Patanjali: A Disruptive Force of Indian FMCG?

Patanjali Ayurved Limited (PAL), based out of New Delhi, is one of the fastest growing FMCG companies in India. From a modest start, this newest entrant has been registering phenomenal growth and its success has been nothing less than staggering. No longer perceived to be an innocuous venture, PAL is taking on the established brands head on and coming out triumphant. But, does it have what it takes sustain its hyper growth and be the disruptive force of Indian FMCG?

India’s FMCG industry

India’s FMCG market, the country’s fourth largest sector, is estimated to reach USD 49 billion in 2016¹. The FMCG sector is diverse with various sub-segments including food & beverages, personal care, household care, tobacco, lighting and healthcare products. Major ayurvedic brands – Dabur and Baidyanath and Indian and MNC FMCG majors – Colgate, HUL, GSK, Marico, Emami etc. make up the majority of the organised segment of the Indian FMCG space.

Patanjali – The journey

Patanjali Ayurved Limited (PAL), founded by Acharya Balakrishna and yoga guru Baba Ramdev reported revenues of INR 5000 cr. (FY16e). What started as a small pharmacy in 1997, morphed into an FMCG company in 2006.

Key promoters include Acharya Balakrishna who owns 94%, and a Scotland based NRI couple – Sunita and Sarwan Poddar².

Patanjali started selling its products through its network of exclusive stores: Patanjali Arogya Kendra (health and wellness center), Patanjali Chikitsalya (clinics with a doctor offering medicinal products) and Swadeshi Kendras (focused on non-medicinal products). PAL currently has 15,000 exclusive outlets (5,000 franchise stores), 3,000 health centres³, and the company’s products are also available via traditional retail.

Patanjali products are available through over 177,000 retail outlets. To expand its modern trade presence, PAL entered into an agreement with Future Group in Oct., ’15 to make available Patanjali products at all Big Bazaar, KB’s and EasyDay outlets. PAL also has presence in 400 stores across Star Bazaar, HyperCity and Reliance Retail. Online, PAL sells through its website , and e-commerce sites like Amazon, Big Basket etc.

Competition

Established FMCG brands, which were once hesitant to acknowledge PAL as a threat, can no longer label the shift in consumer preferences toward PAL as a fleeting trend. Recently, HUL reported its slowest revenue growth rate in 6 years and Colgate-Palmolive reported its worst top line growth (8% q-o-q and 4% y-o-y) in ~4 years.

This slowdown can be attributed to PAL’s increasing market penetration and consumer acceptability of its products. According to IIFL, Patanjali’s top line will grow to INR 20,000 cr. by 2020, a 10x jump from FY15. Majority of PAL’s growth could come at the expense of current market leaders, with Colgate experiencing an 8% drop in FY20 sales.

Rattled by the growth of PAL, incumbent FMCG behemoths are looking for an image makeover. Perception of PAL’s products as healthy and natural alternatives has pushed bigger brands back to the drawing boards. HUL is trying to revive its herbal brand Ayush; Godrej launched a crème hair colour with coconut oil; Himalaya launched a range of wellness products for therapeutic solutions; Colgate launched a salt and neem toothpaste.

Growth Factors

So, what really has brought PAL to the forefront? In order to understand PAL’s exponential growth story (see table below), it is crucial to focus on few key aspects. Firstly, Patanjali has unconventional ways of doing business right from its branding, advertising, pricing to distribution model⁴. PAL does not use different brands across product categories and instead uses the “Patanjali” brand across all product categories. PAL has been prudent in using Baba Ramdev as the unofficial brand ambassador. As long as Baba Ramdev is fit and promoting Yoga, PAL would be able to ride on Baba Ramdev’s image.

(INR mn)	FY13	FY14	FY15
Revenue	8,419	11,844	19,991
Growth %		41%	69%
Gross Profit	4,062	5,673	9,068
Gross Margin %	48%	48%	45%
EBITDA	1,518	2,393	4,571
EBITDA Margin %	18%	20%	23%
PAT	756	1,547	3,088
PAT Margin %	9%	13%	15%

Source: MCA

Another differentiator is PAL’s product pricing. Patanjali products are priced on a cost plus basis and are at a significant discount to competition across most categories⁵. This is possible as a result of efficient raw material procurement (sourcing directly from farmers without middlemen) and lower management / manpower costs.

