MANAGEMENT DISCUSSION AND ANALYSIS

Introduction

Kaya Limited ('Kaya' or 'the Company'), headquartered in Mumbai, Maharashtra, India, carries on Skin Care Business in India and through its subsidiary / Joint ventures in Middle East region. The Kaya Business principally comprises advanced skin care services and products under the brand name of Kaya in India and Middle East.

India

Economic Overview

The year 2015-16 has been a difficult year for the world economy with a major slowdown in China and limited recovery in the USA as various central banks have persevered with various versions of easing through provision of liquidity as well as maintenance of an easy interest rate regime. India, although being largely dependent on the developed nation economies, has emerged as the fastest growing major economy in the world as per the Central Statistics Organisation (CSO) and International Monetary Fund (IMF). India's gross domestic product (GDP) grew 7.6 per cent and all the economic prospects have brightened on the back of reining of inflation, rise in domestic demand, and increase in investments and decline in oil prices. The reduction of inflation has been driven by sharp decrease in prices of crude oil and a fall in major industrial commodities.

Year 2016 was expected as a revival year for the Indian economy, but, largely the industry, consumer sentiments etc remained muted. While the Government has been cautious in its spending while adhering to the fiscal deficit targets, it has taken several initiatives in the areas of infra push in roads and railways, easing the process of doing business, opening the doors to FDI, targeting inflation for monetary policy, starting campaigns on smart cities, urban development, startups, skill development etc. The impact of most of these measures can be gauged over a period of time and may not get reflected in the economic numbers immediately.

According to the Economic Survey 2015-16, the Indian economy will continue to grow more than 7 per cent in 2016-17. The improvement in India's economic fundamentals is expected to accelerate in the coming years with the combined impact of strong government reforms, RBI's inflation focus supported by benign global commodity prices.

INDUSTRY OVERVIEW:

The year 2016, goes down the annals, as a steady year for business development and one that has set the pace for expansion for those involved in beauty and wellness. Indian consumers continued to opt for non-invasive and minimally invasive treatments over surgical procedures for skin wherever possible and these treatments generated more than three-quarters of the total cosmetics treatment sales.

Not only have salons grown, the overall business of beauty is witnessing a change in its form like never before. From brands launching make-up apps, exclusive skin care brands opening stores on high streets and malls to at-home beauty services are catching the attention of investors/corporates hence mushrooming of numbers is proof enough to accentuate the giant strides being taken by this industry. The underlying fact is that the growth potential warrants merit. Not only international names are now in the country, the community of investors have also grown and they are whole-hardheartedly supporting start-ups, at-home beauty services and growing e-commerce sites.

The US $ 1.6 Bn skin care market in India, already the third largest within personal care is likely to grow further as penetration expands. Per capita spends on skin care is just US $1 per year vs US $49 IN US. Currently skin lightning creams dominate the market; however categories like Anti-ageing are also fast growing and will become the next driver of growth. The category is still in need-creation phase and hence adequate amount of education and marketing investments is required to create space.

Digital and especially social media has been another significant driver of the need of beauty and wellness. With the resultant growth of beauty and hair industry, the cosmetology industry has also witnessed an all-round growth in 2015-16.

Technology's influence in skin care has been twofold. Firstly, it is influencing innovation through the rise of beauty treatment devices, new ingredients and new technologies and secondly, customer interaction and experience through the use of diagnostic tools and digital apps as well as payments and delivery are the other areas that are transforming rapidly.

Highly fragmented market

The market is highly fragmented with very few players in the organised space. Some regional players are brsent in cities across the country. The popularity of most of these stand-alone clinics is the result of the positive reputations of the clinics' individual dermatologists.

Majority of the market is served by stand-alone clinics

As per Euromonitor report, 45% of the total market size is contributed by standalone stores which are located in each region and being run by individual or group of dermatologists. However, regional chained clinics have been expanding their footprint and gaining share. Premium salons also offer specialised services such as Hair removal, peels etc.

