Patanjali Struggles For Second Straight Year
Ratings agencies downgrade the company after weakening financial profile.
Patanjali Ayurved Ltd. has had a second straight bad year as it struggles with a broken supply chain and faces competition from consumer goods makers it challenged as an upstart.
Yoga guru Ramdev-backed company’s revenue and profit continued to decline in 2018-19, Brickworks Ratings said in its March 30 report while rating a proposed Rs 1,000-crore debt issue of the maker of Dant Kanti toothpaste and Kesh Kanti shampoo.
Patanjali registered sales of Rs 4,701 crore (provisional) for the nine months ending December 2018 and a profit of Rs 557 crore before interest, insurance cost, depreciation and taxes, according to a Care Ratings report dated April 5.
BloombergQuint awaits Patanjali’s response to emailed queries on its revenue and business in FY19. In the previous fiscal, the company's turnover had declined about 10 percent year-on-year to Rs 8,136 crore while profit had fallen by nearly three-quarters to Rs 343 crore.
Patanjali hasn’t recovered from the disruption caused by the goods and services tax. Its technology back-end was not ready for the GST-related inventory and invoicing management in time, a person aware of the company’s affairs had told BloombergQuint in November. Distributors, too, were slow to transition to the new regime. And the company was saddled with unsold inventory of non-food products with more than two years of shelf life, which it’s now trying to exhaust, according to distributors.
Patanjali has migrated from merely selling goods to super distributors to self-inventory or cost net freight stockist model to have better control over supply chain and ensuring availability and choice of products based on regional demand, Care Ratings said. That, according to the rating agency, has led to a surge in inventory levels, with its management expecting this to lead to better margin realisation and overall efficiencies in the long run.
Moreover, according to Brickworks, rival fast-moving consumer goods makers have flooded the market with ayurvedic variants of toothpastes to shampoos, something that had helped Patanjali win consumers.
The core user of Patanjali products remains intact, Alpana Parida, managing director and brand strategist, DY Brandworks, told BloombergQuint. “But new consumers that came in to try Patanjali have moved out as rivals also came up with natural and ayurvedic offerings,” she said, adding that users aren't longer loyal to any specific brand.
Patanjali is planning to raise Rs 1,000-crore through non-convertible debentures as part of its debt-led capacity expansion plan. The total investments in fixed asset is expected to be around Rs 3,000 crore for FY19. But Brickworks downgraded the company to AA- from AA, flagging its Rs 2,615-crore debt as of March. To be sure, AA- still signifies a low-risk credit profile with stable outlook in the medium term. Care Ratings downgraded the company from AA- with negative outlook to A+ with stable outlook over weakening financial profile.
The rating agency pointed to an increase in debt, higher interest costs and financial charges because of debt-funded capex in the past two years, and lower turnover and profitability levels reported in FY18 and nine months ended December 2018. The rating revision, it said, takes into account the overall declining financial performance in 2017-18, un-audited financials for the nine months ended December 2018 and financial projections up to the year ended March 2020.
Patanjali has expanded capacity at its Nawasa, Maharashtra dairy processing unit and at the food and personal-care products manufacturing plant in Tezpur Assam, according to its filing with the Registrar of Companies. It’s also looking to commence operations by next year at its export-oriented food unit in Nagpur Special Economic Zone, and start a unit for juices in Nagpur this year, and another one in Noida in 2020.
The consumer goods maker’s profits were down due to higher overhead expenses owing to infrastructure and capacity expansion, failure to achieve break-even at its Tezpur unit, and increasing interest costs due to borrowings over the past two years, the rating agency said.
Incentives To Distributors
Patanjali has been trying to set its distribution network in order. The company has 110 super distributors, which supply to 4,000 distributors, according to Brickworks Ratings report. It also sells directly through around 5,000 exclusive stores, the report said. Besides, Amazon, BigBasket, Flipkart, Paytm-Mall, Grofers, Shopclues and Snapdeal also retail its products.
It’s now clearing the old stock still stuck in the chain by offering incentives to distributors, said stockists BloombergQuint spoke with—they didn’t want to be identified out of business concerns.
The company is offering better incentives on products closer to their expiry date, a distributor told BloombergQuint. These include non-food products manufactured in 2017, another distributor from north India said, adding that demand for Patanjali products has fallen by 20-30 percent in the area he services.
It’s better to push it down the supply chain instead of going back to the company to claim refunds, another distributor said.