VISIT NOTE
PATANJALI AYURVED Waiting in the wings
India Equity Research | Consumer Goods
We recently visited Patanjali Ayurved’s (Patanjali) Food and Herbal Park EDELWEISS RATINGS at Haridwar and met the management team. It is one of the largest food Absolute Rating UNLISTED and herbal parks in the world equipped with world‐class manufacturing machinery and R&D facility. Management has set a revenue target of ~INR50‐60bn in FY16 (INR20.2bn in FY15) and is confident of achieving it, led by its presence in most consumer categories. The company is working on plugging the gaps in the supply chain and distribution with plans afoot to implement ERP (for better inventory management) and consolidate its online presence. Strong innovation and new products pipeline, pricing discounts to the peers (15‐30%), ayurvedic and natural propositions with low A&P spends (leveraging Baba Ramdev’s brand pull) lend Patanjali’s products an edge over competition. However, distribution remains a key monitorable.
Thrust on revenue over profitability; online moves to spur growth Despite being a corporate entity, Patanjali adheres to Baba Ramdev’s consumer‐centric ideologies. Hence, the focus is on revenue and not profitability. The company is well on course to achieve its targeted revenue of ~INR50‐60bn in FY16 (INR20.2bn in FY15). Even though the thrust is not on profitability, the company managed to clock ~20% EBITDA margin in FY15, aided by better cost management (latest machinery and strong R&D capabilities) and lower A&P spends. To improve its distribution reach, it is strengthening its online presence. Patanjali is also implementing ERP which will help in inventory mapping. Shortly, a mobile app will also be launched to help locate retail outlets and for online ordering of Patanjali products.
New product pipeline strong and innovative Patanjali boasts of a strong new products’ pipeline. The products are not only innovative, but reasonably priced too. A central R&D facility equipped with latest techology along with a separate new product department have helped in lining up a series of new launches over next few months. The new launches pipeline includes: Patanjali Noodles, Dant Kanti Advance, Sugar free Chyawanprash, PowerVita, Seabuck thorn dietary supplement and powdered hair dye, among others.
A force to reckon with Abneesh Roy +91 22 6620 3141 Over FY12‐15, Patanjali registered revenue CAGR of 64.7%. The company has aggressive [email protected] plan to enter every consumer category (keeping aside those that impact lifestyle and Pooja Lath health). At the current juncture, though its presence in many categories may not queer +91 22 6620 3075 the pitch for other consumer goods companies (each category not too big to impact [email protected] except Ghee, which is expected to be INR12bn in FY16), over the long term, gaining palpable distribution prowess could pose a serious threat to competition. Patanjali’s Tanmay Sharma +91 22 4040 7586 proactive moves in innovation have been crucial for its growth. Other consumer [email protected] companies will need to step up innovations, particularly in the herbal and ayurvedic space (distribution strength will come handy) to counter competition. October 1, 2015
Edelweiss Research is also available on www.edelresearch.com, 1 Edelweiss Securities Limited Bloomberg EDEL
The 3 principles vital for growth
Patanjali Ayurved is a incorporated company under the Companies Act – Patanjali Ayurved Limited. Though a corporate entity, its working and ideology is not completely that can be compared to that of a perfect corporate culture. The company is focussed on top‐line growth rather than profitability. Its business ideology is inspired by Swami Ramdev’s ideologies to touch every life through Patanjali which will help the consumers and be present in all the segments where the consumers feel they can get a better product at a better price. The organisation conducts its business on the following 3 main principles:
(1) Providing world‐class products to consumers (making sure the company does not add any preservatives or uses natural preservatives as far as possible).
(2) Producing products in the most cost‐effective manner so that the products are priced very reasonably. (3) Whatever profits the company earns are ploughed back into business so that it can invest the same for launch of new products, cost effectiveness or further capacity expansion.
Patanjali will not launch any products that are harmful to the health of consumers and detrimental to the health and lifestyle of the people. Hence, the company will not get into product categories like tobacco and liquor which are bad for health. Going forward, the company also plans to open 500‐600 branches of Acharyakulam (educational institutions).
Fig. 1: The 3 vital principles that drive Patanjali’s business
Source: Company, Edelweiss research
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Table 1: Product catalogue Grocery and Staples Dals and Pulses Edible Oil & Ghee Ghee, Mustard Oil Flour / Atta Atta, Besan, Others Staples / Spices Spices, Salt, Rice
Ready Food Confectionery Biscuits, Cookies , Candies Snacks & Breakfast Honey, Papad, snacks, Namkeek Sauces & Pickles Ketchup, Pickles Sweets Murabba, Soan Papdi
Beverages Juices & Fruit Drinks Apple, Amla, Litchi Sharbat & Squash Squash, Sharbat
Perosnal Care Face Care Face Cream, Lip Care, Face wash Body Care Body Wash, Foot care, Lotions Hair Care Shampoo, Conditioner, Hair Oil, Hair Color Soaps & Hand wash Hand wash, soaps Oral Care Tooth brush, paste Make up Kajal Shaving and Grooming Shave Gel, Shave cream
Health Care Health Drinks, Chyawanprash, Nutrition & Supplements, Digestives
Households Worship related, Cleaning & Washing, Herbal Gulal
Source: Company, Edelweiss research
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.
