Marico Kaya Enterprises Ltd Management Discussions

Marico Kaya Enterprises Limited (‘MaKE’ or ‘the Company’), headquartered in Mumbai, Maharashtra, India, carries on Skin Care Business through its subsidiaries in India, Middle East.

Up to March 31, 2013, the Kaya Business was conducted by subsidiaries of Marico Limited. Following the demerger, from April 1, 2013 the Kaya Business has been conducted by MaKE and its subsidiaries. The Kaya Business principally comprises the provision of skin care products and services under the brand name of Kaya Skin Clinic in India and Middle East.

ECONOMY

India

The Indian economy has witnessed sub-5 per cent growth of gross domestic product (GDP) witnessed over the last two years. The growth slowdown in the last two years was broad based, affecting in particular the industry sector. Inflation too declined during this period, but continued to be above the comfort zone, owing primarily to the elevated level of food inflation.

Given the moderation in inflation and with the global economy set to recover the consumer sentiment is expected to revive and the economy can look forward to better growth prospects in 2014-15 and beyond.

International Region: Middle East Region

Middle East Region offers a curious mix of local and expatriate population. Dubai’s economic outlook remains bullish over the coming years as a whole host of sectors possess significant growth prospects.

United Arab Emirates is one of the most developed countries in the Arab Gulf and has one of the highest GDP per capita in Middle East region. Gulf economies are expected to grow 4.4% to 5% in 2014. Recently announced budget estimates by the GCC for 2014 suggest a growing emphasis on investing in sectors such as education, healthcare and infrastructure. Retail sales are set to benefit over the years from structural factors, including rising disposable income, favorable demographics, and increasing urbanization.

INDUSTRY OVERVIEW:

India

The Indian beauty care market is estimated approximately at Rs.285-290 Billion and is growing at the rate if 15-20%, with skin-care and hair-care taking a bigger pie. The market mainly comprises of three segments namely, cosmetic products, salons & parlors and specialized skin care services (Invasive / minimally invasive/ Cosmetic procedures and treatments). Despite the slowdown in economic growth in 2013, the beauty care market continued its growth trajectory and showed lower signs of downturn as consumer spends in products and services continue to be resilient.

The skin care segment has shown growth and emerged as a potential investment area for players in recent years. From treatment of common skin care diseases, the skin care industry has evolved to the age of cosmetic and anti-aging treatments.

The overall skin care market is expected to grow with the rise in demand of various skin care services. Factors like global-warming, anti-aging solutions, new product innovations, growing working women, increasing media influence, etc. are driving this market. Boosted by growing consumer demand, rise in disposable incomes, lifestyle related disorders, craze for cosmetic surgeries, obsession for young-looking skin, the skin care market in India is likely to expand.

The market for anti-aging solutions has also become vibrant in India with rising concerns about beauty and looks. More & more young people are visiting doctors and dermatologists to improve and maintain their youth. The demand for non-surgical procedures like Botox, Hyaluronic acid treatment, and laser hair removal is also increasing rapidly. Due to pollution, ultraviolet light, and global warming, photosensitive skin disorders like tanning, pigmentation, darkening, sunburn, are increasing at a faster pace.

Currently there is a lack of facilities that provide comprehensive skin related treatments under one roof. This coupled with the low availability of dermatologists in India, (At present, there are about 6,000 dermatologists catering to a population of over 121 crore. This means that for every 100,000 people, only 0.49 dermatologists are available in India as compared to 3.2 in many states of the US) enhances the dire need of comprehensive skin care set ups providing a wide range of services.

The Kaya Skin Clinic along with the proposed expansion of the new product retail format of Kaya Skin Bar ensures that your company is well placed to explore this skin care opportunity.

Key drivers of growth in India:

Key Demographic Trends:

- Growing spending power: One of the key factors driving the growth of the Beauty industry in India is the rising annual disposable income. India’s per capita annual disposable income has been growing at an annual rate of 12 per cent since 2006-07. It is expected to keep growing at similar rates in the next few years as well. The rising income levels, in conjunction with the population increase, will result in discretionary consumer spending in wellness products and services.

- Growing working women: Growing number of women professionals and their ability to indulge in discretionary spends have added to the overall growth of the beauty industry.

- Emergence of niche categories: As these consumers age, they will start demanding solutions that are relevant to their specific needs, and will actively seek ways to maintain their youth and improve quality of life. This is already leading to an emerging category of anti-ageing products and services.

- Rising Urbanization: Around 300 million Indians currently live in towns and cities. According to Planning Commission, with in 20-25 years, another 300 million people will get added to Indian towns and cities. This implies, more and more of Indians will adapt to urban lifestyles in the coming years, leading to increase in wellness and beauty products and services.

