1. Patanjali threat on a decline; consumer goods may see rise in prices

Patanjali threat on a decline; consumer goods may see rise in prices

The trend of deflationary pressure in consumer goods sector may reverse and there could be an increase in prices of commodities.

By: | Updated: April 27, 2017 1:40 PM
The trend of deflationary pressure in consumer goods sector may reverse and there could be an increase in prices of commodities.

Patanjali products ever since their launch have taken the consumer sector by storm, posing a challenge to other established players. The company brought natural products in centrestage and pushed almost all the companies to rework their strategy on the natural products. The company registered stellar growth in FY16—turnover of close to Rs 5,000 crore (Rs 2000 crore in FY15). Its FY17 growth too has been strong.

However, Edelweiss Research feels that the threat from Patanjali is now waning as most of the consumer good companies have realised the potential of natural goods and have geared up to meet the competition is this space. In a research report, it has said that Patanjali may fall slightly short of the targeted Rs 10,000 crore (during the first 7 months it clocked Rs 3,600 crore revenue). Recently, canteen stores department (CSD), the retailing platform for India’s defence forces, suspended sale of Patanjali Ayurved’s amla juice after receiving an adverse state‐laboratory test report.

“Though it gained market share in some categories (toothpaste, honey, chyawanprash, atta etc), further market share gains will not be easy. The key reason behind the same is that now all consumer goods companies have brought ayurveda and natural to the centre stage and have acknowledged the fact that natural is a global trend which one should embrace and will grow faster than other categories. Hence, the focus, which other consumer goods companies initially lacked, has increased significantly. Unilever and Colgate have acknowledged the fact that competition in the natural space has increased and it will be one of their focus areas,” Edelweiss Research said.

On the sector outlook, the brokerage house expects return to double-digit surge trajectory after three years of single digit growth. It expects the trend of deflationary pressure in consumer goods may reverse and there could be an increase in prices of commodities. The research report said,” The sector has been reeling under deflationary pressure for about 6‐7 quarters now. However, the trend has started to reverse, starting Q2FY17, following an uptick in prices of commodities such as palm oil, LLP, copra, crude oil and food commodities (wheat, sugar etc). Companies, in order to counter rising raw material prices, have started hiking prices—while prices have been increased in soaps, biscuits, milk and detergents, promotions in other categories have declined. This, in our view, entails positive implications for the sector, not only from the growth perspective but also on the margin front.

Based on their double-digit growth, Edelweiss recommends Berger Paints, ITC and Pidilite as good stock picks. It favours HUL and Nestle from longer term perspective and remains negative on GSK Consumer.

Factors like unrelated diversification, distribution, top management retention and quality issues could restrict Patanjali’s market share gains in future.

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