Co-Authored by Akshay Narang
Its been a decade since, a phenomenon called Baba Ramdev, arrived on the Indian Political and Social scene, when all other Babas were minting big money by using spiritualism in a self-styled manner. Baba Ramdev did not fall in the traditional category and took the Yoga as a brand to new level which probably his predecessors were unable to take.
During his rise, Baba Ramdev and PAL, have seen both sides of the spectrum, from a glorious start to being targeted by the Pseudo Seculars but Baba Ramdev has not limited his presence to Yoga and Spiritualism, but he has extended it to Politics and the rise of PAL is now challenging India’s consumer space which is traditionally dominated by MNCs such as Colgate, Hindustan Unilever Limited, P&G, and certain large Indian corporate such as Dabur, Godrej, Emami, etc.
In 1997, Patanjali Ayurved Limited (PAL) started as a small pharmacy in Haridwar which has grown into a huge consumer sector conglomerate today and is poised to be further bigger. In fact, the rise of PAL is being so staggering and well entrenched in consumer psyche that large Indian and Foreign Research houses are considering this pretty much a Disruption Factor in the overall consumer sector. In Aug 2015 CLSA came out with a report titled “Wish you were listed, Patanjali Ayurved” and summarized the threat it presented to listed counterparts. Moreover, lately Credit Suisse, IIFL Research, MOSL, Nomura, etc., have over the last 2 months came with various reports stating the obvious i.e. PAL taking the fight on the ground and beating the really big guys at their own turf.
Here we summarize how Baba Ramdev has actually pulled of a miracle, understand his competition. His is an untold story of a Hindu Baba taking on the biggest of the MNCs and taking away their market share in a number of household sectors and how this could be a major boost for Ayurveda.
WHO IS THE COMPETITION
The total turnover of large FMCG companies in India was ~INR 80,000 cr., in FY15 and expected to hit INR 85,000 cr., in FY16. 60% of total turnover is pretty much dominated by MNCs and balance by large Indian corporates. All these Indian corporate are, lets say, ‘OLD MONEY’ and who are conglomerates or being in business for long time and not threatened by any local incumbent for a long long time. In fact, only threat ever happens is when some outside giant comes into play.
The following table summarizes revenue of key players:
PAL looks like a shining light in the slow growing FMCG space with the company expected to double its revenue every 2 years i.e. from INR 5000 cr., in FY16 to INR 10,000 cr in FY18 to hit INR 20,000 cr by FY20. This growth is no ordinary achievement, its unprecedented for a Consumer Sector / Staples companies. I have been a consumer sector analyst and for a company like this we would have valued at multiples twice that for HUL.
This makes Baba Ramdev’s company more valuable than Nestle India and pretty much come after HUL.
Own Distribution Channel and low Advertisement Spend:
This achievement till dat from a small pharmacy store to hitting INR 2000 cr., revenue is pretty much driven by a) Baba Ramdev’s image of Yoga Guru, b) perceived organic lifestyle expected by customers and c) distribution network.
It is worth noting that most of the large FMCG companies have a large distribution network with warehouse, distributor, wholesalers and retailer; while PAL has depended on 10,000 stores and has now started building a traditional network mode.
PAL is unique in a sense that it is the only FMCG company built mainly on its own retail network. The company has ~10,000 consumer touch points as “Chikitsalays” (Dispensaries) and “Aarogya kendras” (health centres). These are operated by third parties as Patanjali Exclusive Stores. Bulk of the sales of PAL until recently were via these stores. The company is now building up a more robust distribution network to make its products available in general trade and modern trade. The products are currently available in 200,000 outlets but the company targets to make them available in 2,000,000 outlets by Dec 2016. That’s a 10x growth in a span of 1 year.
PAL has set out a unique deal with Modern Retail wherein the company will get separate space in the store instead of ‘fighting for shelf space’. Moreover, in October 2015, Patanjali partnered with the Future Group, to offer its products range through Big Bazaar outlets across the country. “There is a great demand for their interesting range of products,” said Biyani whose group is targeting INR 1000 cr in sales from Patanjali products this year (FY16); this vs. INR 1300 cr worth of Unilever products annually from him. “I believe Patanjali will hit INR 5000 cr in revenues this year, double it next year and in the next two-three years, become a Top Three Indian consumer products brand,” said Biyani. (Source: Forbes)
Patanjali is now in the process of starting mega-marts – modern retail formats of 3000-5000 square feet, which would stock only Patanjali products. One such store has been recently opened in Nagpur.
This pipeline of sales & distribution is developed at a very minimal advertisement spend. Generally FMCG companies spend anywhere between 10% to 14% of Sales; while this numbers is less than 5% in case of PAL. Lately, the company has started advertising and has taken in two brand ambassadors i.e. Hema Malini and Olympics Medalist Sushil Kumar, for its Biscuits and Ghee respectively.