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Chart 1: Sales trajectory 23,000 Total Income
19,000
15,000 mn)
(INR 11,000
7,000
3,000 FY12 FY13 FY14 FY15 Total Income
Chart 2: PAT trend 3,500 Net Profit
2,800
2,100 mn)
(INR 1,400
700
0 FY12 FY13 FY14 FY15 Net Profit
Chart 3: Revenue mix
Total Income Composition Health Care‐ Ayurvedic 21%
Food 40%
FMCG (cosmetics, hom ecare) 39% Source: Company, Edelweiss research
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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 .
Fig. 2: Some Patanjali products used in the Indian kitchen
Source: Company, Edelweiss research
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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.
Table 2: Pricing of Patanjali products versus other consumer goods companies Patanjali Comparable Product Name Qty Products Prices Price Comparable Company Discount Special Chyawanprash 500 gm 115 160 Dabur Chyawanprash 28.1% Pineapple Juice 1 Ltr 85 99 Dabur Real Juice 14.1% Cow Ghee 1 Ltr 450 710 Parsi dairy farm Cow ghee pure 36.6% Honey 500 gm 135 199 Dabur Honey 32.2% Patanjali Saundraya Face Wash 60 gm 60 80 Pears Face Wash 25.0% Patanjali Kesh Kanti Anti Dandruff Shampoo 200 gm 110 159 Head & Sholders Anti Dandruff Shampoo 30.7% Patanjali Dant Kanti (Tooth Paste) 200 gm 68 84 Pepsodent Germicheck 19.0% Patanjali Kanti Neem Bathing Soap 75 gm 15 24 Himalaya Neem & Turmeric 37.5% Patanjali Super Dish Wash Bar 175 gm 10 15 VIM Dish was Bar 32.8% Patanjali Corn Flakes Mix 500 gm 145 182 Kelloggs Corn Flakes ‐ Original 20.2% Patanjali Detergent Powder Popular 250 gm 13 19 RIN Detergent Powder 31.6% Source: Edelweiss research
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.
Fig. 3: Patanjali’s informative print advertisements ‐ Kesh Kanti and Ghee
Source: Company, Edelweiss research
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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.
Fig. 4: Baba Ramdev promoting Patanjali products
Source: Company, Edelweiss research
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.
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Fig. 5: Patanjaliayurved.net
Source: Company, Edelweiss research
Apart from online presence, Patanjali is also taking steps to enhance its overall distributor coverage. The company has invited applications for distributorship of its products. Being seized of the fact that that there is high demand for its products, Patanjali is now offering separate distributorship for food and cosmetics compared to the earlier system when one distributor managed both. Also, the company is giving distributorship at the district, tehsil and mandi levels, which shows its confidence on its the growth trajectory and demand for its products.
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Fig. 6: Application form for distributorship of Patanjali products (available online)
Source: Company, Edelweiss research
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New products pipeline strong and innovative Patanjali has a separate team for new product development. The company has been able to leave a mark owing to the pace and frequency of new product launches. Its robust R&D department has churned out new products in quick time and lower costs. For instance, Patanjali started working on its own brand of instant noodles post the Maggi issue and within a period of 3 months it is now ready with its own instant noodles. The product has been sent for approval and is expected to be launched within a period of one month (we got a chance to taste the product and really liked it). The company has a robust and innovative pipeline of new products with some set for launch soon and some others at R&D phase.
New products that are expected to be launched soon: Patanjali Noodles (will compete with instant noodle players like Nestle and ITC).
Dant Kanti Advance (already has 3 variants of Dant Kanti toothpaste – Regular, Medicated (similar to sensitive) and Junior).
PowerVita (will provide competition to all health food drink companies (Mondelez, GSK Consumer) – this product is made up of ayurvedic ingredients like Brahmi, etc.). Sugar Free Chyawanprash (competition to chyawanprash manufacturing companies like Dabur and Emami).
Seabuck thorn dietary supplement in collaboration with DRDO (made under a technology‐sharing agreement with DRDO (used by army personnel in tough terrains as a source of nutrients)). This product will have richness of all the necessary nutrients and will be made available to civilians). Powdered hair dye (the company has a separate unit, Coloroma, which manufactures herbal colours and dyes).
Divyapay (health drink comparable to tea) in dip dip format. Child range (the company is also planning to launch a children’s range under Patanjali which will include products like baby oil, talcum powder, baby soap, shampoo, etc).
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.
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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).
Fig. 7: Patanjali Food and Herbal Park
Source: Company, Edelweiss research
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.
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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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Recent Research
Date Company Title Price (INR) Recos
30‐Sep‐15 Britannia MD meet takeaways: 3,087 Not Industries Reloading the growth punch; Rated Visit Note 16‐Sep‐15 Dabur CEO meeting takeaways: 282 Buy Banking on health for future wealth; Visit Note 07‐Sep‐15 Consumer Going the SMART way; Goods and Sector Update Retail
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Reduce depreciate more than 5% over a 12‐month period Market Cap (INR) 151 54 3
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