- Male grooming segment: Male grooming market is estimated to be Rs 3,800 crores in India, and is seeing plenty of action with new entrants and existing players clocking impressive growth. As per estimates by global market research firm Euromonitor, the category clocked 21% annual growth and is expected to touch Rs 5,270-crore in the next three years.

- Growing Beauty Consciousness across consumer age groups: Globally, the 40+ age category is a very active consumer of wellness products and services. Consumers who are in their late 20s and 30s today are already well exposed to global grooming trends, inclined towards skin-care and hair-care services & most exposed to educational initiatives by consumer centric brands. Increasing disposable income will enable them to spend more on beauty, grooming and wellness related services and products. Moreover, the younger population is expected to rise to 427 million by 2015 who are already looking for high quality grooming and beauty solutions. This young generation is more aspirational, better connected and networked, more technology-savvy, highly mobile, has greater spending power, and is more self-conscious. Thus, it will have significant impact on personal grooming and consumption across many wellness services and products in more categories, than the previous generations. This implies a very large market opportunity for providers of wellness services and products.

Middle East

As the Middle Eastern cosmetics market experiences an upturn, the skin care segment holds a large growth potential. Given the skin care led medical technological advancement & Consumer awareness level , it is leading into a penetration of advanced skin services in countries like UAE & Saudi , Middle East continues to be regarded as a market of immense potential even as increasing numbers of them make a beeline to the region to tap into that growth, with Saudi Arabia and the UAE leading the region in consumption of skincare services & products, which includes facial care, hand care, depilatories and sun care products.

The increased household income resulting from the expanded workforce is translating into higher spending on luxury products. This means that more and more people are opting for increasingly sophisticated skin care routines, which is seeing mass brands being built to resemble premium brands. An expanding retail landscape, combined with a great deal of product innovation, are the main driving forces behind market expansion, which is mainly being fuelled by facial care, specifically anti-ageing and skin whitening.

While the majority of skincare consumers are women, market trends indicate a growing number of men going in for skincare protection regimes. While sales will continue to be strongest among upper-mid- to high-income women, men are also expected to use a widening range of skin care solutions. There is an expected growing shift towards the daily use of products such as facial cleansers, toners and moisturizers, while a growing number will use face masks on a weekly basis.

Key drivers of Growth in Middle East:

Key Demographic Trends:

- Growth of Expats in UAE: The population of the UAE will reach 10.6 million in 2030, an increase of 26.9% from 2012. Foreign citizens dominate the population and are forecast to comprise 88.2% of the population in 2030. The biggest city in 2012 was Dubai and will remain so in 2030.

The expatriate population is expected to contribute to strong population growth in the United Arab Emirates during the forecast period and will thus further expand the potential consumer base for beauty services & products. An increasingly international consumer base in the country will support strong growth for well-marketed brands. An increase in the number of expatriate women and children, encouraged by the issuing of visas to those buying properties, is expected to prove particularly beneficial for baby and child-specific products, colour cosmetics, depilatories, skin care and hair care. Growth rates of 5% CAGR for skin care, hair care and colour cosmetics will for example be strongly supported by ongoing growth in the country’s female expatriate population.

- Male Grooming: While the majority of skincare consumers are women, market trends indicate a growing number of men going in for skincare regimes in the GCC region more men in the UAE and GCC are buying skin care products, according to experts at specialized cosmetics firm Seagull. The demand has been focused on after-shave creams, mattifying (a product used reduce skin shine), anti-ageing, and anti-oxidant products for the skin.

The UAE cosmetics market is expected to be valued at $140 million (Dh514.92 million) by 2014, according to a recent study by Seagull. Demand for men cosmetics will contribute to the industry’s growth, although women will continue to be the largest contributors.

- Growing Potential in young consumers: According to figures released by the Economic Intelligence Unit, the population of the Arab Gulf countries is expected to reach 53 million by 2020, with over 25 per cent under the age of 15. A young and sizeable growing middle income class will amplify the growth prospects for the beauty sector in the Arab gulf countries. An increasing number of young consumers are expected to join the workforce and drive demand for the latest skin care solutions. The young consumers also spend disproportionate amounts of income on beauty solutions and in regions where incomes rise; disposable incomes tend to ebb from purchasing necessities and flow into luxury products.

- High demand due to Climatic conditions in region: The Euro monitor research estimates that there are approximately 30,000 spas in the Arab Gulf Countries and the figure is set to rise along with growth. The spa culture, attributed to the strong growth of the sector, is also driven by the harsh climatic conditions which contribute to the demand for hair and skin products & services used as a protection against skin damage and dryness.

