patanjali dreams and reality

The fight that's threatening Patanjali's INR20,000 crore dreams
Patanjali's rush to dominate the consumer-goods market is spreading chaos in the business's engine room: its distribution network.
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Soumya Gupta
2 May 2018
FREE READS
 BABA RAMDEV, FOUNDER, PATANJALI AYURVED; VIPIN KUMAR/HINDUSTAN TIMES VIA GETTY IMAGES
Want to get into business with Patanjali? Here’s what you can expect to find:

 Several mutations of its official website
 A form to become a salt distributor appealing to you to be a “well-wisher and supporter of this movement” and “get rid of the foreign MNCs’ loot”
 A Google Doc collecting sign-ups from aspiring distributors
 A notice on its website (it’s www.patanjaliayurved.org, in case you are wondering) cautioning against fake agents asking for money to help apply for distributorship, as well as fake application forms, though we couldn’t get our hands on one.
The road to Patanjali is filled with temptations, and it’s not hard to see why. The buzziest FMCG company in the country, and the thorn in the flesh of giants like HUL and P&G, said it had breached INR10,000 crore in revenues by FY16 from less than INR500 crore in FY12.

Its next target: INR20,000 crore.

Given its hulking track record, it would be foolish to doubt Patanjali’s ability to get there — unless you put your ears to the ground, and listen to the rumblings deep in its heart.

This is what you will hear if you do: Patanjali’s 20K crore dream is itself falling prey to temptation. And it’s corroding the very soul of its business — its distribution network.

This is crucial, for once your shampoo, soap, or masalas are made, distribution (and if you have the cash, advertising) is all there is to a successful FMCG business. Patanjali understood this. It got where it is today by building a canny, low-cost distribution system that was remarkably efficient in getting its products acceptance against far heftier rivals.

But that foundation is now under severe stress, ET Prime learnt in a series of conversations with Patanjali associates. As the company doubles sales targets every year and sets its sights on total domination over the Indian consumer, it has developed an uncontrolled hunger for new distributors and new channels of trade, often at the expense of older allies.

The upshot: India’s most ambitious consumer-goods firm might be tripping up on its own ambition. A detailed questionnaire sent to Patanjali Ayurved and its spokesperson SK Tijarawala, as well as messages sent to him, remained unanswered.

Let’s start at the beginning. Patanjali’s earliest retail locations were its Chikitsalayas, or clinics, where vaidyas prescribed medicines made by the firm. It’s hard to get a number, but estimates suggest there are some 20,000 Chikitsalayas all across India.

Coupled with Baba Ramdev’s personal charisma, the Chikitsalayas’ free healthcare advice helped build consumer trust, says Pankaj Gupta, who heads the retail and consumer practice at Tata Strategic Management Group (TSMG). They were a smart way to build the Patanjali brand at a time when the company did not spend heavily on advertising. In return, Chikitsalaya owners benefited from their monopoly over Patanjali’s products. But in 2012, the cozy arrangement started showing cracks. “That year, Babaji expanded into the open market, to small shopkeepers,” distributor Pradeep Garg, proprietor at Baba Enterprises in Shahdara, Delhi, remembers.

In India, there is no alternative to this channel — technically called general trade and comprising kirana shops and local unorganised marketplaces — to quickly reach large swathes of customers.

“In the early days, the company struggled for distributors,” Garg says. “Shopkeepers were also reluctant to take their material because there was a lack of marketing from the company’s side.”

The success of the Chikitsalayas helped break this barrier and bring general trade on board at much lower margins than they would get from competing products, says Gupta of TSMG. “For instance, in categories with lower margins (typically food), where Patanjali's general trade partners earn around 6.5%, rivals can earn them 10%. Similarly on higher margin goods (usually personal care), Patanjali retailers earn around 12.5%, while rivals often offer 18%-20%,” he says.

Now, say retailers and distributors, as the company flexes its marketing muscle and demand for its products soars, its relationship with general trade is increasingly cozy.

Who’s feeling left out? The once-formidable Chikitsalayas.

“Babaji wants his products to be as visible as possible,” a Chikitsalaya owner in Mumbai’s western suburbs says, requesting anonymity. “But that’s a big problem for us. A kirana has other products to sell, but we are bound to sell only Patanjali products. Besides, kiranas can put any discount they want on the products. We can’t. If I am selling ghee at Rs560 a kg and they discount it to Rs520, how will I compete?”

This Chikitsalaya owner says his headaches increased when an ‘ayurvedic supermarket’ right opposite his shop began to piggyback on the Baba. “He used to have a cut-out of Babaji in front of his shop,” he says, pointing to the supermarket across the street. “But he is not selling just Patanjali. His customers come in for Patanjali but he can sell them other products too. We had to complain to the local company officials to get the cut-out removed.”

A Chikitsalaya owner in East Delhi sounds just as dismayed at the infiltration by general trade. “If a kirana shop has the basic products you need, like toothpaste or ghee, why will you ever go to a Chikitsalaya?” he says.

“Initially, Patanjali had a policy to give products first to us only, but now the goods go first to general trade,” complains a Chikitsalaya owner in Navi Mumbai.

As the company pushes for more visibility, territory demarcations are also shrinking. All retailers and distributors we spoke to say that before the big general trade push, Patanjali used to mandate a distance of 5km between two Chikitsalayas, ensuring plenty of business for everyone. This has now come down to as little as 1km-2km.

If this wasn’t enough pressure, now there’s the Patanjali Mega Store. “Mega Store is an exclusive outlet, but much bigger,” says the proprietor of two Mega Stores in Mumbai. Owners and distributors in Delhi say Mega Stores are generally double the size and investment of a Chikitsalaya.

Mega Stores pose an even tougher competition for goods from “Haridwar”, distributors’ code for Patanjali’s headquarters, since they often get stocks directly from the company along with the area’s super distributor.

But not all Mega Store owners are happy with the format.

“It is a bit of a flop concept,” says the Chikitsalaya owner in East Delhi cited above, who also owns a Mega Store. “First of all, 25%-30% of products [in the company’s portfolio] are not available. Then, low-shelf-life products are coming in bulk packs. Of the 250 Mega Stores in India, I don’t think even 50 would be profitable.”

Anaemic margins and product delays pile on the pain. Take ghee, one of Patanjali’s biggest sellers, which accounts for up to 40% of the sales at some Chikitsalayas. Margin for ghee distributors can be as low as 3%.

Chikitsalayas and general-trade distributors get their stocks from an area super distributor, who in turn picks up material directly from Haridwar. The average margins on all kinds of products, they say, is around 11%.

However, higher-margin goods don’t move as fast for some retailers. For instance, a Chikitsalaya owner from Mumbai’s western suburbs says stores have trouble selling the pricier facewash range.

Patanjali has a buffering problem. Fast movement is essential in FMCG to make enough money to take home. Distributors and retailers say Patanjali has a terrible reputation here.

“Babaji will announce a product in the media, but it takes extremely long for it to hit the market,” says the Chikitsalaya owner from Navi Mumbai. “For example, Patanjali Power Vita powder took nearly a year to come to us after Babaji had announced it. On average, it takes between 3-6 months for products to come.”

