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Marico's Restructuring Exercise

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From the Bajaj Group and Wipro to Pantaloon Retail, Cinemax or Provogue, corporate India has enough and more cases of companies that have executed demergers to unlock value for their investors. 
 
Last week there was one more addition to that list. Hair and skin care major, the Rs 4,008-crore Marico (FY 2011-12) announced a restructuring exercise across the organisation effective April 2013. On agenda was the consolidation of its FMCG business across the globe and a demerger of its skin care services business Rs 279-crore Kaya from the company.
 
First, the details of Marico's restructuring in the FMCG part of its business. Till date, Marico ran its FMCG business as two entities. The domestic business called internally as Consumer Product Business (CPB) headed by Saugata Gupta and an International Business Group (IBG) headed by Vijay Subramaniam that managed Marico’s ventures from Bangladesh to Egypt.
 
The product composition of the domestic and international businesses were also different. While the domestic FMCG business of Marico was mainly a hair care and health food range of products, the international business had an extensive personal care portfolio. The lines started to blur in this financial year when the domestic business acquired the portfolio of youth brands including Set Wet, Zatak and Livon earlier this year from Reckitt Benckiser. As a company statement acknowledges, "the portfolios of the domestic and international business were increasingly mirroring each other". Post the restructuring exercise, both units will be merged into a single business unit and report to Gupta who will remain CEO for the joint entity.
 
Post regulatory approvals, the demerged Kaya will be listed separately as Marico Kaya Enterprises (MaKE, as the company proposes to call it) and be headed by Vijay Subramaniam who will take over as CEO for the services business. Once Kaya is listed as a separate entity somewhere around mid-2013, shareholders of Marico Limited will be issued one share of MaKE for every 50 shares they hold in Marico.
 
Kaya has been a loss making venture for Marico and during the financial year 2011-12 the business made a loss of Rs 29 crore (PBIT) on net sales of  Rs 279 crore, though it was a shade better than the Rs 33 crore loss that the Kaya business suffered in 2010-11. The company however says that the Kaya business is getting only stronger as same store sales have been growing at an encouraging pace. Currently, Marico’s exposure to Kaya stands at Rs 180 crore, with an equity investment of Rs 73 crore and an interest free loan of Rs 107 crore. “Marico intends to convert the loan into equity prior to the demerger,” says an Angel Broking report.
 
Marico says that these initiatives will only help make the enterprise stronger in facing the future. “We strongly believe that for the next phase of our value creation journey, the Kaya business should be run in an entrepreneurial manner independently from the FMCG business of Marico,” says a company statement.
 
Analysts at Angel Broking believe that the new arrangement will also be beneficial for Marico’s existing shareholders. “The demerger of the loss making venture would result in Marico turning into a pure FMCG play enjoying superior return ratios.” The announcement has had a mixed response at the bourses. Even as the BSE Sensex closed above the 20,000-mark, Marico's stock was trading at Rs 224.40 at the closing hours of Friday, 18 January, on the BSE, lower than the one-year high of Rs 230 earlier this month, and much lower than the Rs 250 mark the stock had touched in November 2012.
 
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