Possible disruption by Patanjali Yogapeeth

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Here is another interesting article from Business today about how Patanjali is going about its business.

It mentions that Patanjali had turnover of Rs.1195 Cr in 2013-14 and Rs.2007 Cr in 2014-15 and they estimate their turnover to be Rs 5000 Cr in this financial year! The article claims that market cap of Patanjali would be around 40,000 Cr as per Wazir advisors when they touch sales of Rs 5000 Cr.! :open_mouth:

After reading the article, I feel that Patanjali would be much more disruptive that all of us have thought.

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Quoting for the Business Today article:
“Our profit margins are miniscule because the main aim is not to make profit,” says Ramdev.

Surely, they can be disruptive if they provide same quality at much less cost. But how sustainable can that be, working without profits? Will suppliers, employees, distributors, retailers also work without profit?

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There was a full page article on Patanjali some two days back: http://www.thehindubusinessline.com/specials/the-monk-who-wants-abilliondollar-company/article7958593.ece

During the flood that ravaged Chennai, I happen to visit Big Bazaar and found that Patanjali biscuits were flying off the shelves due to panic buying/perception of scarcity and by volunteers/relief workers. The other brands of ITC, Britannia and Oreo were still available. People like ITC, HUL, Nestle and others need to be worried and they have started to advertise also.

Disc: Do not own any FMCG businesses.

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sorry, but I do not buy the logic here with due respect to you -

If people were panicked due to shortage of food/biscuits, I don’t think people would bother about buying a certain brand, all brands immaterial of local, non-local, organised, unorganised will fly off the shelfs. What you observed might be true and it might show the brand strength or initial ‘try it out’ behaviour but not due to panic/flood situation.

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IIFL came out with report aptly titled " Patanjali is injurious to listed FMCG’s health" estimating Patanjali to grow to Rs 20,000 crore by 2020 from Rs.5000 crore this year.

I heard many FMCG head honcho’s trying to wish it away on TV. Everybody is blaming poor topline growth on rural consumption and bad monsoon etc. But I think Patanjali is the real deal! Time to rethink whether FMCG stocks deserve such stratospheric valuation for 10% topline growth :worried:

See the news in Economic times few days back -

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I am a new investor and I have invested in all major FMCG companies like Dabur, Colgate, Marico, Bajaj Corp, Godrej, Nestle and P&G thinking of them as safest stocks. I am looking for moderate returns and if they just about beat FDs I’ll be reasonably happy. I am seeking opinion of seasoned investors on this forum as how they look at the ongoing slaughtering of FMCG stocks by Patanjali. Credit Suise just came up with its report on Colgate slashing price targeta for next 2-3 yrs? Does it signal structural changes in FMCG business?

I am new to this forum and my first post. So, pardon me if I have broken any protocols in my post. Constructive criticism is most welcome:)

Disc: Invested in mentioned stocks at current levels.

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Just to remind a quote " Don’t put everything in one basket" you should diversify your investment into different sectors.

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https://twitter.com/DrunkVinodMehta/status/686777567668355072

While this report has to be independently verified this is the second adverse input about Patanjali Cow Ghee I have received.

The first was a warning from a dairy industry stalwart who informed me that Patanjali was sourcing fat / cream from a dairy which was known for taking in milk rejected by other dairies (bad aflatoxin + bacterial count)

Ultimately however powerful the ‘Baba Halo’, if quality is not respected and product is found wanting, consumers will get wiser over time and shift loyalties.

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Few things first: I am no expert here and whatever I say is hypothetical and generic in nature. Even though I subscribe to the view you should exhibit caution and take a more nuanced approach. I am responding here only because I was the one who started this thread.