When a customer keeps coming to you over and over again asking for a new product and they don’t get it, they will lose interest, says a longtime Chikitsalaya owner who runs multiple stores in Mumbai.

Added to all that, Patanjali is not too fussed about taking care of its partners. Chikitsalaya owners in Mumbai say they neither get credit, nor do the company’s distributors deliver products to their stores at the company’s cost.

“How do I protect my margins? First, I have to pick up the goods myself from the distributor, transport it here. My margin on goods is only 8%-11%, how much will I save transporting goods all over Mumbai?” says an owner in Andheri East.

“Claims for damage or expiry of goods are not available for us,” says the Chikitsalaya owner in Navi Mumbai. “That cost eats into our margins.”

Some Chikitsalaya owners say the company will often delay deliveries until it gets a big enough order from an area. “Stocks are not delivered on time,” says the Chikitsalaya owner in Navi Mumbai. “Unless an order worth at least Rs1 lakh comes up, delivery does not happen to that area.”

“The company does not give a single rupee in credit,” says the owner of the Mega Stores in Mumbai area.

“Patanjali advises cash against stock,” Garg from Baba Enterprises says. “The super distributor may give you credit for just about a week, but it depends on how long you have been in business and how well you know him.”

For context, most FMCG firms offer credit for anything between a week to 30 days to their distributors, especially those dealing exclusively with their products.

The outcome of this chaos? A feeding frenzy that could put paid to the company’s growth plans.

“Patanjali has broken the distribution system,” says the East Delhi Chikitsalaya owner. He had taken up a distributorship to sell to general trade in 2013. He soon shut down that business. “A margin fight has broken out,” he adds. “Four distributors have changed per year per area in most parts of Delhi.”

“Their attitude is all about making money and building their brand,” says the Andheri East Chikitsalaya owner. “Once the maal (stock) leaves their factories, they don’t care.”

“For us, sales are down almost 20% year on year,” the Chikitsalaya owner from Navi Mumbai quoted above says. “We used to do INR16 lakh a month, but it’s now down to INR10-INR12 lakh.”  "Brand equity is what creates trade equity. If you want to have goodwill with the trade, your brand has to be strong,” says Milind Sarwate, advisor to Future Consumer, the FMCG arm of Future Group, and former chief financial officer of FMCG major Marico. “Patanjali may have stretched their brand equity beyond limit.”

“[Sure,] as long as there is throughput, the trade will pick up Patanjali stock…” Sarwate adds. [But] the trading community is astute and cares most about its own margins.”

Patanjali could brand itself as a “movement” all it wants, but it would do well to remember this brutal home truth about business.

(Clarification: The chart titled 'Comparison of Patanjali sales profit, with major listed FMCG firms' (FY17)' has been corrected to accurately reflect Patanjali's May 2017 revenue announcement.)

manpasand beverages in deep trouble

Manpasand is running out of juice
The auditor's resignation might have made headlines — but it’s only a symptom of a much bigger problem eating into the company.
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Soumya Gupta
30 May 2018
 ETORRES/SHUTTERSTOCK
This is my last season selling Mango Sip.Manpasand distributor in Varanasi
What happened? Manpasand Beverages Pvt Ltd, the marketer of Mango Sip juice, one of the hot consumer companies to have emerged in the last three years, has seen more than 1/3 (~40%) of its market value evaporate over the last five days. So sharp has been the drop in its stock price that trading in Manpasand has been halted.

 The stock is now trading below INR320, the price at which it listed in July 2015*.
 Its auditors Deloitte Haskins & Sells, Baroda — one of the big 4 accounting firms — resigned a few days before the company’s quarterly results, scheduled to be announced today.
 The board meeting and results announcement have been cancelled.
 Deloitte in a letter to the promoters said it was resigning because the company refused to give crucial information to complete the auditing result, as per a report in Bloomberg Quint.
Why is Manpasand significant? Brokerages and investors had positioned Manpasand as a great consumption story based on rural demand. Its public issue was oversubscribed 1.4 times, and it had raised private equity from SAIF Partners.

Since going public, Manpasand Beverages has done brisk business with over 41% CAGR in revenues between FY15 and FY17 (full-year data for FY18 is not yet available). As of FY17, it was a INR700 crore brand. Its closest and bigger rival, Parle Agro, marketer of Frooti mango drink which defines this category, grew at just 17.31% CAGR between FY14 and FY16. Till date, it has given its investors nearly 69% returns since the day it listed.  In November 2017, equities-brokerage firm Motilal Oswal published a report with top stock ideas for investors looking to bet their money on India's rural opportunity. Among them was Hindustan Unilever, India’s largest FMCG firm, Mahindra & Mahindra, among the country’s top three auto makers, and Manpasand Beverages (MANB).

"MANB is primarily focused on the rural market. This is evident in its competitively priced small SKUs and continuously-expanding rural distribution network," the report said.

"In the last one year its rural outlets have doubled to ~500k. Moreover, with access to 4.5m Parle outlets pan-India, MANB is in a sweet spot to penetrate the rural market across geographies."

In November 2017, the brokerage had a buy rating on the stock with a target price of INR492, which was 19% higher than its prevailing market price at the time. As per stock-exchange data, the scrip has fallen 32% since that time.

Where is the trouble? In December 2016, Amit Mantri, fund manager at portfolio-management services firm 2Point2Capital, wrote a blog post titled 'The Curious Case of Manpasand Beverages', which said the company’s growth in revenues and claims to market share do not square with the rest of the industry.

With competition from PepsiCo, Coca-Cola, Dabur, and Parle Agro, Manpasand has its work cut out in gathering market share. Mango juice is over 85% of the fruit-juice market in India, making the category already well established and heavily competitive. According to recent Euromonitor rankings, in the mango-juice category Manpasand does not figure in India’s top five juice makers. Besides, the juice market has grown just 6.6% in volume and 10.2% in value year on year between 2016 and 2017, according to latest Euromonitor data. So Manpasand’s growth is a massive outlier. No other mango-juice seller is showing growth rates even close to Manpasand’s.

Manpasand’s distrubution channel does not reflect brokerages’ enthusiasm. ET Prime spoke to the company’s distributors and they weren’t a happy lot. Manpasand has a policy of selling its inventory outright without any returns. If distributors can’t sell it further down to the retailers, they have to bear the cost.

According to a mango-juice distributor in Varanasi, Manpasand product management policies leave much to be desired. "This is my last season selling Mango Sip," he says, requesting anonymity.

"The company undercuts the area they demarcate for their distributors. Ever since their plant has come up in the city, they are distributing their product to anyone who is willing to pick it up. That’s why my margins are suffering; they are already low at 35%. Besides, the company does not take back damaged or expired stock, which eats even more into my margins."

Mantri, who wrote the December 2016 blog post, says he found similar stories in his interactions with distributors and retailers in Manpasand’s biggest markets — UP, Rajasthan, and Gujarat.

"A lot of distributors and retailers have told us they end up buying the products because the company tells them, ‘we are listed, we have Sunny Deol and Tapsee Pannu as brand ambassadors,’ he says. “But distributors get stuck with inventory that is not selling. Some shops with Mango Sip hoardings say they are simply earning a fee from the company to keep the hoarding. They don’t end up selling the product at all."