Certain products like honey, face washes and wheat flour are priced as much as ~30% less than competitor’s products. This works well with Indian consumers who look for cost effective but high quality alternatives to popular FMCG brands.

An exception is PAL’s cow milk ghee, which is offered as a premium product and is priced higher (14% higher than leading brands) than competition.

Select Categories	Volume	Price	Comparable Company	Comparable Price	Discount
Packaged Food
Cow Milk Ghee	1 Ltr.	450	Amul Ghee	395	(14%)
Chyawanprash	1 kg	250	Dabur Chyawanprash	295	15%
Honey	500 gm	135	Dabur Honey	199	32%
Wheat Flour	10 Kg	280	ITC Ashirwad	400	30%
Home and Personal Care
Sun Screen Cream	50 gm	100	HUL Lakme Sun Expert (60 ml)	190	37%
Neem Tulsi Face Wash	60 gm	45	Himalaya Purifying Neem (50 ml)	55	32%
Dant Kanti	100 gm	40	Colgate Dental Cream	44	9%
Amla Hair Oil	100 ml	40	Dabur Amla (90 ml)	42	14%

Secondly, the consumer’s perspective is changing and consumers increasingly prefer wellness focused products. PAL’s ayurvedic products appease to such a consumer base, looking for chemical-free, natural and herbal products.

Lastly, another significant factor is the favourable socio-political environment. The current government has been quite vocal about its “Made in India” initiative. PAL has certainly been riding this wave and positioning itself as the national alternative to foreign brands. PAL has been encouraging both consumers and retailers alike to shun foreign MNC manufactured products by trying to invoke the Swadeshi movement. Government’s efforts in promoting Yoga and Baba Ramdev being at the fore front of that mission has helped the cause of PAL and further strengthened its brand image.

Challenges:

Is this hyper growth sustainable? While PAL’s products have been flying off the shelf, there have been recent reports and allegations on the safety and authenticity of health benefit claims made by PAL. The company has not been oblivious to controversy, from fungus and bugs being found in a few ghee bottles⁶ and noodle packets⁷ respectively, to reports of the “Putrajeevak” fertility pill violating the Pre-Natal Diagnostic Techniques (PCPNDT) Act, 1994⁸ and the criticism the company received for airing “misleading”⁹ edible oil advertisements. It would be imperative for PAL to address these allegations with all seriousness if they have to sustain their growth momentum.

Additionally, distribution could be PAL’s Achilles heel. PAL would need to work on further expanding into mainstream kirana stores, addressing retailer’s concern of low margins (current margins are 6-10% across categories) and add additional distributors across states.

What the Future Holds:

Despite the roadblocks and PAL’s “raw” style towards business, the company is on a growth trajectory (FY16e Revenue: INR 5,000 Bn.) unseen in the FMCG space. Established companies across the FMCG space and specifically in certain food and health and wellness segments such as ayurvedic medicines, ghee, toothpaste, chyawanprash, honey etc.¹⁰ are likely to feel the impact in the medium to long term.

As PAL continues to add product categories, enhance its production and distribution capabilities and export sales, it could achieve its ambitious growth targets. The next few years will determine if PAL will continue to disrupt the FMCG market and it will be interesting to follow the response of the FMCG bell weathers.

References:

1. Nielsen
2. MCA Filings
3. HSBC India Consumer Report, IIFL Institutional Equities Report “Patanajali Injurious to listed FMCG health”
4. IIFL Institutional Equities Report “Patanajali Injurious to listed FMCG health”
5. HSBC India Consumer Report, IIFL Institutional Equities Report “Patanajali Injurious to listed FMCG health”
6. Time of India
7. Financial Express
8. Times of India
9. Rediff
10. HSBC India Consumer Report, IIFL Institutional Equities Report “Patanajali Injurious to listed FMCG health”

The article is authored by Shweta Jain of Aurum Equity Partners LLP, an Investment Banking firm based out of Gurgaon