- Medical Tourism in UAE: In 2012, 107,000 medical tourists visited the emirate, generating Dh652 million. By 2016, the DHA expects that number to increase to 170,000, with revenues of about Dh1.1bn. The medical tourism strategy has been designed over two phases. The first one has been chalked out until 2016 and the second until 2020. Treatments to be offered include orthopedic and sports medicine, plastic surgery, ophthalmology, dental procedures, dermatology, preventive medicine and skin care.

Medical tourists will be issued with new visas and a choice of travel and accommodation packages. The packages will include visa, hotel stay and activities in Dubai. There will be different categories of visas depending on the specialty of the treatment.

The authority wants Dubai to be on par with medical tourism destinations such as the US, Singapore, Thailand and India.

- Expanded Internet Access Fuels Interest in Beauty and Personal Care: Lifestyle trends in the gulf are expected to be increasingly shaped by a focus on fashion and celebrity lifestyle fuelled by widening internet access. The internet will also offer consumers access to forums and blogs offering skin care recommendations, tips and tutorials. This will result in consumers becoming increasingly confident in trying out new skin care solutions, This could prove highly beneficial to brands that are able to build links with bloggers or forums, enabling a means of building a stronger dialogue with consumers. Players in beauty and personal care are also expected to increasingly focus on marketing via social networking sites such as Facebook and Twitter and other effective means of reaching interested consumers.

BUSINESS OVERVIEW:

Kaya, pioneer in specialized skincare in India, delivers customized skincare services and products through a combination of highly qualified dermatologists and advanced state-of-the-art and highly safe technologies across its chain of skin clinics in India & Middle East.

Kaya’s key differentiator is in offering customized and complete skincare solutions backed by expert dermatologists and advanced technologies. The company has been consistently investing in new and advanced technologies in the skincare business, to bring cutting-edge services and products to discerning Indian consumers. Kaya has a strong strategy of focusing on specialized skincare services like Anti-ageing, Pigmentation, Laser Hair Reduction and Acne/Acne scar Reduction. The beauty facials portfolio adds to the wide array of our skincare solutions, providing regular beauty maintenance services as well with an objective of providing largest range of solutions for skincare needs.

In the year 2013-14, the brand has strengthened its key offerings by innovating across services & products and building these categories by consistent consumer awareness campaigns. With its own dedicated R&D centre, Kaya develops and formulates its own advanced range of skincare and hair care products.

Formats:

Kaya Skin Clinic, India

Spread across 26 cities with 85 clinics Kaya Skin Clinic, India has over 6,00,000 satisfiedcustomers in India. Kaya Skin Clinic, India has the largest pool of dermatologists in the country with over 150 dermatologists.

Right from a personalized consultation & solution, Kaya Skin Clinics have dermatologists to guide our consumers through their journey of skin health at Kaya. Every service and product offering at skin clinics have been formulated and designed by Kaya’s expert dermatologists and are backed by state-of-the-art safe technologies made available for consumers from across the world.

Kaya Skin Bar:

The Kaya Skin Bar is a new retail format designed to cater to the needs of today’s modern Indian consumers, who are always on the move. It is a product-forward store with an open and inviting layout. This store format houses over 50 specialized Kaya products ranging from skin care needs to specific skin concerns like acne, sensitive skin, pigmentation, aging, fairness, hair, etc. The Kaya Skin Bar also has houses an interactive skin diagnostic tool which provides a complete skin health report. This enables our highly trained and certified beauty therapists to recommend the right solution, thereby providing the customer with a customized and effective offering. The 3 outlets of Kaya Skin Bar are spread across Bangalore, India at high footfall areas.

Kaya Skin Clinic, Middle East:

Kaya Skin Clinic entered the Middle East market in 2004 with its first clinic in Dubai. Today, Kaya Skin Clinic is the largest international chain of skincare clinics in the Middle East with 18 clinics across UAE, Saudi Arabic & Oman. Backed by a panel of 26 esteemed dermatologists and over 130,000 satisfied customers, Kaya Skin Clinic has been successfully delivering complete skin care solutions for over 10 years.

KAYA’s STRENGTH:

Trusted and Preferred Brand: Kaya is well known as the first corporate organized chain in the skin care segment in India. This brand value provides several tangible and intangible benefits such as the belief and trust that makes customers choose Kaya, the ability to attract doctors, sustained marketing campaign and a head start in footfalls at new facilities. With around 7,00,000 satisfied customers, Kaya enjoys a strong equity and scores high on elements of safety and hygiene.

Dermatologists Expertise: We have the largest pool of over 200+ professional Dermatologists across the chain which helps us in delivering highly efficacious services to the end consumers. Our engagement model with the doctors provides them the professional comfort and freedom to deliver optimal performance. Many of the doctors associated with us are prominent within the medical field having received many accolades and awards.