Another distributor in Navi Mumbai says he quit the business because margins were low and the company could not supply enough to keep up with demand in his area. He requested anonymity.

Last year, Manpasand tied up with Parle Products to get access to their distribution system. Before this deal, the company had access to just about 100 distributors**. Now, it has 500-600 more, according to an executive at Parle privy to the details. With increase in distribution coverage, channel management becomes much more demanding. Manpasand is probably realising this now.

Where does this leave Manpasand’s investors? The stock has hit the lower circuit twice in the last two days, meaning trade in the stock is halted as a caution against uncontrolled selling. But large institutional investors are in trouble if they wish to exit their positions now. "Who is the new buyer who will come in?" Mantri asks. "The shareholding is largely institutional and there is not much free float outside of institutional holdings. So any buyer will now have to understand why the auditors have raised a red flag on financials, and also address concerns that we have raised on multiple occasions, including in our blog post."

(Corrections and clarifications:
*Although it is above its adjusted issue price of INR160, calculated after a 1:1 bonus issue in September 2017.
**In an email to us after this story was published, Manpasand denied this, saying it has 2,500 distributors. ET Prime could not independently verify this. In its email, the company also said the following: "Deloitte has been auditor of Manpasand Beverages Limited for 8 long years, and we have been providing all required information as and when required by them. While there could have been some delays but we have never denied sharing any information with them," Abhishek SIngh, Director, Manpasand Beverages, said in an email reply.)




CONTRIBUTORS WHO HAVE COMMENTED ON THIS STORY
test
 Soumya Gupta ET Prime, Senior Staff Writer
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 Madhumita Chakraborty VentureNext, CEO
1 CONTRIBUTOR COMMENT
• FEATURED
31 May 2018 
Madhumita Chakraborty
CEO , VentureNext
Hi Soumya, Very nice post. I am curious about the conflict of interest issue here - if MOST owns 5.5% of a stock, how can they recommend it to investors?

If possible can you pl share the exact conflict of interest rule.

Thanks!
Liked 5 likes
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Soumya Gupta
Senior Staff Writer , ET Prime

Hi Madhumita, thank you for the feedback! I checked with our financial markets editor Pravin Palande, and as far as we know, there is no rule preventing PMS and mutual funds from recommending stocks they are invested in. A counter argument could be that since Motilal Oswal was also invested heavily in Manpasand, they have skin in the game. Their investments took the big hit as much as anyone who put money in Manpasand based on their recommendations.

jio giga fiber

Jio GigaFiber is here. Where do broadband companies go?
‘Nowhere’ seems to be the most likely answer. It’s a classic case of what happens when companies are too busy acquiring customers at the expense of thinking ahead.
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Soumya Gupta
11 Jul 2018
 KUZZIE/SHUTTERSTOCK
In case you are crunched for time, here’s the short version of this story. The combined market cap of all listed broadband and cable operators in the country is less than INR5,000 crore. Meanwhile, Reliance Jio is launching its nationwide fibre-optic network, GigaFiber, with an investment of INR2.5 lakh crore.

Now, the long version. It begins with a long, and long-anticipated, announcement by Reliance Industries chairman Mukesh Ambani at the firm’s annual general meeting last week.

"Optical fibre-based fixed-line broadband is the future … Jio is determined to move India to among the top five in fixed-line broadband, too. Your company has already invested over INR250,000 crore for creating state-of-the-art digital infrastructure to provide mobile and broadband connectivity across the country, with the largest fibre footprint … We will now extend this fibre connectivity to homes, merchants, small and medium enterprises, and large enterprises simultaneously across 1,100 cities to offer the most advanced fibre-based broadband connectivity solutions.

"Having the ability to compete in the global marketplace using digital tools and techniques that are powering the FOURTH INDUSTRIAL REVOLUTION … We are calling this fibre-based broadband service JIO GIGAFIBER."

The message is clear. Just as Jio shoved India's telecom firms into their worst times, it’ll plunge the country's broadband firms into an existential crisis. Stocks of broadband companies fell 18% the day Ambani made his speech. Hathway Cable & Datacom, the biggest among them in terms of market capitalisation, touched a one-year low in intra-day trade.

What will broadband companies do now?
There are only an estimated 18 million broadband subscribers in India. Jio wants to be in 50 million homes. India’s broadband market as it exists today is dwarfed by Jio's mind-numbing ambition.

Combine this with fears that Jio might offer broadband packages that are ridiculously cheap, setting the stage for price wars of the kind that eroded telecom firms’ bottom lines for the past year.

Where do companies like Hathway go from here? According to most investors, nowhere. The stocks of Hathway, GTPL (a Hathway group firm), Den Networks, and Siti Networks have been dropping dramatically for the last one year. These four stocks are trading at half of what they used to be in July 2017. In contrast, the benchmark NSE Nifty has risen 12% since then. "Broadband, fixed-line Internet, was the next big connectivity opportunity," says an executive at a private equity firm, which invests in the media industry, on the condition of anonymity. "Hathway and ACT are the biggest private broadband providers in India. Right now, these multi-service operators (MSOs) have last-mile [reach] into housing societies and people’s homes. Reliance Jio does not. And broadband is a sticky business because it takes time and effort to set up a connection. So for these firms, their existing customers will remain. But the new, first-time users of broadband? All of that will go to Jio."

How did MSOs get here?
MSOs first made their money via cable and set-top boxes. At the height of the government's phased drive to digitise set-top boxes (2012-16), companies like Hathway rushed to acquire customers by handing out boxes lest they were lost to direct-to-home satellite television. In that zeal, these companies lagged in collecting data and money from the new subscribers. That hit revenues for a long time.

"Now, Hathway and others will have to match their prices with Jio's to get customers, and also to retain the existing ones if the difference is too great. And knowing Reliance, they could very well offer Jio for some ridiculously low amount," says the private-equity executive quoted earlier.

Sell-side analysts tracking these firms predict a similar fate for the broadband business.

In a note from brokerage JM Financial dated May 29, analyst Sanjay Chawla says Hathway’s broadband revenue growth had slipped, leading to lower average revenue per user (ARPU). This downside will continue, especially because GTPL had "poor broadband execution" even with the looming Reliance threat.

Broadband revenue growth fell to 11% year on year for FY18, after growing 75% the previous year. JM Financial is modelling for stagnant ARPUs in the next three-four financial years after a drop of 12%.

The brokerage flagged similar concerns for rival Siti Networks, noting that broadband revenues grew only 4% in FY18. Its ARPU from the business is also expected to stagnate.

What will be the magnitude of this fall and stagnation? According to another brokerage firm, Jefferies, broadband ARPUs in India currently range between INR400 and INR1,000. Domestic brokerages are predicting broadband ARPUs to fall and plateau at INR450 for GTPL and Siti. Right now, Hathway and Bharti Airtel — the largest private providers of broadband in India — have ARPUs of around INR750 and INR950, respectively.

When contacted, Hathway was not immediately available to comment. But its management offered to meet at a later date.

Can investors eke out any hope at all?
For some investors, still sitting on stocks of the incumbents, what is playing out right now is nothing more than an industry disruption that was always on the cards.

