Future-Patanjali tie-up to see mutual gains

Grossing revenues of Rs 1,000 crore in 2 years looks difficult

Future Group stocks made strong gains after the announcement that it would market Ramdev-promoted Patanjali Ayurveda’s range of products through its network of about 570 stores across 245 cities and towns in India. While Future Retail was up four per cent, Future Consumer Enterprise gained 18 per cent (and hit its all-time high) over the past two trading sessions. While the entire range of Patanjali products will be sold initially through Big Bazaar (part of Future Retail), the distribution arrangement will be extended later to other chains of the group, which include KB’s, Aadhaar and Nilgiris, which are all part of the Future Consumer Enterprise. The Future Group outlets will sell Patanjali’s food products (supplements, dairy products, and juices), fast-moving consumer goods/home care (cosmetics, detergents, powder, liquids and ayurvedic products) and products for blood pressure, joint pain, among others. To enable the distribution, the Future Group will set up an office in Haridwar, where Patanjali’s food-processing units are.

Currently, Patanjali distributes its products through its 200,000 outlets and about 10,000 ayurvedic consulting centres. Patanjali also has a tie-up with Reliance Fresh, whereby it distributes its products through the latter’s stores. Patanjali crossed the Rs 2,000-crore-mark in revenues in FY15 and expects to double that in FY16. The company, which has presence in multiple food products, plans to launch its brand of noodles this month, to take advantage of the opportunity thrown up by the product-quality issues of Nestlé’s key brand Maggi.

While Future Group expects the tie-up to generate a revenue of Rs 1,000 crore over the next 20 months, an analyst at a domestic brokerage says the target is difficult to achieve as the two partners are starting from scratch. “Given its existing distribution, it is possible to more than double Patanjali’s existing revenues to Rs 5,000 crore, but reaching the Rs 1,000-crore mark just through the alliance is an ambitious target.”

Analysts say the key strength for Patanjali products is the visibility, due to Ramdev and the strong brand. The key issue has always been the distribution network, being rectified.

Currently, Patanjali earns an Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin of about 20 per cent compared with Future Retail's 10 per cent. The company has not spelt out the finer details on this front, but expects to earn a healthy margin from the sale of Patanjali products.

While Future Group might not achieve the target, the deal is a positive for the group given Patanjali’s strong brand pull. In May this year, the group had announced a tie-up with Bharti Retail, wherein its retail operations were to be merged into the latter. Analysts say, as a result, Future Retail’s debt would come down and its return ratios would improve. Further, tie-ups such as the one entered into with Patanjali will improve its range of offerings as well as revenues.

For the quarter ended June 2015, Future Retail had revenues of Rs 2,899 crore, up 22 per cent year-on-year while operating profits were up 17 per cent to Rs 294 crore. For the same period, Future Consumer Enterprise had revenues of Rs 358 crore, a growth of 22 per cent, while at the operating profit level it reported a marginal loss of Rs 2.6 crore (versus loss of Rs 3.5 crore in the year-ago quarter). The tie-up with Patanjali should help Future Group improve on these.