Key trends

• Indian consumers are increasingly focusing on improving their appearance. Inspired by movies, TV soap operas and social media, women are seeking to become fairer, younger and slimmer while men want to appear fitter and more metrosexual

• Rising social image consciousness is driving the growth of beauty and personal care industry. It is expected that there will be a greater demand for even skin tone rather than fairer skin

• Anti-aging treatment is being brferred driven by increasing demand for latest procedures, particularly among the growing number of urban middle and upper class consumers

• Hair restoration treatments are driven by the increasing brmature hair loss due to rising stress levels, poor water quality and increased pollution

• Indian men have become increasingly conscious of their appearance and the growing demand for new men's grooming products is expected to drive overall industry growth over forecast period

• The diagnosis and treatment will change from being invasive to less invasive, brventative and image-based

• The tools used for treatment will be a holistic combination of therapy and diagnosis —Theranostics with a more brventive rather than corrective approach which will be inclined towards overall wellness

• Tremendous influx of medical technologies from all over the world. There are many skin care products, mesotherapy products, laser as well as light-based technologies that have hit the Indian cosmetic market. However, there are also some other promising non-surgical technologies from the global market

• Increase in demand for treatments for body contouring and tightening. Till some time back, we used to see a demand for treatments for face and neck only. But that is not the case now. Full body solutions are showing increase in demand now

Middle East

Economic Overview

The UAE economy is expected to weather the turbulence caused by the oil price collapse better than its Arab neighbours, as Abu Dhabi advances its strategy of economic diversification focusing on tourism, technology and skilled labour. Growth for the United Arab Emirates (UAE) slowed to 3.9% in 2015, down from 4.6% the year before, according to the International Monetary Fund (IMF). The IMF expects the UAE economy to expand 2.4% this year and 2.6% in 2017. The slowdown largely reflects the sharp decline in oil prices over the past two years. Crude oil exports rebrsent about 30% of the UAE's gross domestic product, which makes the country vulnerable to shocks in the energy market.

However, the UAE economy is clearly better positioned to withstand additional headwinds caused by collapsing oil prices than its regional ally Saudi Arabia. The Saudi monarchy, which heads the Middle East's biggest economy, recently announced plans to diversify away from oil dependence.

Industry Overview

GCC is one of the highest penetrated markets in the world when it comes to Skin Care products and services (Estimates). Given the high incomes, cultural sensitivities, and an affinity towards European and American trends and products, the category of Skin Care Services is one of the most evolved in the world. The demand for the latest and the best, combined with a high propensity to pay, brings to the market very advanced and the best technologies/machines/products from across the world. Saudi Arabia stands at top in the hierarchy, followed by UAE, Kuwait, Qatar and Oman. The skin in gulf starts experiencing such services at a much earlier age, and therefore, the demand for harsher and quicker solutions continues to grow rapidly. In Saudi, one can find one of the most advanced services available across the world, given that the country has one of the good spending power and a very high beauty consciousness.

UAE (Internal Estimates)

As per Euromonitor, UAE skin care products market is estimated around $150mn and the UAE skin care services market is estimated anywhere around $250mn - $400mn. This is projected to grow at around 20% CAGR in the next few years, as against 5% CAGR of skin care products market, which suggests a huge potential in the category.

The current addressable market size in UAE for the category amounts to almost $1bn coming from around 1.25mn customers.

In UAE, given the small percentage of local population, a large customer base is of Arab Expats (from other Arab countries) followed by Western Expats, with a higher skew of local + expat Arab population in Non-Dubai emirates.

Laser Hair Removal is a highly penetrated category now (our internal estimates suggest anywhere from 60% to 70% penetration), which is leading to intense price competition in the market.

Saudi Arabia

As per Euromonitor, KSA skin care products market is estimated around $600mn and the KSA skin care services market is estimated anywhere around $400mn - $450mn.

The current addressable market size in KSA for the category amounts to almost $2.9bn coming from around 3.9mn customers.