Comparing Jio with Amazon, a portfolio-management services (PMS) firm terms it as "nothing more than a disruption that has scared investors in the space away with seemingly endless money and muscle." The note was shared by investors requesting anonymity.

But, the PMS firm argued in its note to clients that it made sense to have put money in the broadband business because it had relatively lower competition and was largely funded by internal accruals rather than free-flowing external funds. Jio's ambition, investors argue, will simply help increase the size of the broadband market, allowing everyone to earn more from Indian customers.

Another source of optimism is that investors in these firms could get an exit.

"Cable TV digitisation is done. And broadband's growth will be dictated by Jio. This leaves companies like Hathway to partner, or perhaps to get acquired," says the executive at the private-equity firm quoted earlier.

"I would have thought Jio could partner with the MSOs for last-mile connectivity. Getting permissions and putting in lines into the homes takes time and capital. But it doesn’t look like Jio is going [that route]. They seem to be going into it alone."

(With additional inputs from Pravin Palande)
 
CONTRIBUTORS WHO HAVE COMMENTED ON THIS STORY
test
 Soumya Gupta ET Prime, Senior Staff Writer
test
 Madhav Samant NAP Financial Wellness LLP, Managing Partner
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 Manikandan Sanjive RBL Bank Ltd, Corporate Banking
2 CONTRIBUTOR COMMENTS
• FEATURED
16 days ago
Madhav Samant
Managing Partner , NAP Financial Wellness LLP
As the Chairman said in his speech Jio is on its way to becoming a data behemoth. In western countries its all streaming is through broadband and hence valuations of companies such as Netflix are stratospheric. Not only will cable companies will suffer but also DTH. I am infact seriously reviewing whether I should continue with my Tata Sky connection. A cost effective broadband connection + Netflix would suit me just fine. Somebody now just needs to stream the English Premier League and I will be off Tata Sky in a jiffy :).
Like 3 likes
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Soumya Gupta
Senior Staff Writer , ET Prime

Hi Mr. Samant, I totally agree! I cut the cord on cable nearly 7 years ago and I haven't missed it much, except during live football/cricket matches when current broadband speeds tend to dip slightly. With all this incoming competition, I expect firms will begin to upgrade infrastructure and solve their speed and connectivity issues.
Like 0 like 11 days ago
o
• 16 days ago
Manikandan Sanjive
Corporate Banking , RBL Bank Ltd
I think fixed line Broadband industry is going to get disrupted in short run. Jio has high competing edge - the network strength of Jio is also well proven in the pre-paid SIM segment and the price point of broadband is expected to be lower compared to peers. I could envisage a good number of switch over of customers from existing service providers to JioFiber in additon to fresh customers. As we have seen in telecom, this industry will get disrupted shortly (unless the existing players reduce their prices sacrificing the margins in long run or discover an efficient cost structure) and it may be headed for consolidation. Also, whether Jio will partner with existing service providers is a big question mark (But there is no need for Jio to partner with existing service providers as I presume they have a solid business plan like they had in pre-paid SIM segment and have financial muscle).
Like 3 likes
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Soumya Gupta
Senior Staff Writer , ET Prime

Hi Mr. Sanjive, totally agree, Jio may completely bypass existing players despite how difficult last mile connectivity can get. Some investors did tell us that customer stickiness in broadband is high, so maybe existing providers will hold on to their current customer base for now.

hindustan unilever problems

Unilever has a food problem
The company’s recent move to club its foods and refreshments businesses may not yield much, considering the intense competition in those categories. While it is trying to change the game around, there are significant challenges ahead for reorganising the business.
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Soumya Gupta
12 Jun 2018
 SANJIV MEHTA, MANAGING DIRECTOR AND CEO, HINDUSTAN UNILEVER LIMITED; TIMESCONTENT.COM
Last week, India’s largest packaged consumer-goods firm, Hindustan Unilever Limited (HUL), recombined its foods and refreshments businesses, just about two years after separating them. Both decisions were prompted by the global parent Unilever.

Both HUL and its parent firm have had trouble with their foods business, and the ongoing restructuring shows that the company is currently depending on better-entrenched, higher-margin home-care and personal-care businesses as profitability becomes a priority.

Signs of turmoil
Unilever’s first wave of trouble began last year, with a takeover bid from rival Kraft-Heinz, backed by billionaire investor Warren Buffett. While the bid was withdrawn a few days later, it jolted the Anglo-Dutch firm into shaping up financially.

Soon after, the restructuring began. In April last year, Unilever announced it was recombining its foods and refreshments businesses. According to Unilever’s latest annual report, the foods business includes mayonnaise, soup, and spreads (such as margarine), while the refreshments portfolio includes tea, coffee, and ice cream.

Unilever sold the spreads business to private equity firm KKR for EUR6.83 million in December last year. That left the foods business with just two major global brands — Knorr soup and Hellmann’s mayo (both EUR1 billion brands) — along with smaller ones, including Kissan in India.

This restructuring was not without good reason. Unilever’s refreshments business was not growing as well as the home-care and personal-care ones, and the food business was lagging. In India, HUL has a similar problem. It does not sell any of the spreads brands in India, and in spite of a strong home-grown brand like Kissan in its kitty, the foods business has been sluggish.

Compare the growth of its food business with the other listed FMCG firms in India that solely sell food and beverages.  Here’s a problem that is leaving HUL hamstrung: The company sells nothing in India’s biggest packaged-food categories.

According to a 2017 report from market research firm Euromonitor, packaged foods’ top five categories are edible oil, dairy, rice/pasta/noodles, savoury snacks, and sweet biscuits/fruit snacks.

HUL’s biggest food brands are Kissan (sauces, condiments) and Knorr (soup), both categories significantly smaller than the top five. For instance, while the edible-oils market was estimated to be worth INR1,344 crore in 2017, sauces, dressings, and condiments was worth an estimated one-eighth, INR161 crore.

Besides, according to the Euromonitor report, rice/pasta/noodles, edible oil, breakfast cereals, and ice cream are expected to be among the fastest-growing categories. Given HUL’s current portfolio of brands, its refreshments business appears to be a more promising investment than the foods business.

The focus gets clearer
In combining the two businesses, HUL seems to be focused on new launches in certain categories. In a report by equities-brokerage firm Jefferies, the key takeaways from the HUL analyst meet on food included leadership in the tea business, growth in reach of Kwality Walls’ ice cream, and repositioning of instant noodles launched under the Knorr brand.

Last week, the company launched ready-to-cook breakfast mixes under the Lever Ayush brand, its first attempt to tap the breakfast cereals market.

The challenges ahead
HUL’s peers in the packaged foods business are making significant investments in the dairy business. While Nestlé has been selling milk and dairy products in India since 1961, Britannia invested INR94.72 crore in FY17, according to its latest available annual report.

However, these large firms have so far been unable to shake the dominance of local brands owned by milk co-operatives such as Amul, Mother Dairy, and Nandini. HUL will find it equally challenging.

Besides, packaged food in India (and globally) is increasingly seeing the rise of regional brands with a strong hold on their category. Recent successes include semi-urban and rural-focused mass brands like Yellow Diamond (from Prataap Snacks) and Mango Sip (from Manpasand Beverages), along with more urban brands including Paper Boat drinks, juice brand Raw Pressery, Epigamia yoghurt, and staples brand iD Foods. This leaves fewer spaces to tap and build national brands.