Pioneer in Leveraging Technology: Kaya has been a pioneer in adopting cutting edge technology to provide advanced skin care services for delivering flawless skin services. Backed by internationally proven and world-class skin care technologies, the technologies and equipments used in delivering solutions are state-of-the-art technologies & conform to international quality & safety standards. Today, Kaya is at the forefront of offering cutting-edge solutions (services & products) in the areas of Anti-Ageing, De-pigmentation, Acne/Acne Scar Reduction, Laser Permanent Hair Reduction, etc. along with advanced beauty facials.

Professional Management team with good Corporate Governance: Our management team comprises of senior professionals with abundant expertise and know-how. They possess a proven track record in the services industry and have been instrumental in driving strategy and growth. The blend of doctors as well as qualified professionals for key functions has enabled the company to repeatedly balance the multiple objectives of delivering high standards of service excellence, best-in-class care, rapid technology adoption, value optimization and focus on key specialties while growing in a steady and calibrated manner. Furthermore, the Company’s unwavering focus on good corporate governance has been a beacon for the industry.

Strong focus on Systems & Processes: Kaya continues to invest in our front and back end processes and systems. The company believes that continuous investment in people, process and technology will drive sustainable and profitable growth for the company. Our advanced technologies also conform to the highest level of international safety and hygiene standards. We have in the past year, undertaken a number of new investments in building up robust systems & processes for delivering high level of customer satisfaction and continue to upgrade our systems, information technology capabilities and processes from time to time. We also continuously seek customer feedback through various channels that the company has created.

Enhancing our Human capital: Kaya continues to assess our human capital across all levels through assessment centers for enhancing their capabilities to meet the changing needs and for career planning and succession planning. Individual and organizational development is the primary objective of the assessment centre. We conduct associate satisfaction survey every year which helps us in identifying the engagement & loyalty factors and we take proactive measures to make it stronger based on survey feedback. We continue to benchmark our compensation and benefits, with the best in the industry to pay our associates accordingly.

RISKS AND CONCERNS:

Scarcity of doctors and medical personnel: The dermatologist expertise involves engaging with the right pool of medical talent and investing in building their scientific knowledge and technical skills. The quality of Doctors and supporting skincare professionals are critical to the quality of the skin care service business. Top quality doctors and medical personnel are a finite resource and these professionals enjoy abundant opportunity in the form of entrepreneurial ventures, independent practice as well as competing offers from other service providers in India and abroad. Our continued performance and growth substantially depends on our ability to attract and retain the best of skilled medical talent and professionals.

Employee retention: The Company believes that employee satisfaction and retention is of prime importance. The demand for experienced personnel in specialized services will only increase in the near and long term. Kaya believes that this challenge will persist until the industry reaches a steady growth phase.

Obsolescence of medical equipment: We use the latest equipment in our clinics to provide top Quality services. Due to the extent of global research and development into skincare and frequent product improvements and evolving technology, there is a chance of obsolescence which may reduce the time frame for investment recovery and may dilute capital efficiency.

Execution: We believe the key risk to our growth is execution risk. The expansions for clinics and skin bars have been planned. The timely execution of expansion along with the planned introduction of new products and services will be critical. The company has a strong process and an execution team which has the capability to execute the desired plans. The new clinics / skin bars performance may vary and it may subsequently impact their gestation period.

OPPORTUNITIES:

Growth in existing categories: Most of the categories the company operates in are niche and are lowly penetrated. The company continues to develop these categories through building consumer awareness, giving the best in class services & providing offerings to suit custome needs.

Expansion into new categories: The Kaya clinic business with dermatologists at the core is well poised to exploit the growing need for hair care services. The company intends to expand in this area of offerings over the next 18 months.

Format diversification and expansion into products: Kaya Skin Bar is a new product retail format launched by the company to tap into the growing premium cosmetic products category in India. It provides better engagement with the brand. The format provides for higher scalability with lower capital cost in comparisons to the clinics.

Geographical reach: Kaya continues to increase its footprint in India as well as Middle East. The Company’s strategy is to increase the number of Kaya Skin clinics and Kaya Skin bar stores, and improve penetration in existing and new cities to increase market share in the skin care product and services.

Online Channel: The last few years have seen exponential growth in e-commerce in India. Kaya believes that the internet is well on its way to becoming an accepted and convenient mode of shopping. The company has tie ups with large e- commerce players and has also set up its online e-portal for products @ www.kayaclinic.com which shall provide access of Kaya products to even places where Kaya clinics presence is not there.