Keep in mind that all the companies that you have mentioned are very high quality companies and have delivered decent returns with adequate capital protection, the only sticking point is growth. Even before I come to Patanjali I see FMCG growth as a side effect of nominal GDP (GDP + inflation). In the last 8 to 10 years where we had both +ve inflation(WPI) and GDP growth the figure came to around 12%. In the current deflationary scenario the sole contribution is GDP growth. A -ve WPI hinders FMCG growth since we are not going to use an extra amount of tooth paste/atta/soap/oil or other FMCG products (although the discretionary spending do go up). This itself should reduce the growth prospectus to around 7%, the current GDP figure. Patanjali only adds up to their woes by chipping away from this already stunted growth. Where it impacts should be seen on a case to case basis (product to product). I think Dabur(Chyawanprash/tooth paste etc.) and Marico (Parachute) will be impacted most.

Disclosure: Not invested in any of the stocks you have mentioned.

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Yesterday, even HUL acknowledged competition from Patanjali. Dabur too has some time back. HUL had volume growth, but mainly due to price cuts. Do you think, these guys would have affected price cuts, if not for Patanjali ?

Patanjali products are good (have been using it for many years, and can vouch for most of them).

They are bound to attract motivated attacks (due to their disruptive pricing and growth).

Despite all misgivings, etc. Patanjali has grown tremendously, against all these big and powerful MNCs. It should be a matter of pride for us, Indians.

Having said that, I would love Patanjali to work on strengthening supply chain (they are already addressing that), consolidate in existing products, make sure their are no slippages in quality, and keep their advertising costs low. They have grown by word of mouth and will continue to do so. The only one who can screw them are they, themselves.

-Jiten

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I live in an engineering college hostel and most of the mates here are preferring patanjali Atta noodles over Maggi. When Maggi was not available we tried patanjali’s noodles. They are good and cheaper. I think recent issues regarding Maggi will continue to weight down on nestle earnings and Maggi is losing market share slowly…

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amit,
I too was thinking on the same lines. (ie FD replacement type of stocks). But this certainly is a big threat and not something one can ignore. because 1)pricing, 2)good quality products, 3)in india. if you market something as ayurvedic, it will sell very well.
i thought they wont take on the likes of Gillette. to my surprise, they have shaving gel too and found it very good. i am no expert. but in my opinion, the following will be impacted the most. dabur, marico (surprisingly marico is rock solid. fell only 3.9% from 52 week high even in this crash),emami, bajaj corp, zydus.
i feel, gsk consumer (i may be biased), godrej consumer, p&g will be least affected.

disc: i hold glaxo and dabur. thinking of exiting dabur.

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Excellent Research report from Edelweiss research - Highly recommend to read

Above link is from official edelweiss research portal and not shared from personal cloud.

Targeting more than 250% revenue growth in FY16
Patanjali clocked revenue of ~INR20.3bn in FY15 with EBITDA margin of ~20%. The company targets to achieve revenue of INR50‐60bn in FY16 itself. Growth is being driven by the company’s largest selling product, cow’s ghee (expected to be INR12bn in FY16) followed by Dant Kanti and Kesh Kanti. Patanajali also has a robust pipeline of new products, which will help achieve its target. Patanjali operates via 3 business segments, viz., foods (foods, supplements, digestives, dairy, juices, etc), FMCG (cosmetics (shampoo, soaps, facewash), home care (detergent cakes, powder, liquid), etc) and ayurvedic products (healthcare products for blood pressure, skin diseases, joint pain, etc). In FY15, of the total sales of INR20.3bn, food and cosmetics contributed INR8bn each, while healthcare products comprised the balance. The company has adequate capacity to achieve its revenue target of INR50‐60bn in FY16.

Aspires to be part of every SKU in kitchen
Patanjali is working on a kitchen concept, as part of which it will launch products that will touch all categories of the SKUs used in an Indian kitchen. For instance, the company already has products that are used in the Indian kitchen such as dishwash bar, ghee, rice (has 3 variants of rice), pulses, spices, mustard oil, flour and madhuram (replacement for sugar made out of jaggery) under the Patanjali brand name .