"This integration of foods and refreshments business will help HUL increase organisational agility and better serve local consumers while harnessing the advantage of global scale," an HUL spokesperson says via e-mail.

"Our foods business continues to deliver strong volume growth focusing on core categories. We have successfully landed innovations which will be critical to tap into a fast reshaping landscape of packaged foods."

how foreign brands can setup shop in india

How to set up shop in India
For foreign fashion brands, India's complex market and byzantine regulations make partnering with local players an attractive option. But data shows the model is bleeding.
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Soumya Gupta
28 Jun 2018
 PRADEEP GAUR/MINT VIA GETTY IMAGES
What's happening? A horde of foreign brands, large and small, are making their way to India's fashion market. Last year, Franchise India said almost 50 global retailers were planning to set up shop in India, including Greek footwear brand Migato, Japanese denim wear brand Evisu, and Greek personal-care brand Korres. Last month, Japanese fast-fashion brand Uniqlo said it was going to open stores in India with a licence for foreign direct investment (FDI) in single-brand retail.

What's the right way for the new guy to set shop in India?

 Option #1: Go it alone. The last one in the news to do this was Swedish fast-fashion biggie H&M, which came to India in 2015. This involves getting single-brand FDI licence from the government. Advantage: total control over your operation. Challenge: getting local knowledge of the Indian market.
 Option #2: Get a partner. You’re intimidated by India’s language and consumption complexity, and you’ve heard government regulations can be notoriously difficult to handle. It makes sense to pick a local partner. You can franchise your brand out to a reliable firm that has experience running retail in India. You control the design, the look of the store, in exchange for a fixed income. Your partner makes the investments and could even manage the manufacturing. Of course, for some more control and skin in the game, there's always the option of a joint venture with the local partner.
Which model should you choose if you are a foreign retail brand eyeing India? Data from the Registrar of Companies shows times are bad for franchisee operators. 
 Apart from Page Industries (Jockey and Speedo) and Genesis Luxury (Burberry, Tumi), which have been there for a while, the large franchisee operators in apparel retail are bleeding money.
 There has been a lot of churn in this business as well. DLF Brands, for instance, has almost completely stopped selling premium and luxury brands in India. In its heyday, it was the repository of top-notch foreign designers including Armani, DKNY, and Salvatore Ferragamo. The last straw came when it lost rights to run stores of Spanish fashion brand Mango to apparel e-commerce firm Myntra. In October 2016, DLF Brands said it would exit the luxury business.
 Major Brands, one of the biggest names in premium and luxury fashion in India, has recently launched American personal care brand Bath & Body Works in India. Its arsenal is formidable: Aldo, Nine West, and Charles and Keith, all marquee names globally. Yet, the losses continue.
 The franchisee space is now dominated by one player: After acquiring a controlling stake in the Genesis Group, Reliance Brands has become the single largest repository of foreign brands in India. Last week, we had written how Reliance Retail became India’s largest retailer — the foreign-brands business, from Gas and Diesel to Marks & Spencer and Muji, has played a large role in its success. Meanwhile, high-end brands like Bally, a Swiss luxury brand, re-opened stores in India in a partnership with Reliance Brands last year.
 VF Brands, one of the oldest to operate in India, has maintained a profit margin, although it’s thin.
Here is a sample of some leading companies in this business model.
 Uniqlo is the next big thing to come to India, and has chosen to do business independently with 100% FDI. So has Swedish furniture retailer IKEA that will open its first store here in Hyderabad, while French fashion icon Louis Vuitton got a licence to open its own stores in India last October. Lesser-known brands like Swiss watchmaker Daniel Wellington also decided to set up their own stores.
 "If you need to control the service element a lot more, it makes sense to go it alone," says Abhishek Malhotra, partner, Asia-Pacific, at consulting firm AT Kearney, who leads the consumer industries and retail products practice in India and Southeast Asia. "That's the only place where a franchisee model might try to cut corners because everything else — the products, the manufacturing, the look and feel of the store, will be controlled by the foreign brand."
 But franchisee operators can bleed money because they end up having little control over their own business cycle, says Govind Shrikhande, former managing director of department store chain Shopper's Stop. "In the distribution model (where you are selling the products made by a foreign brand), everything is imported into the country. So you have little flexibility on pricing, margins, etc. Then, brands will have a policy of same retail price globally, (which often means a very high price for the Indian customer). So your margins can suffer," he says. "When a partner has control over the manufacturing, and thus on the retail cost and pricing, it becomes easier to scale and get returns."

The bottom line: Shrikhande and Malhotra both say the appeal of the franchisee model lies in companies that have small markets in India. "For high-end brands that do not have a market for more than 20-30 stores in India, it makes sense to go in with a partner instead of investing in a full team, a country manager, and so on," Malhotra says. "[However,] if you're looking to sell a "masstige" brand (mass-prestige), and you want to open 50-100 stores in the country, then it makes sense to do it on your own. The fixed costs are worth incurring over that scale in the long term," adds Shrikhande.

horlicks story

Why Horlicks isn't taller, stronger, sharper anymore
From Unilever to Coca-Cola, F&B biggies are said to be eyeing the once-glorious brand, but they might be going after a dead end. The story of Horlicks is also one of how India changed. Part 1 of a two-part series.
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Soumya Gupta
19 Jul 2018
 MUHABIT UL HAQ
You know what’s a weird place to discuss Horlicks? The Hacker News portal of YCombinator — the incubator of Airbnb and Dropbox — better known for topics like ‘Qt for Python available at PyPi’.

Listen to PraneshP, a forum member who says he is from south India: “When my dad had a heart issue in 2003, his doctor strictly told him to stay away from Horlicks. But every well-wishing visitor would bring a pack of Horlicks, and we had some 25-30 packs lying around in the house.”

The rest of the thread contains barbs about Horlicks’s “insidious marketing”. One member calls Horlicks’s operations in India a “rabbit hole”.

That’s when the thread begins to make sense. Of course. What was Horlicks’s conquest of kitchens if not a classic hack?

British pharma company GlaxoSmithKline’s (GSK) Trojan Horse entered India around the Second World War, and for the next seven decades sat pretty on monthly grocery lists promising to make Indian children “taller, stronger, sharper”.

On March 27, the company said game over.

Paneer. Lots of paneer.
On that day, GSK said it would sell off Horlicks, its biggest money-spinner in India. Along with Mondelēz’s Bournvita, Nestlé’s Milo, and Heinz’s Complan, Horlicks is part of a legacy malted food drinks market that largely exists in India and South Asia.

Among the brand’s reported suitors: Unilever, Nestlé, and the Coca-Cola Company.

But why buy Horlicks? There is no good reason, if you ask Prachi Sanghavi, Mumbai-based nutritionist and director of MyDIETist, a nutrition app that helps build and track a diet regime.

“Parents still give Horlicks and all to their children, but nutritionists tell them to avoid it completely,” says Sanghavi. “We as parents need to understand that products like these are not high on protein. They are little more than marketing gimmicks. Good nutrition today means parents ensuring their children get fibre and protein.

