Patanjali’s acquisition of Ruchi Soya, will it aid to its ambition?

• Records impressive growth in the sector dominated by large MNC players
• Growth stagnated in the last few years on the back of macroeconomic factors
• Stiff competition from incumbent players, which have come out with natural offerings

Established in 2006, yoga guru ‘Baba Ramdev’ promoted Patanjali Ayurveda Ltd. ([‘PAL’], [a flagship company of the Patanjali Group]) is engaged in the manufacturing and trading of FMCG, Ayurvedic and Herbal products under the brand name ‘Patanjali’ (a single brand strategy has helped Patanjali to stand out from other market leaders and gain visibility in the market). Presently, PAL has a network of 110 super distributors across India, which supplies to ~8000 distributors, besides selling directly through 5000 exclusive mega stores as well as big online retailers (Amazon, Flipkart, Paytm-Mall, Grofers, Big Basket, Snapdeal, etc.) and offline channel partners (Future Group, Reliance Retail, Star Bazaar, etc.)

In a span of 4-5 years, Patanjali has become a prominent brand in the Indian FMCG space witnessing an unprecedented growth in the sector vis-à-vis the multinational incumbents and reached a turnover of INR 9,030 Cr in FY17 from a mere INR 500 Cr in 2012 (the second largest pure-play FMCG player after the market leader Hindustan Unilever [HUL]). The swift rise of Patanjali was driven by a large variety of product offerings in a short span (selling over 444 products including over 30 types of food products) with a perceived superior quality (Ayurvedic, natural and healthy alternatives) and at a cheaper cost (attractively discounted) coupled with unconventional marketing strategies (positioned as being Swadeshi [i.e., Made in India] with brand equity of Baba Ramdev as one promoting a healthy lifestyle) has disrupted the whole FMCG sector and revolutionised the industry in a record time.

However, the staggering growth story achieved from 2012 onwards fell short of expectations in FY 2018, with a decline in revenues of over 10% vis-à-vis FY17 numbers. The supply chain and distribution network could not keep pace with the exponential growth rate achieved by the firm, which led to poor stock refilling frequency. This was further aggravated by the GST (goods and services tax) implementation in July 2017 (which disrupted trade for at least two months) and also post-GST prices of several product categories witnessed a decline, making them more competitive to lower-priced Patanjali offerings. But more importantly, the extensive diversification led to the dilution of the Ayurvedic credentials of the company (expanding into non-Ayurvedic products such as biscuits, toothbrush, noodles as well as plans to foray into apparel and frozen vegetables). Additionally, a strong competitive response from large companies (HUL, ITC, etc.) with their own Ayurvedic offerings and a sharp drop in advertisement spending led to a brand fatigue setting on consumers.

The company has taken these issues head-on and has taken necessary steps to fix its supply-demand mismatch by investing in technology-based solutions and supply chain enhancement along with continuous investments in the fixed assets at pan India level to reduce dependence on contract manufacturers, this was done in order to maintain the final product quality and ensure better internal controls. The total investments in a fixed asset are expected to be INR 3000 Cr for FY19. However, the company has been exploring other non-organic avenues to grow, in order to continue with the exponential growth trajectory and its ambitious plan to become the largest FMCG player in the globe by 2025.

The company’s acquisition of Ruchi Soya, its first major acquisition will help it to become the second largest edible oil (soybean oil and other products) company with a 14% market share (19% of Adani Wilmar) from a negligible presence in the sector. Edible oil is the fastest-growing category among large packaged food categories, which grew at CAGR 25% (2012-2017) as per the Euromonitor and is slated to grow further on the back of rising population, economic growth and disposable incomes.

Moreover, with a transaction price of INR 4,350 Cr., Ruchi soya is definitely a bargain for Patanjali. The rationale for the acquisition is pretty simple, the edible oil business is a thin margin business and if a company can get existing plants and manufacturing facilities it makes sense. The acquisition of Ruchi soya will give Patanjali access to its 24 plants (mainly for crushing, milling, refining and packaging edible oils) having the largest oilseed extraction capacity in India. Furthermore, a strong portfolio of mass-market edible-oil brands is readily available to be exploited with a readymade customer base spread across India. Additionally, Ruchi Soya is also one of the country’s largest exporter of value-added soy products.

While Ruchi Soya had built strong brand equity with an impressive manufacturing feat pan India, however, it ran into trouble with low rainfall for three years (2013 onwards) leading to a reduced soya crop under cultivation resulting in increased cost of production for the firm. This was aggravated by global commodity price collapse in 2015, which led to losses in castor seed trading business of the firm and was later banned by the NCDEX (National Commodities and Derivatives Exchange) following allegations of manipulative trading. Meanwhile, the revenues halved with net losses and the debt ballooned, which seriously impacted the debt repayment capability of Ruchi Soya taking it into bankruptcy proceedings by its financial creditors in Dec. 2017. Finally, the creditors approved the takeover plan by PAL in April 2019 (taking over 50% haircut). This seems to be a major positive for the company, both in terms of gaining significant market share in the edible oil market in the country, alongside taking advantage of the strong brand presence of Ruchi Soya in different parts of the country.

For Patanjali as a whole, its entry into the FMCG space with natural (Ayurvedic ingredients), host of product lines introduced across different lines of FMCG value chain, strong brand management from the group backed by very efficient marketing strategies linked with mass acceptability and appeal of Baba Ramdev led to the fastest growth in the FMCG space in the country in decades. While the pace of growth rationalized in the last year, Televisory feel that Patanjali has a long way to go for its ambitious plan to become the largest player globally in the FMCG space. Investment in new products during FY19 such as dairy and frozen food, packaged drinking water, nutraceuticals, natural health supplements, products for pregnant and postnatal mothers, etc. are likely to add up to its revenue profile over the medium-term. The inorganic growth (such as the acquisition of Ruchi Soya) is likely to be a key determining factor in the overall growth. Further, strengthening of supply chain and investment in technology should help the company sustain higher levels of growth.
 
While the competition will certainly heat up as other international and national players gear up to take the battle on PAL’s turf, introducing fresh products backed by Ayurvedic touch, PAL would need to reinvent the marketing and branding strategies and simultaneously focus on the utmost quality to continue its high growth path in the coming years. Though hurting large FMCG companies in the short-term, Patanjali predominantly gained the market share in commoditised categories made up of unorganised players. The company seems to be here for a long haul, but tough times are ahead as they say, ‘moving to the top isn’t easy, sustaining the same is even a bigger battle to manage.’