Kaya: The Brand (Middle East)

Kaya has the largest network leadership across Middle East region with ~19 clinics in 3 countries (Kingdom of Saudi Arabia, Oman and UAE) and being the only largest international player it has significant first mover advantage, strong brand platform and is well positioned for future expansion in the region. Kaya is the only brand in our category to receive a SUPERBRAND status, and that too 6 years in a row, from 2011 to 2016

Over the last 13 years of our existence in this market, through good servicing of our clients, we are proudly the No1 Brand in our markets, with an awareness of almost 90% without our target segment, and a TOM of around 25%. This status has been reaffirmed by a number of coveted external recognitions too.

This has been possible due to various reasons. Our differentiated strategy and value proposition, our high focus on customer quality, our thought leadership in marketing, differentiated employee culture, and a very professional organization support structure and processes.

As a brand, we are stronger than ever, and stronger than our network brsence, thus holding an opportunity to grow well in the future.

There are not many skin clinic chains across the region. Our main competition comes from reputed dermatologists owned clinics, and hospital chains. These clinics operate with high quality and ambience and tend to pull clients with the reputation of the dermatologist. They tend to be perceived as more personal to their clients, since most of their business comes from word of mouth and recommendations. However, since they are owned and managed by dermatologists, who are mostly practicing themselves, they are limited in their scope to expand professionally, probably the reason why we haven't seen many chains coming up in the last many years. Collectively, all these dermatologists clinics do give us an competition.

Kaya's Growth Drivers

- Growth of disposable incomes

o Consumers today do not hesitate to spend on their looks as it makes them feel more confident about themselves and there is an increasing desire to brsent them in a certain way. The share of Top Income people in the total household (as per McKinsey & Company, April 2010) is expected to increase from 6mn in 2008 to 25mn in 2020 and 77 mn in 2030. This would result in a 4x increase in household in 2020 and 13x increase in household by 2030.

- Increasing awareness and acceptance of beauty and wellness services, especially among women.

o Rising social image consciousness: Indian consumers are increasingly focusing on improving their appearance. Inspired by movies and TV soap operas, women are seeking to become fairer, younger and slimmer while men want to appear fitter and more muscular

o Increase in working women: Women make up about 30% of India's 400m workforce and ~20m of them are in urban pockets. The company expects ~1.05bn women in the working age bracket by 2020 to fuel growth for the sector

o Growth of affluent + elite: It expects a 1.2m p.a. increase in affluent women and more than 2m p.a. increase in the elite group to aid the segment. The company estimates the combined segment to rise from ~6% of the population share to ~13% by 2020. This would lead to an increase in their share of consumption of beauty and wellness services from ~24% now to ~39% by 2020

o Younger population: India has a relatively young population, with two-thirds of the population aged below 35 with a median age of 26 years. The company believes this age group offers better growth, being more aspirational, better connected, more technology-savvy, more self-conscious and spending power

- Increase of demand in Men grooming segment

o Indian men have become increasingly conscious of their appearance and the growing demand for new men's grooming products is expected to drive overall industry growth over forecast period. Although traditionally women have been the primary driver of demand, beauty services are no longer targeted strictly to women and there has been increased demand from male consumers as well, seeking personalized services such as men's facial, chest hair removal etc.

- Better accessibility in terms of stores and ecommerce

- Introduction of better technology and brference for organized players

There is a significant improvement in the research & technology to address the problems the consumer faces with respect to beauty. Non-surgical methods has witnessed strong growth and increased brference amongst the consumers. Products like Anti-ageing solutions have gained lot of acceptance in the recent times. Increased brference for branded professional beauty care providers who provide consistent consumer experience is boosting the organised segment. Branding is key to have loyal customer base that are attracted by strong R&D & safety standards of organized and branded players. High level of research & technology in the field of beauty treatments has created a trust amongst the consumers and increased the awareness for these products.

Currently there aren't enough facilities that provide combrhensive skin related treatments under one roof. This coupled with the low availability of dermatologists in India, enhances the dire need of combrhensive skin care set ups providing a wide range of services.