“My clients today, I tell them to get their children into the habit of eating salads and soups. Non-vegetarian parents are giving more chicken and fish to their children, and even vegetarian parents are trying to give eggs to their children. I see a lot more paneer added to children’s diets.”

When you lose to paneer, you know your market really is dying. Malted food drinks indeed seems a hopeless business, because the notion of what is healthy has changed drastically. Carbohydrates (especially sugar) are a pariah in modern-day nutrition.

To understand the forlorn state of the business, there are few better places than Canteen Stores Department or CSD canteens. Small supermarkets set up to cater to employees of the armed forces and the police, these account for 7%-10% of the sales of major consumer-goods firms in India, from Marico to United Spirits. For GSK-CH, this channel has been a godsend. Most army kids (this writer is one), for instance, were raised on a steady diet of malted food drinks with their milk. One of the leading brands would be part of an army officer's monthly ration allowance along with dal, rice, and jam.

All that has changed now. Malted food drinks no longer occupy eye-level shelf space in many large CSD canteens in urban areas. For officers in peacetime cantonments, the monthly ration that included malted drinks was dropped, which affected sales of Horlicks.

The hit from all this is clear in the droopy performance of the stock of GSK Consumer Healthcare (GSK-CH), the listed firm in India whose sales are dominated by Horlicks and Boost, both malted drinks.Globally, Horlicks stopped being important for the GSK group a long time ago. In 2017, across markets (India being the largest), the brand made GBP500 million according to a statement released by GSK.

This is a drop in the bucket for GSK's total consumer healthcare business that had sales of GBP7.2 billion in 2016, and of GSK's total revenues of GBP27.8 billion in the same year.

In India, Horlicks’s share in the health food drinks market has stagnated and started sliding. As per GSK-CH’s annual reports, its volume share fell from 66.2% in FY14-15 to 64.6% in FY17-18 while value share has fallen from 58.3% in FY15-16 to 55.3% in FY17-18.

The kids aren’t all right
When the malted food drinks category was introduced in India, it was the land of poor milk production, way before it became the world’s largest supplier of the liquid. The effect was more pronounced in southern and eastern India where milk was even less available and Horlicks helped mothers mask the taste of the thing — sometimes diluted with water — to coax sniggering kids.

“As kids, we had several things available, including Maltova (also owned by GSK-CH),” says Amit Prasad, a mid-level executive at a large Indian bank. Prasad was raised in Patna in the 1980s. “Maltova was a fun drink, it was tasty, you could even eat it kachcha (raw, meaning in powder form, not mixed in milk). Horlicks was a daily affair because my mother believed it was the best thing for a growing boy who was studying hard. I would mix Horlicks with water. But Complan, that was the top thing. In powder form, it tasted bitter, so people thought it was obviously better for health than the others. We had Complan during important exams.”

It was a different country from the one where doctors, paediatricians, and nutritionists issue regular warnings to parents about a juvenile-obesity epidemic — India is home to the world’s biggest obese-kid population after China.

“Energy” and “growth”, the two strongest baits in malted food drinks’ advertisements, no longer guarantee jars flying off shelves. “A balanced diet that helps control weight”? Now that’s a good tag line.

"I think Horlicks is the base of the pyramid of the brown beverages and powders market," says Ambi Parameswaran, former CEO of advertising agency FCB Ulka that manages Horlicks's account. "But the market has become so large, there are many more choices. Since milk consumption has gone up, you have flavoured milk, you have lassi. And then you have competition from PediaSure (made by Abott Nutrition).”

PediaSure won a large chunk of the market despite being between 50%-100% times more expensive than Complan and Horlicks, because it wormed its way into an approval from doctors and nutritionists. "That's what Horlicks used to have some time ago, which Complan got after them," Parameswaran says. As per industry estimates, PediaSure and its variant for older consumers Ensure rake in about INR1,000 crore in sales.

“For all these [malted food drinks] brands, there is no real scientific backing to their claim that they help children at all,” says Sudhir Sane, director, department of paediatrics, at Thane’s Jupiter Hospital. “In reality, a child with a normal childhood — going to school, playing two to three hours a day — does not require any such supplements. We recommend them to children who have chronic diseases or are recovering from an acute illness.

“But [even] in those cases … we recommend one spoon in a cup of milk, while manufacturers generally require tablespoons of it,” Sane says, adding that it is high visibility via advertising that gets parents buying these supplements in the hope they’re doing all they can for their child.

Epang. Opang. Ad-slowdown pangs.
That’s exactly where Horlicks suffered its second blow. Known for carpet bombing homes with its television spots, the brand stopped getting its owner’s support.

After a long period of investment, GSK-CH’s advertisement and promotion expenses have been falling steadily. At the peak of the malted food drinks business, GSK differentiated its products by spending heavily on advertising and positioning them as indispensable supplements.

The ad push was critical because, according to nutritionists, there is nary a difference among the various rival brands. “Look at the list of ingredients. Malted sugar is the biggest component, and the quality and quantity of protein is not too high,” MyDIETist’s Sanghavi says.

Remember the ads? Complan’s “I’m a Complan boy” and Boost’s “Boost is the secret of my energy” were crucial lines to create brand recall and position them as the secret of success in school and sports. Parents bought into that message.

Reduced marketing support for Horlicks has benefited its bigger competitor Bournvita. Distributors of Horlicks we spoke to from disparate parts of India say it does between 70%-90% of Bournvita’s sales in their area.

“Kids only know and ask for Bournvita,” says a Horlicks distributor from semi-rural Rajasthan. “On television, Cadbury Bournvita ads are all that run, and so children understand only Bournvita when they think of this category,” he says, adding that others like Horlicks and Complan are sold as substitutes to the winning brand in his coverage area.

A similar story comes from a long-time Horlicks distributor in Bengaluru, who has never seen demand for malted food drinks wane.

So, back to the question: Why buy Horlicks?
In some ways, the decline is mirrored in other packaged-food brands that were staples of middle-class India in the 1980s and 1990s. Take Parle-G glucose biscuits and Britannia Marie, teatime staples for the longest time. Now, buyers can pick up everything from dry-fruit cookies to cream-filled biscuits.

"There's just so much more choice in everything," Parameswaran says. 

That brings us back to the question of what any potential acquirer expects from the Horlicks brand.

One answer: boosting their respective packaged food portfolios. Hindustan Unilever needs a daily-consumption product to add to its stuttering food business, which largely comprises Knorr soup and Kissan jams and ketchup in India. Nestlé, after the Maggi fiasco, could do with a brand that has a hefty history of trust. Meanwhile, Coca-Cola is in the middle of a long-term strategic manoeuvre to reduce dependence on unhealthy carbonated drinks.

But is Horlicks the right choice to achieve any of these goals? It’s not the advertising crimp (or the rise of paneer) alone. Horlicks has been affected by a deep shift in distribution channels and the sudden assault of protein and plant-based products that have fundamentally changed the nutritional-supplements industry in India.

More on that in part 2 of the story.

Move over malted drinks. India has fallen in love with proteins.

Horlicks is on the block, Complan is said to be looking for a buyer as well. Meanwhile, a barrage of newfangled proteinaceous treats are eyeing the newly health-conscious Indian.

