A few years ago, the massive growth and promise shown by yoga guru Baba Ramdev’s Patanjali Ayurved was a bone in the throat of incumbent fast-moving consumer goods (FMCG) majors. As time passed, inconsistencies in product quality, questionable corporate practices, forays into unrelated segments and inability to sustain initial euphoria started weakening the company’s position in the marketplace.

For the first time in five years, Patanjali’s revenue saw a decline in FY18. Among the fastest-growing companies in the years prior to FY18, Patanjali’s FY18 revenue declined over 10 percent to Rs 8148 crore and the profit halved to Rs 529 crore.

Financial woes

However, two years of financial weakness did not deter Baba Ramdev and Acharya Balkrishna’s ambitions as they continued to look for inorganic growth. Patanjali has recently announced the acquisition of Ruchi Soya’s assets for over Rs 4,000 crore.

Whether this brings them out of growth troubles remains to be seen. But this move hasn’t gone unnoticed by ratings agencies. CARE today downgraded their rating on the company’s long and short term debt by a notch and put the company on credit watch with Developing Implications.

CARE’s rationale for the action stems from expected weakening of its financial risk profile on account of large outflow of funds from PAL to Patanjali Consortium Adhigrahan Private Limited (PCAP), the special purpose vehicle created for the purpose of acquisition of Ruchi Soya Industries Limited (RSIL).

As per NCLT order, the total acquisition cost is likely to be Rs 4350 crore, as against PAL’s net worth of Rs 2873 crore as on March 31 2019. The order states the funds infusion from PAL in the SPV shall be in form of non-convertible debentures and preference shares aggregating Rs 900 crore and further equity infusion from the group is to the extent Rs 204.75 crore (which at an aggregate level is much larger than the earlier committed amount of Rs 100 crore by PAL).

Mysterious investments

The revision also factors in PAL’s higher exposure by way of loans and advances/equity investments to the group entities. PAL continues to be the largest corporate entity in the Patanjali group and hence a sizable load of the RSIL acquisition (excluding debt from banks) will be borne by the PAL balance sheet.

It may be noted that CNBC-TV18.com had, in the past, reported on the mysterious investments made by Patanjali in related entities.

While competitors, equity analysts and D-street watchers have been cognisant of Patanjali’s weakness and priced in an Ayurveda boom for Dabur, Colgate and HUL, a credit rating downgrade, is finally, a formal acknowledgement of the stress on PAL’s financials.

First Published:Oct 7, 2019 2:45 PM IST