A few years ago, there was a consensus building on the Street that it was all over for India’s consumer companies. Patanjali Ayurved Ltd was on a rampage, felling established brands and companies, with a special appetite for ones with foreign roots.
That rampage is running out of steam, as Mint reported that Patanjali’s FY18 sales growth slowed and will be around the same level as that of last year.
It may be tempting for the Street to think that the Patanjali threat has blown over. That would be as big a mistake as overplaying the threat it posed to the sector a few years ago. If it plays its cards right in the next few years, it will still remain a strong competitor in the fast-moving consumer goods (FMCG) market.
Patanjali’s management has blamed the slowdown chiefly on the after-effects of demonetisation and the goods and services tax (GST). That these moves were very disruptive is true, but then most FMCG companies recovered in the second half of FY18.
GST changed the way area-based excise benefits accrued to companies such as Patanjali, which has units in Haridwar. Post GST, they have to pay GST and then claim a refund partially from the centre and separately from the states. This refund mechanism, too, was set up after months of delay. The resulting blocking of working capital could have affected Patanjali’s performance.
Also, GST changed how sales were accounted for, because excise was earlier included in sales, whereas now sales are reported net of GST. That’s why Hindustan Unilever Ltd reported a 2% increase in reported sales in FY18, while its comparable sales growth was 11%.
Whatever the reasons, that Patanjali’s growth juggernaut is slowing is not in question. You can sense it in the relaxed manner in which the chief executives of FMCG companies field questions about Patanjali.
It is time the company takes stock of its journey so far, and how it wants to grow in the next decade or so.
One risk that Patanjali faces is trying to do too much at one go. A good blueprint for a consumer company to grow is to consolidate its position in a few categories, turn them into cash cows, and use those cash flows to enter the next big category. Instead, it is simultaneously entering a number of categories.
For instance, in categories such as toothpaste, honey and other personal care products, its rivals are fighting back by launching herbal variants and promoting them heavily. While they are fighting one disruptor, Patanjali has to manage multiple battles. That becomes even more difficult in years when external events disrupt business.
That’s why it probably needs to relook at its market strategy.
As of now, Patanjali needs to increase capacity to ensure availability of its products and it is raising debt. It had debt of Rs2,766 crore as of 31 March 2017, with a debt to equity of 0.8 times, according to a recent Brickwork Ratings’ note.
It expects the debt-to-equity ratio to deteriorate as Patanjali has a planned debt-funded capex of Rs2,000 crore in the medium term. But it takes comfort from its projected annual cash flows of Rs1,100-1,200 crore. Brickworks expects debt to affect profitability over the medium term.
Patanjali has several things going for it, chief among them being consumer acceptance. It needs to wield this power carefully, dishing out products that enhance its acceptance, rather than confuse the consumer with an “if you use it, we will make it" approach.
The Brickwork Ratings’ note says it sells 1,000 products, with more in the pipeline. That seems like too many products. Sometimes, less can be more and that cliché could help Patanjali build a more durable growth model for the next decade.