Patanjali's woes signal good news for investors in listed FMCG players

Issues on distribution front, unattractive trade margin and lower ad spend are hurting Patanjali; aided by new products listed players are clocking higher volumes

For investors of listed fast-moving consumer goods (FMCG) firms such as Dabur, Colgate-Palmolive, Emami, among others, which faced significant pressure on their business and profitability due to Patanjali's aggressive moves, there is good news. Patanjali Ayurved’s (Patanjali’s), the yoga-guru Baba Ramdev backed domestic player, which created a storm in the consumer space a few years back, is facing issues on the operational front for its existing business such as consumer staples, personal care. As per a recent survey-based report by IIFL titled ‘What ails Patanjali,’ on-the-ground checks in Mumbai suggest that in most retail outlets, sales of Patanjali products have halved from two year-earlier levels, amid distribution issues. This, along with the efforts of listed players in terms of product launches and innovation should help them recover lost ground.

Before delving more into this, let’s first revisit the history.

Positioned as harmless-herbal and organic products, Patanjali gained brand preference over the last three years and took over significant share in consumer staples and personal care markets in a very short span of time. From just Rs 50 billion in FY16, the company crossed Rs 100 billion revenue milestone in FY17, which further went up to Rs 120 billion in FY18.

On the flip side, with consumers gradually started shying away from their older choice such as Dabur, Colgate, etc, to Patanjali, led to a sharp deceleration in domestic volume growth of the listed players. The fact of being bitten by competition from Patanjali had also been highlighted by many established consumer companies. This had also impacted investors’ sentiment as volume growth and market share trend are key performance parameters for consumer companies.

Patanjali

Patanjali’s operational issues

The slowdown in Patanjali’s turnover is mainly due to change to a complex distribution system (separate distributors for each vertical leading to time gap in the delivery of products to retailers), which impacted product supply across retailers. Retailers have stopped keeping stock of some products, states IIFL.

Besides, lack of sufficient advertising, the adverse impact of expanding reach through general stores on retailers (most exclusive retailers’ average monthly turnover has dropped 50 per cent as compared to two years ago, as per the report), are few other factors playing against Patanjali. Moreover, with unattractive trade margin and the dearth of schemes or offers on Patanjali’s products, retailers in general trade seem to be unhappy and are not pushing its products.

But, deriving benefits from others’ distress is just one aspect. The companies too are not leaving any stone unturned. “After a strong surge in demand for ayurvedic offerings from Patanjali, the listed consumer players have also been growing their Ayurveda portfolio and are expanding reach. Given healthy distribution network of already established listed consumer players, the supply-side issue at Patanjali should help the listed players,” says Nitin Gupta, an analyst at SBICAP Securities.

Even though the underlying consumer demand is still strong for Patanjali’s products, Gupta believes that resolving these issues, mainly distribution/supply side, would be complex and time consuming for Patanjali. Thus, the listed players would see some volume improvement in oral and personal care categories, segments like honey, among many others. They would also have some time to recoup lost ground and strengthen their franchise.

"Major competition from Patanjali is in toothpaste category, ghee and hair oil to some extent. Thus, listed players in these categories can benefit if the issues (as mentioned above) continue. Besides, an issue in terms of quality is also observed for some products of Patanjali," says Vishal Gutka, AVP at Phillip Capital.

In fact, some listed FMCG players too informed gaining market share from Patanjali. Emami, for instance, during the September 2018 earnings call said that it (Kesh King brand) gained market share from Patanjali in hair oil category. Promotional efforts and product innovation/enrichment undertaken by the listed players are among reasons for these gains.

Efforts to reach the Patanjali management did not solicit any response. While Patanjali has been investing in capacities, how soon it can correct these issues needs to be seen.

Thus, in the coming quarters, the street would be looking for more clarity on this market share battle between Patanjali and listed consumer players, and whether the latter can sustain or grow it from current levels.

For now, the uptrend in volume growth and market share would auger well for the listed FMCG players and their share price, say analysts.