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Soumya Gupta

20 Jul 2018

Free Reads

The molecular structue of whey protein; MOLEKUUL/Science Photo Library RF/Getty Images

How do you tell when a food product has become desi enough?

When Patanjali wants you to eat it.

We are talking about the newfangled phenomenon of protein bars. Or their more sugar- and carb-infused alternative, energy bars.

Do you know how many protein-bar brands are available in India? At least half a dozen homegrown ones, including Delhi's Feel Mighty and MuscleBlaze and Bengaluru’s Hyp. Patanjali’s eponymous energy bar claims to offer higher protein for its price of INR30. For comparison, a single MuscleBlaze bar sells on Amazon for INR146.

The market leader is nutrition firm Naturell's RiteBite. The firm started launching most of its products only six years ago. Today, it controls 60% of India’s protein-bar market. Beyond that, there are nearly 15 major foreign brands of protein bars sold in India either online or through major supermarkets and stores dedicated to gym addicts.

That’s just bars — a relatively piddling 2% of the INR3,000 crore-INR4,000 crore protein supplements market. Protein powders are a whole other thing. Some 51 brands are listed under protein supplements on Amazon alone.

Such is the growing clout of protein that Danone SA, one of the world's largest dairy firms, abandoned milk altogether in India to concentrate on the nutrition business, mostly protein. It extended its biggest brand Protinex to kids, and even launched biscuits called Protinex Bytes.

Forget foreign specialists. Amul, India’s largest dairy, had launched a whey protein powder, Pro, in 2012. Amul's former managing director BM Vyas now runs his own protein-powder maker Nutrisattva. Listed dairy firm Parag Milk Foods launched Avvatar whey powder last year.

Where whey powder’s sway has grown, brown powders — Horlicks territory — have stagnated. In March, GlaxoSmithKline Consumer Healthcare (GSK-CH) decided to put Horlicks on the block, marking a watershed in the history of the storied brand that came to India around the Second World War.

Neither egg nor chicken
"It started with the sports-nutrition business, which is globally for the core consumer group of body builders and athletes," says Rohit Garodia, founder of Pecan Group and EAT Anytime, a brand of energy and protein bars.

"Until the late 1990s, only eggs and chicken were considered the primary sources of protein. Think of movie visuals of athletes eating raw eggs," Garodia says. "But in the US, the sports-nutrition business had already picked up. The biggest ingredient in all this was whey, a byproduct of cheese production."

All fitness enthusiasts, not just professional athletes, know about whey protein, the holy grail of protein supplements because it has almost all the sought-after amino acids for bodybuilders and athletes.

"Very soon, the players realised that there is a larger market in India. Then they began making protein supplements for ordinary people as well," Garodia says.

Among the protein supplements that ordinary folk would have heard of or used are Threptin diskettes, biscuits made by pharma firm Raptakos, Brett, & Co., and adult protein-powder supplements like Danone’s Protinex and Ensure made by Abbott Nutrition.

"Today, there is so much segmentation in the protein supplements market alone," Garodia says. The two axes on which the market is divided are product form — bars and powders — and consumer type.

"You have the core consumer, who is into sports nutrition. Then you have the fitness-conscious consumer who goes to the gym regularly, is better informed about nutrition. And then you have the bottom of the pyramid, the mass aspirational consumer who wants to be healthy and fit but is 'casual' about it."

Combine these blossoming choices with the growing disapproval for malted food drinks in India. Doctors (especially paediatricians) and nutritionists have increasingly been dissing sugar-rich supplements: think Bournvita, Horlicks, and Complan, given India is home to the world’s largest obese-children population after China. With a little help from fad diets focused on fewer carbs, and the growing realisation that Indians are largely protein-deficient, the focus of the nutrition market shifted squarely towards protein-rich supplements.

Data from the National Sample Survey Organisation (NSSO) shows how Indians' consumption of protein-rich milk, milk products, eggs, and meat has risen dramatically since the 1990s — when malted food drinks enjoyed their time in the sun. Latest NSSO data on household consumption is available from 2011-12. Shop at the chemist
Since the demand for protein supplements originated from a space relatively unfamiliar to India — sports nutrition — it created new channels of distribution too.

This turned out to be a critical inflexion point and, as we shall see, hastened the loss of sheen of the malted food drinks business.

Protein bars like RiteBite found their way to gyms, gym-focused nutrition stores in the big cities, and finally to chemists. Pharmaceutical firms, looking to premiumise their products and sell more to the core and health-conscious category of users, found their customers more at chemists as they became more scientifically informed about macronutrients. Protein-bar brands are also given prominent shelf space — usually the glass display at the counter — at pharmacies.

Distributors for Horlicks and Boost, both owned by GSK-CH, say channel competition is growing.

"In my area, demand is not the problem. There is strong demand for Horlicks. But the customer has much more choice now, there is modern trade, there are chemists. So the demand (sales) has not dropped, it has been divided," says a Horlicks distributor in Bengaluru who has been in the business for the last 30 years and covers 90-95 retailers.

"Paediatricians and doctors are a very important channel for brands like Horlicks," says a former executive of GSK-CH. "So naturally, pharmacies are a big channel for these brands."

"I don’t take samples personally, but I do know that medical representatives of these [malted food drinks] makers come to doctors and offer them samples and pitch the product," says Sudhir Sane, director of the department of paediatrics at Thane’s Jupiter Hospital.

Amit Prasad, a banking executive, grew up on Horlicks and the like in Patna in the 1980s and 1990s. Now, he is 36 years old and deals with a high-pressure corporate job in Mumbai. His doctor, worried about his constant fatigue and stress, suggested he try Protinex with milk daily. "I always used to have two glasses of milk, daily. But I started putting a spoonful of Protinex in it ever since the doctor told me to. And my life has changed. I am more alert. I always knew Horlicks was mostly sugar, but we were told it's good for us during exams. But this actually worked."

There is another challenge for several Horlicks retailers: The brand's biggest selling unit is the 500 g refill pack, according to the distributors ET Prime interviewed. Only in Maharashtra, where malted food drinks don't sell much, did a distributor report selling more of the 'snacky' INR10 sachets of Horlicks in his area outside Navi Mumbai. Sachets often work as introduction to a product in India. 

What's a malted drink to do?
Horlicks is on sale, and this churn means it could run the risk of turning irrelevant to a large number of consumers. So what's it supposed to do?

"I can only say, when the going gets tough, the tough get going," Navneet Saluja, area general manager, India subcontinent, and managing director, GSK-CH said in a rare company call with investors in May. "People are very much focused on business as usual, delivering what they can control." (The company didn’t respond to ET Prime's request for comment.)

Among the things the company can control is a renewed focus on nutrition, as consumers define it today. With this in view it has launched Horlicks Protein+, a high-protein variant aimed at adult consumers who were flocking to newly available protein powders and bars. Horlicks Growth+ also launched a campaign for young children that focused on protein and essential nutrients, endorsed by international paediatricians.

For what it's worth, GSK-CH India's latest annual report (FY17-18) mentions "protein" 13 times versus just five times in the report from a year earlier. The earliest available report, from FY2001-02, mentions protein only twice, as a matter of industrial disclosure of manufacturing capacity. Management discussion does not bring it up.