INTERNAL CONTROLS

MaKE and its subsidiaries have established a wide-ranging system of Internal Controls to ensure that all assets are safeguarded and protected. Further, it has processes in place to ensure that all transactions are evaluated, authorized, recorded and reported accurately.

Your Company has also put in place an extensive budgetary control review mechanism whereby the management regularly reviews actual performance in comparison to forecasts.Anysignificantdeviation from forecasts is reviewed and assessed rapidly to identify any market trends or shortcomings in service offerings. The system is designed to adequately ensure that financial and other records are accurate and reliable for preparing financial information and other data. The internal control procedures are augmented by an extensive program of internal, external audits and periodic reviews by the management.

HUMAN RESOURCES

MaKE, along with its subsidiaries, has total workforce strength of 1000+ employees across 85 clinics and 3 skin bars in India and over 18 clinics in the middle-east. The company is also associated with over 200+ Dermatologists across the chain in India and Middle East. Our clinic team structure comprises of Clinic Managers, Customer Care Executives, Consultant Dermatologists and Beauty Therapists.

The people policy has ensured to drive human capital effectiveness and setting new benchmarks to inspire. Our company prides itself for its culture of care, concern, customer-centricity and transparency which are driven through its, member assist programs & rewards and recognition programs and through platforms like CEO – Connect, CEO – Speak & Business Excellence Conferences. Utmost importance is placed on driving an energized work culture through various initiatives, which in turn delivers wow experience for our customers. The organization ensures regular interventions to communicate and align members to organizational thrust areas. We share with our members quarter wise annual road map of business performance and other business indicators. This ensures that the entire organization is geared up towards a collaborated performance delivery.

Growth aspiration of the member in the MaKE family along with the organization’s need to have a robust pipeline of ready talent has been addressed through a system built around assessment centers to groom talent. Given Kaya’s unique demographic profile of 85% young, aspiring work force, across geographies, ensuring cultural sensitivity is of utmost importance which is ushered through human resource policies and processes. Employee engagement was a keen focus area and the success of the programs introduced over the year across the group was reflected in the high engagement scores in both the employee and Doctors surveys undertaken.

Training and development is a critical part of our customer experience strategy. Capability building of our members is structured through ongoing in-clinic training that is specific to the skills required for performing various services and is continuously adapted to latest in skin care services. In addition, members are taken through soft skills training and these along with technical training are re-iterated from time to time.

CUSTOMER RETENTION AND SATISFACTION:

Loyalty Program in India - Kaya Smiles:

Our focus has always been to nurture and strengthen the relationship with our customers. It is our customer centric approach that has enabled us to garner such a commendable customer loyalty. Our loyalty programme, launched in India 2 years ago, is the first of its kind which has more than 1.5 lakh customer base contributing to over 79% of sales and is enrolling members every day.

Key benefits of Loyalty programme are:

• Exclusive schemes, benefits and promotions.

• Special previews before the sale periods.

• Invitations to exclusive events - both in-store as well as those organised outside the stores.

Customer engagement:

Customer engagement through innovative initiatives in Digital and Social Media continue to be a big focus for the year. Various consumer education initiatives were undertaken on this space have ensured that Kaya enjoys significant levels of engagement among its 4 lakh+ fan base on Facebook. Kaya is also active on other platforms such as Twitter, YouTube etc.

At Kaya we strive to provide our customers with the best overall experience. To measure the customer experience we conduct customer satisfaction surveys to evaluate a range of parameters including clinic environment, staff, transaction efficiency, loyalty programme, schemes and promotions, merchandise range and quality, to name a few and undertake improvements in areas based on feedback.

PERFORMANCE OVERVIEW:

MaKE is engaged in the business of providing skincare solutions carried directly or indirectly through Kaya skin clinics in India and Middle East MaKE consolidated financials includes MaKE standalone financials for a period starting January 19th 2013 and ending March 31st 2014 and all its subsidiaries financials for a period starting April 1st 2013 and ending March 31st 2014.

During the year, MaKE took a strategic decision to focus on the Kaya Business in India and Middle East and hence Kaya Limited divested the entire business in Singapore and Malaysia.

MaKE Consolidated Financial Summary:

The following table present summaries of results of operations for the year ended March 31, 2014:

	2013-2014
Particulars	Amount in Rs. Lacs	% to Revenue
Revenue from Operations	36,246.10	100%
Operating EBIDTA (Earnings before interest, tax and depreciation)	3,594.69	10%
Operating EBIT (Earnings before Interest and Tax)	2,459.74	7%
Earnings before Tax & Exceptional Items	2,234.26	6%
Earnings after Tax	3,501.76	10%

Note:

1. Above financials includes MaKE standalone financials for a period starting January 19th 2013 and ending March 31st 2014 and all its subsidiaries financials for a period startingApril 1st 2013 and ending March 31st 2014.