Products at R&D phase
 Butter milk in powder form.
 Oats with masala.
 Chicory coffee (caffeine free).
 Weight gain and loss products.
 Madhuram – ginger and rose flavor.

Online platform to spruce up distribution network
Many people complain that due to Patanjali’s weak distribution network its products are not easily available everywhere and they are unable to buy them. To address this concern, the company has chalked out an aggressive plan to improve its presence on the online platform. Currently, it is already selling its products through its web‐site, www.patanjaliayurved.net, from where consumers can order the products and get free delivery of the same if the order value exceeds INR499. Other companies like bigbasket.com, etc., that also sell Patanjali products online have been barred from doing so. The company is also implementing ERP for better mapping of inventory (SAP has already been implemented). Patanjali will also be launching its mobile app, which will allow consumers to locate nearby outlets that are selling Patanjali products and also facilitate online ordering of products. Patanjali also sells its products through the Patanjali Chikitsalayas (where free medical consultancy is given by medical practioners), Patanjali Arogya Kendras (health and wellness centre) and Swadeshi Kendras (regular outlet). As for reach, the company has close to 0.2mn outlets and 10,000 franchisee model of Chikitshalyas and Arogya Kendras. Distribution‐ wise, the company operates through 100 super distributors (this will be bolstered going forward) who in turn supply to the wholesalers and retailers (who operate through a 500‐600 strong sales team). As of now, the company has no plans to have direct reach.

Attractive pricing, natural positioning ensure competitiveness
Patanjali’s key strength, apart from its superior product quality, lies in pricing. The company’s
products are priced at ~15‐30% discount to competition, which makes it an attractive
proposition for consumers. It is able to offer such discounts primarily because of having
negligible A&P spend versus other consumer companies which have A&P spends ranging
from 12‐18%, as a % of sales. Another reason for the discounts is the consumer‐centric
ideology of the organisation and selling best quality products at attractive price points. There
may even be some products in the company’s portfolio which are making losses or fetch low
margins, but it continues to sell these products to meet consumer needs.

Image.png927×313 77.8 KB

Lower and effective advertising aids lower pricing
Patanjali Ayurved has limited advertising expenses, which gives it enough leeway to pass on
the savings from lower ad spends by way of lower prices. The company advertises in a limited
way – news tickers, regional newspapers, some digital advertising, etc., though going ahead it
might start other forms of advertising too. Patanjali has adopted the unique information‐
based advertising. For instance, the company highlights the positives of cow’s ghee, which
automatically helps sale of Patanjali Ghee. In the recent past, the company’s print
advertising has seen a marked increase.

For the consumers, Baba Ramdev remains the face of Patanjali and its products. Baba
Ramdev, during his yoga sessions, showcases the Patanjali products. After the session, he
makes the attendees aware of the benefits of using Patanjali products.** Till date, close to**
70mn people have come in contact with Baba Ramdev through his yoga camps and it is
believed that this can increase to 200mn going ahead. This highlights the potential reach
that the Patanjali brands can have without much mainstream advertising. Also, being
associated with Baba Ramdev helps in creating a better perception among consumers that
being ayurvedic offerings, the Patanjali products are healthy

Patanjali Food and Herbal Park: One of the biggest world class facility
Patanjali Food and Herbal Park is one of the largest food park in the world spread over 150 acres. Construction of the park was completed in record time of 10 months and the park has been in operation for over 5 years now (park construction started in Feb 2009 and it started operations in January 2010). Patanjali has 3 manufacturing units in Haridwar (we visited the largest one, Unit 3). Production at unit 3 is divided into 3 parts: (1) food, (2) cosmetics; and (3) digestives and RTS. Ghee and ayurvedic medicines are manufactured at the other 2 manufacturing units. It is a world class plant equipped with the best machinery installed by companies like Tetra Pack, Alfa Laval etc. As far as manufacturing is concerned, Patanjali does 90% manufacturing in‐house. However, going ahead to meet demand and therefore enhance capacity it is open to even third‐party manufacturing or opening new plants. The company has zero waste technology wherein whatever is left after usage of the raw material is further processed for further usage. This park employs close to 10,000 personnel (from in and around the city within a radius of 25kms).

