Marico Kaya INITIATING COVERAGE Report By HDFC Sec

A pioneer in cosmetic dermatology, Kaya remains unchallenged in the organised skin clinic space in India. Management is confident of 20% revenue CAGR over the next 3-5 years, a claim that looks surpassable. A new found focus on product sales adds synergies to its story. Kaya turned profitable in FY14 (after 11 years of losses) and has significant untapped operating leverage in its operations.

The business model is unique and impregnable. Hardly any long term capital is required as operations require negative working capital. Cash of Rs 1.8bn post demerger (from Marico) and improving OCF are adequate to fund growth over the next 3-4 years. By then, operations may well spew enough cash to continuously expand Kaya’s footprint in a grossly underpenetrated space.

Valuations are rich at ~5x FY15 revenues (net of Rs 1.8bn cash), but do not worry us. Our estimates put FY17 revenues at ~Rs 4.7bn (19% CAGR over FY15-FY17E). With multi-year growth possible and no incremental funding needed, we value Kaya at 4x FY17E EV/sales. Recommend BUY with a TP of Rs 1,675.

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