2. No comparable figures are av ailable for previous years as MaKE was incorporated ion January 19th, 2013

Revenues

Revenue from operations for MaKE at a consolidated level is at Rs 36246.10 Lacs. This includes revenue from operations from the divested Singapore entities for the period of nine months amounting to Rs 7218.66 Lacs.

On a standalone basis MaKE’s revenue from operations is Rs 78.08 Lacs comprising the royalty income earned from subsidiary.

Earnings before Tax & exceptional items (EBT)

Operating EBT (before exceptional Items) at MaKE consolidated levels at Rs 2234.26 Lacs is at 6% of revenue. This includes EBT from the divested Singapore entities to the extent of Rs 1708.39 Lacs. On a standalone basis MaKE’s operating EBT is at Rs 15.22 Lacs.

Earnings after Tax

Earnings after Tax at MaKE consolidated levels is Rs 3501.76 Lacs (10% of revenue). On a standalone basis MaKE’s Earnings after Tax is at Rs 5.72 Lacs.

Exceptional Items includes profit on divestment of Singapore business (5960.02 Lacs), Impairment loss on goodwill on consolidation (Rs (3850.00) Lacs), provision relating to statutory matters (Rs 340.36 Lacs) and other reversal of provisions (Rs 378.93 Lacs).

Kaya India Performance Overview:

The company is focused on building a profitable business that not only provides great value to all its stakeholders. The company has undertaken numerous initiatives and designed multiple activations to boost overall growth. The customer acquisition strategy underwent a make-over with a focus on cure categories like Laser hair removal, Anti-ageing, Pigmentation and Acne. These categories not only stem out of the dermatological expertise of Kaya but our analytics also showed that customers acquired in these categories are most engaged on a longer duration. Bringing back our strategic intent to broaden our offerings in these areas, Kaya has been relentlessly investing in advanced skin care technologies to reinforce its commitment of offering cutting-edge skin care solutions to consumers. Over the past 1 year, Kaya scaled-up advanced technologies in the field of Anti Ageing, Acne & Pigmentation to widen our offerings.

Financial Summary:

The following table present summaries of results of operations for the year ended March 31, 2014:

	2013-14		2012-13
Particulars	Amount in Rs. Lacs	% to Revenue	Amount in Rs. Lacs	% to Revenue
Revenue from Operations	15,342.16	100%	14,333.86	100%
Cost of Materials	3,019.64	20%	3,592.10	25%
Employee cost	4,001.40	26%	3,646.10	25%
Advertisement sales and Promotion	1,272.01	8%	1,501.91	10%
Other Operative Expenditure	7,050.23	46%	6,571.81	46%
Operating EBIDTA (Earnings before interest, tax and depreciation)	(1.12)	0%	(978.07)	-7%
Depreciation and Amortization	492.44	3%	1,027.22	7%
Operating EBIT (Earnings before Interest and Tax)	(493.56)	-3%	(2,005.29)	-14%
Other Income	393.70	3%	32.40	0%
Earnings before Tax and Exceptional Items	(114.76)	-1%	(1,973.72)	-14%
Earnings after Tax	3,396.16	22%	(2,975.30)	-21%

Operational Metrics:

Particulars	2013-14	2012-13
Net Revenue SSG Gr (%)	7%	8%
Customer Count Gr (%)	3%	-3%
Ticket Size Gr (%)	9%	7%
Avg Ticket Size per customer (USD)	363	384
Avg Ticket Size per customer (Rs)	>7000	>6500

*SSG – Same Store Growth (Source: Company’s internal MIS)

Category Mix:

Particulars	2013-14	2012-13	Gr%
Cure	67%	60%	25%
Care	13%	20%	-25%
Products	20%	20%	11%

(Source: Company’s internal MIS)

Revenues

Kaya India has been gathering positive momentum with same store sales growth over a number of quarters. This is the outcome of our strategy to focus on our cure vertical and the business is well placed to capture the growth opportunity on a sustainable basis. Kaya India has achieved a turnover of INR 15342.16 Lacs registering overall growth of about 7% over FY13. However on a closer look, the cure portfolio and the products grew by 25% and 11% respectively on collection basis. The care portfolio of beauty facials de-grew by 25% resulting in a net overall collection growth of only 11% in FY 14. The company is working to put the care business in order through tie ups with major international players and is slated for a re launch in the later part of the coming financial year.