Traditional FMCG companies are highly profit oriented. In fact, the RoE of key FMCG companies are:
PAL has generated RoE of ~50% in FY14 and net profit margin of ~11.30% despite having a pricing substantially lower in its product category vs. its peers. The following section shows
Affordability factor of PAL products is one of the reasons for popularity. As Baba Ramdev said, the purpose of Patanjali is Upkar and not Vyapar, hence their products are reasonably priced. Further, such pricing strategy will surely help Patanjali in making inroads, especially in the countryside and the middle class or lower middle class population, given that their products are close substitutes to the consumer goods produced by major FMCG companies. Penetration in the rural market shall be critical for PAL to be able to take hold of lion’s share in the consumer market.
The Government of India is pitching in for greater economic activity and the market is ever expanding, the ambitious plans of Patanjali are in consonance with both Make Indian and Make in India, giving it a stronger moral pedestal to stand on as compared to as compared to the MNCs. Moreover, while big wigs like ITC and HUL primarily produce western household products, Patanjali’s product line in mostly Ayurveda and even its Shampoos and Toothpaste are produced from natural ingredients hinting at a healthier lifestyle. In short, its product appeal to Indian Nationalism and a sense of Swadeshi, which might help it in getting an even greater market share. Even among the small number of competitors for Ayurveda Products, Patanjali has a definite advantage given the popular face of Ramdev.
State of the manufacturing facility and food park.
On 5 January 2010, the world’s largest food park opened 20km from the holy city of Haridwar, Uttarakhand, India. The INR 500 cr.., Patanjali Food and Herbal Park is spread across ~95 acres in first phase; and has generated direct employment for 7,000 people. The construction started in February 2009 and was completed in a record time of less than a year. Construction work included the building of warehouses, research and development centres, variable humidity stores, multi-commodity cold storages, pre-cooling chamber, and a ripening chamber.
As per latest visit by IIFL research, the food park is now spread over 150 acres and manufactures most PAL’s products. ~85% of products are manufactured by PAL in-house and only few products are outsourced. Further, many plants are not running on 3 shift basis so production can increase creating a strong back end profile. Despite this, PAL plans to invest INR 1000 cr., in FY16 for expansion. The company plans to start manufacturing:
- More dairy products such as cow milk powder and cheese,
- Animal feed for cows,
- Cosmetic products under brand ‘Saundarya’, and
- Baby care products under brand ‘Shishu Care’
IMPACT ON KEY PLAYERS
Recently, Credit Suisse (CS) downgraded Colgate to neutral on 11 Jan 2016 According to CS, Colgate is facing a stiff competition in the dental cream category by PAL as despite fairly limited distribution the herbal brand enjoys a 4-5% market share. It feels that PAL share may cross double digits in toothpaste category over the next few years after it expands distribution in 2016. In fact, CS has cut earnings estimate of Colgate for FY18 by 3-7% due to competition from PAL.
In fact, IIFL research states that large FMCG companies will be hit anywhere between 2% of sales to 8% of sales. This number is quite significant from large company perspective as growing at 9% to 11% is considering a HUGE ACHIEVEMENT and if this growth is taken off; and PAL growing at 41% CAGR then it can provide a huge threat to large companies and be a boon for customers.
Ramdev has political leanings, but that does not by itself take away the fact that he is serving the Nation by promoting products which are made in India, and seek to revive the culture, the way of living of India and the fact remains that Patanjali seems to be involved more in making available Indian products at a low price than becoming a business giant, even if it did have an ambition to become a business giant, there is nothing wrong with that.
One may also argue that Patanjali is going to face tough competition from specialized companies but till now it has shown enough business acumen to get an unprecedented market share, and over the last 2 years or so, Patanjali Products have started appearing increasingly on the shelves of Retail Stores, showing that it has definitely entered the market and is here to stay. The argument that his opponents use, that Ramdev has become a businessman, is pure rhetoric, entrepreneur skills, is exactly what India needs for becoming a superpower, if at all, he has developed such skills, he deserves praise for that and there is nothing in Indian Culture which bars someone from possessing and making use of such skills.
One of the most point, we want drive home is that well managed home grown enterprise is pretty much capable of being a strong competitor. We would urge small companies, manufacturers, to work in organized manner and take the MAKE IN INDIA move forward and create disruption agents.
Note to article
There were controversies floated to derail the growth, but none of them seem to stick and company and Baba Ramdev is going great guns.
Recently, Live Mint came out with an article on titled ‘Patanjali:Molehill or Mountain’ based on IIFL Report, however, the tone of author while not much celebratory or anything but seemed to be bend towards disdainful tide.
Axis Capital Research