Robust R&D ensures quality and new product development
During our plant visit we also visited Patanjali’s R&D facility, which is well equipped with all the latest machinery necessary for testing the products. The company has a separate R&D department for each of the production units where the manufactured products are tested. The company also has a high‐end central R&D facility situated at the park. This facility ensures the products meet high quality standards and is undertakes R&D for new product development.

Organisational culture:
Building blocks Though Patanjali might not be regarded as a complete corporate set up, but the company has been taking significant steps to professionalise the management and incorporating the necessary processes and technology in the work culture. Patanjali is emerging as an Employer of Choice’’ as many professionals are independently coming forward to work with the company. During our visit and interactions we found there any many professionals who are managing different units and have past work experience in companies like Dabur, Shehnaz Hussain, SGH Labs, Alkem Laboratories, etc. Patanjali is currently advertising for many positions. The company has tied up with all major hiring agencies like naukri.com, linkedin, etc., to get the best talent from industry to work for it. As for the processes, the company is moving towards a KRA‐based working system and is defining its processes and internal control systems. SAP has already been implemented which has led to automation in majority of the processes. The company is currently in the process to implementing ERP. Overall, the organisational culture is very employee friendly as the company engages in a lot of training and development programmes for its employees. It also engages in career counselling and mentoring activities.

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Indeed an excellent report. Many thanks for sharing!

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Recently visited Nilgiris outlets in Chennai and they are stocking a large variety of Patanjali products now (possibly due to acquisition by Future Group). Most of the products are constantly getting sold out and we have 5 outlets selling their products including two dedicated patanjali franchisees. We use nearly 20 different products from their portfolio and their quality is top notch. I really think existing FMCG companies need to rework their strategies or they are deep trouble indeed.
Btw Patanjali noodles are soo much better than maggi in taste. So people claiming India grew up on Maggi need to visit their hypotheses.

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Dabur has managed the Q3 quarter by selling lot of stuff online on Amazon. They have offered decent discount and this has not been for small quantity so volumes are also there for many people to enjoy the discount. Patanjali the offline sales imho are way greater than their online sales though do not have data to prove this so dabur could manage this quarter. As online sales and discounts normalize and due to stocking up, the sales go down as well as the online patanjali store sees traction, it could get really tough for Dabur.

Marico has barely budged from its 52 week high and been flattish to slightly higher.

Though as a consumer, I am delighted that with such healthy competition coming in we will see good products available at reduced prices be it patanjali or the affected/listed FMCG companies.

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This article raises some subtle red flags in the Patanjali story.

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The Patanjali factory in Padartha is guarded by the Central Industrial Security Force (CISF), and most areas are off-limits to the media.

With Ramdev’s permission, this reporter was allowed to visit some parts of the factory.

This is what he found.

Patanjali claims to make natural ghee (clarified butter) from cow milk.

At the factory, pasteurized unsalted butter produced by the Karnataka Co-operative Milk Products Federation Ltd was being mixed with local cow milk to produce ghee.

The aloe vera unit is a processing and packaging unit, which was using pulp supplied by Dhandev Resorts and Health Care Pvt. Ltd (a Jaisalmer-based company owned by Roop Ram, an Indian National Congress leader). Patanjali claims that it has its own aloe vera plantations for making aloe vera juice.

And contrary to Ramdev’s claims, Patanjali outsources manufacturing of some products like other packaged consumer products companies do. For instance, biscuits are made by Delhi-based Sona Biscuits (that also sells biscuits under Sobisco brand) and juices by a bunch of companies, including GK Dairy and Milk Products Pvt. Ltd (this company also sells products under the Gopalji brand).