Cost of Materials

Cost of Materials includes Cost of materials consumed, Purchases of stock-in-trade, changes in inventories of finished goods, work-in-process and stock-in-trade, Consumption of consumables and stores and spare parts as well as Contract manufacturing expenses. The cost of materials has witnessed a big positive shift of 5% of revenue in FY 14 as compared to FY 13. The absolute cost has reduced by 16% to Rs 3019.64 Lacs in FY 14 as against Rs 3592.10 Lacs in FY 13 on account of shift in focus on the higher margin categories as well as drive in volume efficiencies and sourcing cost reductions.

Employee Cost

Employee cost includes cost of employee at the clinic servicing the customers as well as staff at the corporate office.

This cost at Rs 4001.40 Lacs has increased by 10% as compared to Rs 3646.10 Lacs in the FY 13. This increase was a result of annual compensation increases for our employees.

Advertisement sales and Promotion

Cost of advertisement has reduced by 15% to Rs 1272.01 Lacs (8% of revenue) in FY 14 as compared to Rs 1501.91 Lacs (10% of revenue) in FY 13.

Other operative expenses:

Other expenses majorly include overheads like Doctor professional charges, rent, electricity repairs and maintenance, insurance, travel, rates and tax etc. the same has grown by 7% to Rs 7050.23 Lacs in FY 14 as compared to Rs 6571.81 Lacs in FY 13.

Depreciation & Amortization

Depreciation & amortization expense increased to Rs 492.44 Lacs during FY 14, as compared to Rs 1027.22 Lacs during FY 13. The decrease is largely due to onetime impairment of assets done in FY 13.

Earnings before interest, tax and depreciation (EBIDTA):

During FY14, Kaya India recorded operational loss of Rs (1.12) Lacs at the EBIDTA level as compared to Rs (978.07) Lacs in FY 13, Operating EBIDTA includes Rs (140.74) Lacs loss on account of 3 new Kaya Skin Bar stores - a product based format being prototyped.

Other Income

Other Income in FY 14 majorly includes profit on short term Investments of surplus cash of Rs 294.81 Lacs, write back of liabilites of Rs. 68.13 lacs and other non operationg income of Rs. 30.75 lacs.

Earnings before Tax (EBT):

Earnings before Tax (without exceptional items) is at Rs (114.76) Lacs in FY 14 as against Rs (1973.72) Lacs in FY 13. This includes Rs (154.70) Lacs loss on account of 3 new Kaya Skin Bar stores - a product based format being prototyped. Kaya Skin clinics chain has reported EBT of Rs 39.94 Lacs during FY 14.

Earnings after Tax:

Earnings after Tax is at Rs 3396.16 Lacs in FY 14 as against Rs (2975.30) Lacs in FY 13. Exceptional Items includes profit on divestment of Singapore business (4286.80 Lacs), provision relating to statutory matters (Rs 340.36 Lacs) and other reversal of provisions (Rs 119.48 Lacs).

Liquidity

Our primary sources of liquidity are cash flows generated from our operations. During the year Kaya India received funds by divesting its Singapore subsidiaries. As a result, as on March 31st 2014, company had Rs 16986.69 Lacs of funds available as cash or cash equivalents or invested in Mutual funds and short term deposits.

Kaya Middle East Financial Summary

The following table present summaries of results of operations for the year ended March 31, 2014:

	2013-14			2012-13
Particulars	Amount in AED Lacs	Amount in Rs. Lacs	% to Revenue	Amount in AED Lacs	Amount in Rs. Lacs	% to Revenue
Revenue from Operations	837.17	13,768.10	100%	780.24	11,551.42	100%
Cost of Materials	146.13	2,403.30	17%	163.47	2,420.23	21%
Employee cost	374.97	6,166.78	45%	343.70	5,088.46	44%
Advertisement sales and Promotion	59.58	979.82	7%	79.69	1,179.86	10%
Other Operative Expenditure	193.43	3,181.20	23%	216.13	3,199.77	28%
Operating EBIDTA (Earnings before interest, tax and depreciation)	63.05	1,037.00	8%	(22.76)	(336.90)	-3%
Depreciation and Amortization	27.66	454.84	3%	40.04	592.84	5%
Operating EBIT (Earnings before Interest and Tax)	35.40	582.16	4%	(62.80)	(929.74)	-8%
Other Income	0.33	5.46	0%	0.02	0.32	0%
Earnings before Tax & Exceptional Items	35.73	587.62	4%	(75.85)	(1,123.00)	-10%
Earnings after Tax	35.73	587.62	4%	(125.35)	(1,855.76)	-16%

(Exchange Rate: FY 14 - 1 AED = INR 16.446; FY 13 – 1 AED = INR 14.805)

Operational Metrics:

