The media and analysts will agree that the top bosses of multinationals in India tend to be boring, strait-laced and politically correct. This is probably why Baba Ramdev, yoga guru, brand ambassador and maverick founder of Patanjali Ayurved, has been getting such rave reviews. He cheerfully does headstands while posing for press shoots, rants against MNCs for conspiring against him and ‘looting’ India, and puts forth revenue targets that are four times his last reported sales.

The rise of Patanjali has inspired CLSA to write a wistful research note titled “Wish you were listed, Patanjali” heaping praise on the business model. Brand consultants have credited Patanjali with bringing about a “tectonic shift” in FMCG branding and there are stories aplenty about how Ramdev is set to oust the Unilevers and Nestles in India.

While he deserves credit for breaking into the heavily guarded bastions of the FMCG sector, hype about Patanjali Ayurved seems to far overshadow reality.

Growing, but not that big yet

As an unlisted, closely held company, Patanjali Ayurved’s audited financials are not easily accessible to the public. That must be reason why Ramdev’s ambitious targets ( Rs. 10,000 crore sales by FY17) aired in various interviews are often confused with the firm’s actual numbers.

According to its last official filings for FY15, Patanjali Ayurved had total sales of Rs. 2,013 crore. A report by Brickworks Ratings estimates provisional sales for FY16 at Rs. 3,267 crore (for 10 months up to January 2016). Annualising, this would place Patanjali ahead of smaller listed FMCG players such as Jyothy Labs ( Rs. 1,644 crore) and Emami ( Rs. 2,600 crore), and neck-and-neck with GSK Consumer ( Rs. 4,500 crore) and Colgate Palmolive ( Rs. 4,100 crore) last fiscal. But it is yet to break into the big league of Hindustan Unilever ( Rs. 31,000 crore), Godrej Consumer ( Rs. 9,000 crore), Dabur India ( Rs. 8,450 crore), Nestle India ( Rs. 8,200 crore) and Marico Industries ( Rs. 6,100 crore).

To be sure, Patanjali’s sales growth rates in the last three years have been scorching, with revenues growing at a 55 per cent annual rate when the FMCG market was inching up at 8-9 per cent. But these growth rates have to be seen in the context of a low base, and the vast product portfolio that Patanjali relies on for its critical mass.

Carpet-bombing strategy

Though Patanjali’s current size would suggest that it has already made big market share gains at the cost of the MNCs, this isn’t true yet. This is because Patanjali’s strategy relies on spreading itself thin across dozens of FMCG categories and carpet-bombing consumers with scores of products, rather than on focussing its energies on one or two large wins.

Patanjali’s portfolio spans personal care products, toothpastes, home cleaning products, dishwash and detergents, staples such as atta, salt and cooking oil and tea, juices and dairy products, apart from a range of ayurvedic formulations.

With sales of about Rs. 5,000 crore splintered across as many as 390 products, Patanjali is yet to grab a large enough share of any category to pose a material threat to the leading player. Even in toothpastes, the only personal care category where its Dant Kanti, a best-seller, is snapping at the heels of an MNC, Patanjali’s market share is just 5 per cent to Colgate’s 55.

In the food or dairy categories where Patanjali has made significant inroads, there is little MNC presence.

Any aggressive gains by Patanjali in these categories may threaten desi players such as Emami, Dabur India or Amul far more than the MNCs.

Tough to be natural

Over the long term, the ayurvedic plank on which Patanjali’s products are positioned may work better for niche brands than for category leaders. While all-natural ingredients may have consumer appeal in dairy, cooking oils, honey or health drinks, they may prove less efficacious in household cleaning products, detergents or even processed food.

If Patanjali is serious about using fully organic formulations and natural ingredients, it has a tough task on its hands in procuring these ingredients to fuel its furious growth. While there’s already an efficient, low-cost global supply chain in place for chemical ingredients that go into conventional FMCG products, there are no such readymade solutions for ayurvedic versions.

In fact, these are the key reasons why Indian FMCG players who enthusiastically adopted the ‘herbal’ plank have tasted limited success in the past, whether it was the desi Himalaya and Zandu Pharmaceuticals, or Hindustan Unilever which had to shelve its Ayush rollout.

Pricing and costs

All this suggests that Patanjali’s current business model of offering ‘all-natural’ products, at steep price discounts of anywhere between 10 and 30 per cent to competing MNC brands, doesn’t quite add up. Until FY15, Patanjali’s business model was very distinct from the MNCs that it loves to hate. The company’s umbrella branding strategy helped it gain loyal consumers among Ramdev’s followers and those with a yen for swadeshi products.

As its products only retailed through 10,000 exclusive chikitsalayas and yoga kendras, it could dispense with market research and take a hit-or-miss approach to product rollouts. From its centralised mega-facility in Haridwar, the firm churned out as much as its customers demanded.

But if Patanjali is to succeed in its ambitious plans of giving the MNCs a run for their money, it may have to abandon these quaint practices. A national presence will require substantial investment in manufacturing units in southern, western and eastern India. Word-of-mouth may need to be supplemented by a national advertising campaign.

Acquiring a nationwide distribution presence will require more sophisticated supply chain and inventory management.

It is clear that Ramdev is well aware of these compulsions. In FY16, the company kicked off a television and print advertising campaign, forged alliances with big-box retailers like the Future group and entered the e-commerce channel. But this still leaves us with two big questions. First, how will Patanjali’s profits bear up under all these additional expenses?

In FY15, Patanjali Ayurved reported a 23 per cent operating profit margin with a 16 per cent net profit margin. This was fairly comparable with the margins (operating profits at 17-25 per cent) of the listed FMCG firms. But then, listed FMCG players manage these margins after spending 12 to 18 per cent of their sales on advertising and promotion. So it isn’t clear how Patanjali will accommodate similar spends if it is to continue with its low-price strategy.

The even more burning question is where Patanjali will find the capital needed to bankroll its mega investment plans. In fact, with over 90 per cent of its equity held by Acharya Balkrishna, it isn’t even clear how Patanjali has found all the equity for its successes so far.

Yes, the MNCs that Ramdev reviles do make huge profits and pay out generous dividends and royalties to their foreign parents. But by virtue of being publicly listed companies in India, multinationals such as Hindustan Unilever or Nestle India have also contributed to the exchequer and turned many ordinary investors into millionaires.

For Patanjali to gain similar credibility, it needs to explore a listing on the public markets too. Not only will that clear the air on the company’s funding sources, it may open up one more swadeshi option for Indian investors in FMCG stocks.