The following is a Stock Analyst Note written by Morningstar Analyst Suruchi Jain. Registered Morningstar users can view the complete report on the stock, which includes our thesis, valuation and risks, among other metrics here.
On Monday, Marico Limited announced that it will spin off its Kaya skin care business (to be renamed Marico Kaya Enterprises Limited or MaKE) into a separate entity.
Marico shareholders will receive one share in MaKE for every 50 shares of Marico owned. Based on our initial sum-of-parts analysis, we believe this demerger will create additional shareholder value, and we intend to take our fair value up as a result.
We suspect management's motivation for the move stems from the fact that its loss-making Kaya skin care business (which accounted for 7% of Marico's consolidated fiscal 2012 revenues) posted a 10% operating loss and has yet to break even since its inception in 2002.
As a result, this demerger will instantly boost the operating margins of Marico Limited (the consumer products business posted an 11.9% EBIT margin in the most recent fiscal year).
Further, the two businesses have no interdependencies, hence there are no synergies being lost in the demerger. We believe the private equity investors in Marico (which own 5% of shares outstanding) may have played a key role in pushing management to take this bold step.
By hiving off an unprofitable business that has been a drain on cash and margins, Marico Limited can now use its cash to reinvest in the consumer business, which we view as a plus.
In conjunction with the split, Marico announced that Saugata Gupta will subsequently oversee the CPG business, while Vijay Subramaniam (formerly head of the international segment) will assume the top spot at MaKE. Ajay Pahwa, who has maintained the CEO position at Kaya for the past three years, intends to leave the company at the time of the spin-off.
From our perspective, Pahwa's departure is a signal that Marico is looking to wash its hands of Kaya, which isn't surprising to us given that the segment has bled money for more than 10 years. We will update our analysis as more details come to light.