Patanjali’s juice products, which Ramdev claims to be natural, contains added sugar, water and required preservatives. Haridwar-based Aakash Yog Health Products Ltd manufactures noodles for Patanjali. Aakash used to make noodles for HUL’s Knorr brand, till recently.

Some of these names are mentioned in the fine print of product packets. Mint confirmed these with the managers at Patanjali’s Padartha factory.

None of the companies above responded to emails seeking comment.

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Patanjali… Plant visit update (by PhillipCapital)…

  • State of the art factories, satisfactory hygiene
  • Large plants and aggressive expansion plans
  • Strong belief in ayurveda and its efficacy; emphasis on quality
  • Sankalp to achieve 10K cr turnover
  • Disruption in every category

Source: http://www.phillipcapital.in/Admin/Research/532466763PC_-Patanjali_Plant_Visit_Update-_Jul_2016_20160804144849.pdf

  • Sales up 69% and PAT up 100% in FY15
  • 308cr PAT in ~670cr Equity in FY15. 45% RoE.
  • FY15 sales 2K cr. Seems have clocked 5K cr sales in FY16. And targettig 10K cr in FY17

Wish you were listed, Patanjali!!

  • An Expanding Circle of Customers, and
  • An Expanding Circle of Product/Categories, and
  • An Expanding Circle of Distribution reach

Self-reinforcing business model at play here?

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I am getting a feeling that the no.s are too good to be true…such a high revenue growth continuously for past few years and with pat margins of 15% with their pricing i guess considerably lower than peers in the industry. how is it be possible?!! i am not implying anything…just wondering!

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Disclosure: Invested in ITC, Marico, HUL for several years

I took a different approach and decided to go with qualitative mental models. The thesis was to arrive at hurdles that prevent an objective evaluation and look a the problem differently - ultimately getting to a deeper understanding of not just the company but also the investors (i.e. ourselves :slight_smile:). I have taken a sample list to outline my thinking.

  1. First and foremost, the results of a search are dependent on what your input parameters are. So if you search for how Patanjali is disrupting the business then the results will show it being true. On the contrary - same will be true if you search for “poor quality Patanjali” as well. In other words confirmation bias. How do we get past this - start with a different framework (see #2)

  2. Invert, Always Invert! While several articles/ analyses exist on why Patanjali is a serious threat we also need to look at what would make Patanjali fail. As mentioned by several colleagues in this forum - poor quality (leading to trust issues), political exposure, lack of transparency in the business, halo effect. These in my humble view are being discounted by the market and will prove to be “bangalore style” speed breakers for them

  3. Availability Bias - Fact that Patanjali may be stuffing its channel does not mean (a) products are flying out the door, and (b) sales are profitable

  4. Herding - Patanjali is the new kid on the block for analysts. I urge you to see the video by Prof. Damodaran on valuation on YouTube. One of his famous quotes is “but there is China!”. In the same vein, Patanjali seems to be the stick of the day for beating established FMCG players

  5. Loser’s Game: Taking an example from Tennis, at the highest level of the game (Federer, Djokovic…HUL, ITC…) the outcome of the game is determined by the level of skill of the winner. On the other hand, Patanjali is seems to more about (atleast for now) getting the unforced errors from the big boys/ girls of the game. As well, we need to consider the Red Queen Effect - wherein the established players evolve in the system to meet this challenge thereby forcing everybody’s game up. In such a scenario, Patanjali will need to up its game as well and scale to play in the big leagues. This is still to be seen.

The game is still in very nascent stages and evolving rapidly. Only when we see start to see the second order effects of the competitive response can we really nail down the long term structural impacts. Till then we cannot say one way or the other.

My 0.02 paise - make (compounding) hay while the (established FMCG) sun shines :slight_smile:

Very humbly and with best regards
Value Seeker

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