GST refunds for exporters problems

How the mirage of GST refunds has left exporters in dire straits

How the mirage of GST refunds has left exporters in dire straits

Even almost a year after its rollout, GST continues to create heartburn for exporters. They simply aren’t getting their tax refunds.

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Soumya Gupta

22 Jun 2018a Getty Images

It all started on July 1, 2017, as the government rolled out the goods and services tax (GST). Things were supposed to be simple and seamless with not too many taxes — at least that’s how the story was sold. Firms exporting goods from India were told to pay GST on the products they exported and later claim a refund. They also had the option to export without paying GST using a letter of undertaking. 

It seemed like a perfect plan. But on the ground, the picture is very different.

As the GST portal stumbles through crashes, glitches, and an assortment of problems operating in sync with other databases, exporters have been left high and dry. Between July 2017 and May 2018, exporters were owed INR20,000 crore in refunds for the paid integrated GST (IGST) and input tax-credit claims, according to the Federation of Indian Export Organisations (FIEO).

"Liquidity is a major area of concern, particularly for MSME exporters, who constitute the bulk of exports in high employment-intensive sectors," FIEO said in its press release on May 29.

The government contested this claim in its own press release a day later.

What’s the delay?
Exporters, custom-house agents, chartered accountants (CA), and lobbyists in export councils say the GST infrastructure is simply not ready. Besides this, there is little consensus on what exactly is causing delays in refunds, and the answers vary depending on who you ask. ET Prime's on-ground research points at the following main culprits.

§  Systems aren’t ready

"We have over a crore in GST returns stuck," says Akar Gosrani, managing partner at Atlas Metal Industries, which exports cable glands and earthing accessories. "We are an MSME (medium and small enterprise), but we’re managing somehow." His company has an annual turnover of INR35 crore.

Why are the refunds stuck? Among other trifling whims, the GST network or GSTB is known to generate errors for characters like hyphens used in naming invoices.

"When the switchover to GST happened, we started paying GST and claimed it later when goods were exported. But when we submitted details, the system showed errors because we used to name our invoices as EXP-01 and so on," Gosrani explains.

"GST returns of the first three to four months are still stuck because of these errors and later due to EGM (export general manifest) issues at ICDs (inland container depots) and ports. Apparently ICDs can't file EGMs because there is no facility," Gosrani adds.

§  Coordination between customs, tax, and invoicing systems is broken

With the GST, the paperwork trail has gotten longer. According to a senior official with an exporters' council, export firms now must file return claims with the GSTN. These claims are then tallied with the customs-department filings. Once a refund is sanctioned, it is disbursed to the beneficiary exporter’s account via the Public Finance Management System (PFMS), a central government body which monitors all money paid to the taxpayers and citizens under various benefits schemes.

"The addition of the PFMS is a new complication in the tax system," the official says on the condition of anonymity. "Most exporters had no idea what PFMS is, because it is mostly used for transferring benefits under schemes like MNREGA."

Which means exporters had not set their bank accounts and other paperwork right with the PFMS to ensure that they got their refunds. What’s more, until October last year, the PFMS was still being set up to make IGST refunds to exporters. Even now, according to the official quoted above, many exporters need to sort out their paperwork with the PFMS.

That's not all. If taxes are paid on time, they often take a day to reflect on the GSTN site. That means payments made on the day of the deadline reflect as late payments the next day, and a late fee is tacked on to the original amount, according to a CA working with exporters and importers in Mumbai.

ICEGATE, the customs portal that processes export paperwork, does not communicate well with the GSTN. "When an exporter pays IGST on a shipment, it will reflect on the GST portal, but not on the ICEGATE portal," the CA quoted above says.

§  The GSTN doesn’t let you correct mistakes

According to custom-house agents and CAs who work with exporters, the biggest problem with the system is that it doesn’t have an option for companies to correct basic mistakes.

"Let's say an exporter accidentally says he is approved for a Special Economic Zone, or gets some other registration detail wrong. Right now, there is no way for them to correct their details in the GSTN. Government officials are telling my clients to apply for a new registration altogether," says the Mumbai-based CA quoted above.

Exporters and CAs seem to be prone to committing errors. The export-council official quoted above says cases coming to the council include extremely large errors. "In one case, the CA had listed a number of goods as zero rated (with 0% GST) even when they were not," the official says. "In another case, an entry for INR2 lakh was mistakenly written as INR2,000. This kind of errors is unacceptable".
The solution? "Special refund fortnights"
"Until Diwali, the government was like, numb. No one would respond to queries, and the exporters were also lax. Then, there was a jolt, and the pressure on the government began building," the export-council official quoted above says.
Since March, the government has begun releasing some pending refunds. "About 50%-60% of pending refunds are back with the exporters," the official claims.
Yet, it took a long time to get there. In March, under pressure from frustrated exporters and organisations lobbying for them, the Central Board of Indirect Taxes & Customs (CBIC) held "special refund fortnights" that invited exporters to have their errors fixed on the spot. The promise? "Officials will strive to clear GST refund applications." It was advertised as a "golden opportunity."

Two such drives have already been conducted — one in March and the other in May-June. More such special fortnights are expected, where customs agents and GST officers offer to work on Saturdays and Sundays to manually fix errors in the applications and the system.

However, how much progress the government has really made on refunds is still unclear, with the government’s own claims fluctuating wildly.
Here’s an example:
"At the end of the second special refund fortnight on June 16, 2018, INR6,087 crore IGST refund has been sanctioned," the Ministry of Finance tweeted on Wednesday, adding that state, Centre, and IGST refund claims totalling INR38,062 crore have been sanctioned so far.
That’s more than FIEO’s claim of INR20,000 crore that the government disputed just two weeks ago.
In the meantime, exporters continue to suffer
The first blow is the loss of working capital.
Like Gosrani's export firm in Mumbai, many other MSME exporters are seeing their working capital shrink as they use lines of credit and other savings to pay GST without much refund in sight. The problem is compounded because a firm cannot file the next set of GST applications if the GSTN says previous taxes have yet to be filed.
"This means, the exporter keeps paying IGST every month so that he can stay in business the next month, but does not get anything in return," the CA quoted above says.
“I have met exporters who have put their offices, their factories on mortgage just to make IGST payments,” says the export-council officer quoted above. “Most MSME exporters are in bad shape, many have been ruined. It was a bad Diwali for everyone last year.”
Nearly 70% exporters saw business grind to a halt by October last year, the official says.
Panic increased as the government took little action in November and December last year.
A previous ET Prime story ‘Importers still yearn for their lost LoU’ showed how a combination of factors has led to the drying up of credit, especially for MSMEs and those involved in exports and imports. “There is no money in the market,” says a custom-house agent in Mumbai. “I had an INR35 lakh overdraft facility that was increased to INR70 lakh against some company papers. How is that even sufficient? I draw that facility in one or two days.”
Domestic supply constraints and cash-crunched exporters are now taking their toll on the volume and value of some of India’s largest export categories. Data from the International Trade Centre shows large dips in the value of exports across the spectrum. The worst hit industries are textiles, apparel, and gems and jewellery. But then, these sectors are highly unorganised and have always had a bad track record of tax and regulatory compliance.
This leaves us with another unanswered question: Where will the GST mess leave the government’s war cry — Make in India?