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

Outlook  India

Non-invasive market is projected to nearly triple by 2019

Robust demand for non-invasive procedures is projected to drive the market to increase from INR 1,562 crores in 2015 to INR 3,546 Crores in 2019, reflecting a CAGR of 23% over the forecast period. Growth in demand is expected to be driven by increased awareness of modern beauty concepts, growing disposable income, greater availability and celebrity endorsements. The overall Beauty Services market in 2014 was worth 11,500 crores INR. The cosmetic treatments business comprised of 17% of this and of this the non-invasive contribution was 78% while the invasive business contributed 22%. The market for less invasive category is expected to grow more than INR 3.5 billion by 2019 where Hair restoration, Anti-aging and Skin-whitening will provide the maximum opportunities

Middle East

Beauty and personal care continued to demonstrate a strong performance in 2015, including both the mass and brmium segments. The market was able to maintain a similar growth rate to the CAGR witnessed during the review period, largely due to the growing focus on personal grooming and hygiene, aggressive activities by companies, as well as steady growth in retail channels.

The focus on personal hygiene is expected to intensify in the coming years. This will eventually lead to growing demand for products with a special focus on hygiene. Usage of social media is expected to continue to gain strength in the forecast period. This trend will eventually have a positive impact on beauty and personal care, as companies will reach out to customers in a more direct way. Future communication strategies are expected to be designed mainly around social media, and mainstream advertising will become extremely limited. Business of Kaya has huge potential opportunity through:

• Growth in existing clinics - Better value proposition led by innovations and improved experience

• Expansion in existing geographies - There is good potential to expand in some of the existing geographies like KSA and Oman

• Expansion in new geographies, like Qatar, Bahrain, Iran.

As a brand, we are stronger than ever, and stronger than our network brsence, thus holding an opportunity to grow well in the future.

BUSINESS OVERVIEW

A pioneer in skin care dermatology space, Kaya's strength is that it offers a customized skin care solutions which is delivered through Expert Dermatologists, with the application of state-of-art medical technology. 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. Our prime objective is to become the leading player in the specialty skin care market in India and Middle East.

In the recent years, the brand has strengthened its key offerings by innovating in services across categories like Acne, Pigmentation, Anti-aging and building these categories by consistent consumer awareness program. In the coming year Kaya plans to strengthen its Product portfolio by launching series of products at various assortment levels for both Kaya Skin Bars and Clinics and also has plans to enter the new categories like hair solutions with bouquet of services and products providing the consumers the wholistic solution based treatments for every stage of Hair care through its wide range of offerings into the category.

Kaya is also constantly increasing its brsence in E commerce space through its own website as well as channel partners. Currently 8% to 10% of Kaya India product sales is through E commerce route.

Key drivers of business going forward are

- Focus on solution based approach

- Sustained SSG & expansion - drive growth & operating leverage

o Through growth in existing clinics - Better value proposition led by innovations and improved experience o Through expansion in existing geographies

o Through expansion in new geographies in Middle east, like Qatar, Bahrain, Iran

- Innovation in existing services and expansion plans to drive growth

- Increased focus on products through Kay Skin Bars, Clinics and E commerce

- Plans to enter Hair Care service by leveraging its current business model

INTERNAL CONTROLS

Kaya has 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.

Company has also put in place an extensive budgetary control review mechanism whereby the management regularly reviews actual performance in comparison to forecasts 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 brparing 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

Kaya, along with its subsidiaries, has total workforce strength of over 1200 employees across 107 clinics and over 130 skin bars in India and over 21 clinics in the middle-east. The company is also associated with over 200+ Dermatologists across the chain in India and Middle East.

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. The organization ensures regular interventions to communicate and align members to organizational thrust areas. This ensures that the entire organization is geared up towards a collaborated performance delivery.

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 which along with technical training are re-iterated from time to time.

Kaya was also awarded as Top 10 workplaces in retail category by Great place to Work in 2016.