Particulars	2013-14	2012-13
Net Revenue SSG Gr (%)	8%	16%
Customer Count Gr (%)	1%	4%
Ticket Size Gr (%)	6%	3%
Avg Ticket Size per customer (USD)	384	363

SSG – Same Store Growth (Source: Company’s internal MIS)

Category Mix:

Particulars	2013-14	2012-13	Gr%
Cure	79%	78%	8%
Care	11%	12%	-3%
Products	10%	10%	11%

(Source: Company’s internal MIS)

Revenues

Kaya Middle East has turned into positive trajectory with a turnover of AED 837.17 Lacs (INR 13768.10 Lacs) registering overall growth of about 19% over FY13 post considering the currency impact. On a constant currency basis revenues grew by 7%. Same store sales growth is 8%. This is the outcome of our strategy to focus on our cure vertical and the business is well placed to capture the growth opportunity on a sustainable basis. Cure categories grew by 8% and products grew by 11% in the FY 14 whereas care category de-grew by (3)%, resulting in a net overall collection growth of only 7% in FY 14.

Cost of Materials

Cost of Materials includes Cost of materials consumed, Purchases of stock-in-trade, changes in inventories of finished goods, work-in-process and stock-in-trade, Consumption of consumables and stores and spare parts as well as Contract manufacturing expenses. The Cost of Materials has witnessed a big positive shift of 4% of revenue in FY 14 as compared to FY 13. The absolute cost at AED 146.13 (INR 2403.30 Lacs) has reduced by 11% on constant currency basis as compared to AED 163.47 Lacs (INR 2420.23 Lacs) on account of shift in focus on the higher margin categories as well as drive in margin and volume efficiencies.

Employee Cost

Employee cost includes cost of employee at the clinics servicing the customers as well as staff at the corporate office.

The same at AED 374.97 Lacs (INR 6166.78 Lacs) has increased by 9% on constant currency basis as compared to AED 343.70 Lacs (INR 5088.46 Lacs) in FY 13. This increase was a result of annual compensation increases for our employees, plus the impact of an increasing number of employees.

Advertisement sales and Promotion

Cost of advertisement has reduced by 25% on constant currency basis to AED 59.58 (INR 979.82 Lacs) i.e. 7% of revenue in FY 14 as compared to AED 79.69 (INR 1179.86 Lacs) i.e. 10% of revenue in FY 13.

Other operative expenses:

Other expenses majorly include overheads like Doctor professional charges, rent, electricity repairs and maintenance, insurance, travel, rates and tax etc. which has reduced by 11% on constant currency basis to AED 193.43 Lacs (INR 3181.20 Lacs) in FY 14 as compared to AED 216.13 Lacs (INR 3199.77 Lacs) in FY 13.

Depreciation & Amortization

Depreciation & amortization expense increased to AED 27.66 Lacs (INR 454.84 Lacs) during FY 14, as compared to AED 40.04 Lacs (INR 592.84 Lacs) during FY 13. The decrease is largely due to onetime impairment of assets completed during FY 13.

Earnings before interest, tax and depreciation (EBIDTA):

During FY14, Kaya Middle East recorded operational profit of Rs 1037.00 Lacs at the EBIDTA level which is 8% of revenue as compared to (3) % in FY 13.

Earnings before Interest and Tax (EBIT):

During FY14, Kaya Middle East entered positive trajectory during FY 14 recording operational profit (without exceptional items) of AED 35.40 Lacs (INR 582.16 Lacs) at the EBIT level as compared to EBIT loss of AED (62.80) Lacs (INR (929.74) Lacs) for the corresponding period of previous year.

This profit improvement was led by focus on cure verticals which are high tickets & high margin verticals. Also by rationalizing the advertising expenses into more focused activity, the effectiveness was high in terms of revenue growth and reduction in advertising expenses by 3% of revenue.

Liquidity

Our primary sources of liquidity are cash flows generated from our operations. As on March 31st 2014, company had AED 76.88 Lacs (INR 1253.66 Lacs) of funds available as cash or cash equivalents or invested in short term deposits.

OUTLOOK

The long term outlook for Skin care sector remains positive on the back of favourable demographics, higher awareness about health, rising disposable income, burgeoning aspiring middle class segment and large young and working population as well as improvement in the macro economic factors like GDP, inflation etc. In view of this the company out its growth plans for both geographies.

CAUTIONARY STATEMENT

Some of the statements in this Management Discussion & Analysis, describing the Company’s objectives, projections, estimates, expectations and predictions may be ‘forward looking statements’ within the meaning of applicable laws and regulations. Actual results may differ from those expressed or implied. Important developments that could alter your Company’s performance include increase in material costs, employee & professional cost, technology developments and significant changes in political and economic environment, tax laws and labour relations.