations.
Expenses such as Advertisement is brand building exercise and should be considered more like and investment leading to higher revenue in the future. In the future, the company is expected to see higher revenue as a result of brand building exercise, leading to better profit.
Its the bottom line of any business. Kaya clinic has been suffering losses for the past 2 years as a result of high expenses on building and advertisement expenses. The losses, however, have narrowed down from Rs. 27.26 crores last year to Rs. 18.91 crores this year.
Kaya is investing heavily in building its brand image and is acquiring lots of fixed and current assets, leading to negative profits and working capital(We will analyze these points further in our cash flow statement analysis section).
Company is sacrificing today’s profit for future gains. Once the brand building and expansion is over, company is expected to gain huge profits which will be reflected in the price of the stock.
Kaya Clinic Cash Flow Statement Analysis:
Cash flow statement is the record of in and outflow of real cash. It is the most reliable source to assess a company’s real financial position as it is hard to manipulate cash transactions and the reflect true picture of the company.
Kaya Clinic is earning profit from operations, but the overall cash flow from operations is negative due to negative changes working capital. When a company has negative changes in working capital, it means that company is investing heavily in current assets or drastically reducing its current liabilities.
the second most important head is the purchase of fixed assets. Company has been continuously investing in purchase of fixed assets for the past any years as a result of business expansion and increasing the overall footfall and revenue.
SWOT stands for Strength, Weakness, Opportunity and Threats. It is a model used for analyzing the business of a company, helping us make a clear assessment of the market position of the business and factors (both internal and external) that can work both in favor and against the company.
Some of the key strengths of Kaya Clinic are as follows:
High margin industry- Skin and hair care business is a high margin industry. Kaya Clinic, is positioning itself as a premium hair ad skin care brand, which will help business command high pricing power against premium and professional service. High margin provides a better profitability to business and also acts as a cushion against rise in operating expenses.
Diversified business- Kaya has two different sources of revenue. First is its own skin and hair care clinic where company provides consultation to its clients. Second is the products category, where company has its own range of products such as shampoo, anti aging creams, anti wrinkle cream, daily essentials etc.
The two pronged revenue approach is a great way to de-risk business’ dependence on a single business as a source of revenue.
Non Evasive Surgery- Kaya uses laser technology for skin and hair treatment solutions which unlike other methods is non evasive method of surgery and does not require any cuts on the body, making it quicker and easier both for the consultants and clients.
Backed by Strong Brand- Kaya clinic was formed after demerging from Marico group of companies, a well reputed brand in the personal care segment. The strong brand name is going to play in favor of the company and gain people’s trust in the products and services.
High Fixed Expenses- As already mentioned earlier, company has high fixed expenses such as rent and employee cost which is eating away the profit margins of the company. The only way company can improve profitability is by improving revenue without incurring additional cost.
High Disposable Income- Company has strong presence in India and Middle East, both of them are high growth, emerging economies with large number of young population and high disposable incomes. Improving lifestyle and higher disposable income provide a great opportunity for businesses like Kaya Clinic to capture a large untapped but budding market of hair and skin care by providing quality services to customers.
Fragmented Segment- The Skin and hair care segment is highly fragmented with multiple unorganized, semi or unprofessional players in the segment. Because of lack of professional care in the segment
Botox and other Surgical methods- With more and more people becoming conscious about their looks, they are willing to go under knife in order to achieve better and younger look. This poses as a threat for the companies like Kaya Clinic, the non evasive player that uses laser technology for most of its skin and hair related treatment.
Rapid Changes in Skin care Technology- Technology is changing and getting better very rapidly, which makes it important for the companies like Kaya Clinic to stay updated and keep investing in newer and better methods of skin care. It also requires continuous training and up-gradation of professionals and staff member to stay ahead of the competition. This is a capital intensive activity and requires continuous capital expenditure, impacting margins of the company.
What works in Favor of the Company:
There are few things that work in favor of the company such as:
Low debt: Company has very low debt, which means that it has very little interest expenses, the company will be able to retain almost entire profit to itself, allowing it to use them for future expansions or dividend payments.
Additionally, company has sufficient cash in hand to pay off all its debt obligations using its cash reserves which is a big positive for the company.
Company is able to generate higher revenue each year, a sign that company’s products and services are popular among common people and are gaining popularity. The losses to the company are mainly due to increased employee and other expenses already mentioned above.
As soon as the company is able to cut down its losses, or is able to generate higher revenue without incurring additional expenses, company will turn profitable.
Fewer Players in the Segment: Being highly unorganized sector, there are very few organized and professional players in this segment. This creates a great opportunity for companies like Kaya Clinic to standardize their services and provide expert consultation and treatment to the customers.
What Works Against the Company:
High Operating Expenses: Kaya Clinic has high operating cost which mostly includes fixed costs such as rent, and employee costs. All these expenses together are dragging down the profitability of the company significantly. Kaya is a premium brand in the skin care segment where it has to maintain plush interiors, well- trained staff and welcome drinks etc which costs a lot to the company.
Kaya Clinic needs to work on cost optimization and increase revenue per customer without incurring additional cost. If implemented successfully, Kaya Clinic will become one of the most reputed skin care brand in India and Internationally.
Kaya has a strong business model, and it has positioned itself differently from other player by providing premium skin care service, a niche with few players. Since company is currently suffering losses, it is difficult to value the business based on earnings. However, a fair assessment can still be made by analyzing the business, market, and the growth opportunities.
Kaya Clinic seems like a good investment for long term but has its own issues which needs to be resolved. Company is a new player in the market and i working on the expansion and brand building.
In the previous quarter, company was able to narrow down its losses which gives hope for the future.
Investors willing to bet on this stock need to keep tracking the costs and other financial performance parameters in order to understand and decide future course of actions accordingly.[/vc_column_text][/vc_column][/vc_row]