Performance overview

Kaya is engaged in the business of providing skincare solutions through Kaya skin clinics in India and Middle East. The company is focused on building a profitable business that not only provides great value to its customers but also to its shareholders. The company has undertaken numerous initiatives to boost overall growth. In FY 16 Kaya achieved a gross retail turnover of Rs. 369.9 crores, growth of 11% on consolidated basis.

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 & Hair free to widen the service offerings.

Kaya India - Cure Portfolio comprising of Anti-ageing, Hair free Acne and Pigmentation contributes to 69% of the business in India and has grown by 5% during the year and Care Portfolio with the launch of new category of facials has seen boost in the Topline with growth of 15%. Products category in the clinics has de-grown by 6% during the year contributing 17% of overall business. Company has made substantial expansion in its new product retail format known as Kaya Skin Bar and has entered the market in various formats like Company operated standalone stores / Kiosks, Shop in shops and Modern Trade through high end wellness chains. Company has 134 skin bar doors as on 31st March 2016 and has also increased its brsence in E commerce space which contributes to 9% of overall product sales. Overall Company product sales on collection basis with all formats put together has increased by 18% during the year.

Kaya Middle East - Cure Portfolio comprising of Anti ageing, Hair free Acne and Pigmentation contributes to 78% of the business and has grown by 9% during the year whereas Products grew by 13% in FY 16, driven by launch of new ranges in Middle East. Care portfolio comprising of beauty facials have grown by 23%.

Revenues

Net Revenue in FY 16 at Rs 369.9 crores, registered a growth of 11% (SSG: 6%) over FY 15. India business grew by

7% (SSG: Flat%) and Middle East by 17% (SSG: 13%).

During FY 16, Kaya has added 8 new clinics in India and 2 in Middle East. It has also been able to add over 120 Kaya Skin Bars (KSB) doors - new retail product only stores across various formats.

Cost of Goods Sold (COGS)

Cost of goods sold 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.

COGS has witnessed a shift of around 1% of revenue in FY 16 as compared to FY 15 on consolidated basis on account of new formats of Kaya Skin Bars as well as clinic expansion. The absolute cost has increased by 18% to Rs 71.1 crores (19% of Net Revenue) in FY 16 as against Rs 60.4 crores (18% of Net Revenue) in FY 15 on account of shift in category mix.

Kaya India's COGS has increased by 250 basis points with addition of new clinics and retail format Kaya Skin Bars stores. Kaya Middle east's COGS has seen an improvement of around 30 basis points as a % of Net Revenue.

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 Group level at Rs 128.7 crores (35% of Net revenue) has increased by 21% as compared to Rs 106.1 crores (32% of Net Revenue) in the FY 15. This increase was a result of annual compensation increases for our employees as well as addition of new stores in India and Middle East. Increase excluding expansion is 13% which included new positions at corporate level.

Kaya India's Employee costs at Rs 51.4 crores has increased by 20% on account of annual compensation revision & addition of new clinics and retail format Kaya Skin Bar stores. Kaya Middle east's Employee costs at Rs 77.5 crores has increased by 23% as compared to FY 15.

Rentals

Rental costs at consolidate levels Rs 47.3 crores (13% of Net Revenue) has increased by 17% as compared to Rs 40.6 crores (12% of Net Revenue) in FY 15.

Kaya India rental costs increased by 15% to Rs 33.4 crores (18% of Net Revenue). The increase is on account of new clinic and KSB stores openings during the year. Like to like there is reduction of 4%. The same is expected to be muted in coming years as majority of properties has gone through the renewal cycle in last 2 to 3 years.

Kaya Middle east rental costs at Rs 13.9 crores (7% of Net Revenue) has seen an increase of 21% majorly on account of Expansions and renewals of existing clinics.

Advertisement sales and Promotion

Cost of advertisement at Group level has grown by 11% to Rs 26.0 crores (7% of Net Revenue) in FY 16 as compared to Rs 23.5 crores (7% of Net Revenue) in FY 15.

Kaya India advertisement costs at Rs 15.3 crores (8% of Net Revenue) has grown by 7% in FY 16 on account of new catchments and new retail format Kaya Skin bar being added during the year. However Kaya Middle East Advertisement at Rs 10.6 crores (6% of Net Revenue) has increased by 16% in FY 16.

Other operative expenses

Other expenses majorly include overheads like Doctor professional charges, electricity, repairs and maintenance, insurance, travel, rates and taxes etc. The same at consolidated level has grown by 21% to Rs 83.5 crores (23% of Net Revenue) in FY 16 as compared to Rs 69.0 crores (21% of Net Revenue) in FY 15.

Earnings before interest, tax and debrciation (EBIDTA)

During FY 16, Kaya Group registered operating EBIDTA of Rs. 13.3 crores (4% of Net Revenue) as compared to Rs. 32.7 crores (10% of Net Revenue) in FY 15. Reduction in EBIDTA is on account of slower SSGin India and new clinic / skin Bars expansion in India as well as Middle East.

• Kaya India recorded EBIDTA of Rs. (11.3) crores ((6)% of Net Reveune), compared to Rs. 5.8 crores (3% of Net Revenue) of LY. This includes loss of Rs. (7.7) crores on account of new clinic and skin bar openings. Like to Like EBIDTA (Excluding expansion) at Rs. (3.6) crores ((2)% of Net Revenue).

• Kaya Middle east registered EBIDTA of Rs. 24.4 crores (13% of Net Revenue) as compared to Rs. 26.9 crores (17% of Net Revenue) in FY 15.

Debrciation & Amortization

Debrciation & amortization expense at Group level increased to Rs 16.9 crores (5% of Net Revenue) during FY 16, as compared to Rs 11.6 crores (3% of Net Revenue) during FY 15, increase of 46% over FY 15. The increase is on account of new Medical technology investments in existing clinics as well as clinics & skin bars expansion in India & Middle East

Earnings before Interests and Taxes (EBIT)

Operating Margin of Rs. 3.6 crore (-1% of Net Revenue) as compared to Rs. 21.1 crore (6% of Net Revenue) in FY 15. [Like to Like Operating Margin excluding new clinic / KSB expansion is Rs. 6.6 crores (2% of Net Revenue)]

Other Income

Other income in FY 16 is at Rs 11.3 crores as compared to Rs 14.6 crores in FY 15. This includes profit on redemption of short term Investments made out of surplus cash.

Other income in FY 16 also includes liabilities written back pertaining to brvious years amounting to Rs 0.8 crores. The same has not been considered in other income to show operating EBIDTA separately.

Earnings before Taxes (EBT)

Earnings before taxes and exceptions of Rs. 8.8 crores (2% of Net Revenue) as compared to Rs. 36.6 crores (11% of Net Revenue) in FY 15.

Exception in FY 15 includes compensation for termination of Sale and Purchase agreement of Middle East amounting to Rs. 4.8 crores.

Surplus Funds

Cash generation from Operations before taxes during the year FY 15 at a Kaya Group level considering the working capital changes is Rs. 4.7 crores. As a result, as on March 31st 2016, Company had Rs 149.2 crores (Rs 182.5 crores as on March 31st, 2015) of surplus funds available as cash or cash equivalents or invested in Mutual funds and short term deposits post infusing capital in the business by way of technology investments and Clinics / Skin Bars expansion.

Fixed Assets

Fixed assets increased by Rs 25.5 crores during the year FY 16 from Rs 56.2 crores as on March 31st 2015 to Rs 81.7 crores as on March 31st, 2016. The increase is on account of new clinic and KSB store openings during the year as well as advance technology investments in the existing clinics.

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 has chartered out its expansion plans through our Kaya brand, enhancement of Medical Technology, entering into new categories like Hair, increase products portfolio which will further enhance our brand visibility and strengthen our core offerings in both the geographies.