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Consumer Products (Cautious): Observations: field trip to Patna - Kotak

Posted On: 2017-09-25 10:10:29

Observations: field trip to Patna. We witnessed a healthy level of in-market activity on our recent trip to Patna and nearby suburban and rural markets with the much-disrupted wholesale distribution channel showing signs of adjusting to the new normal. That GST is procedurally exhausting was a common feedback we heard. Select interesting observations - (1) surprisingly high salience of premium hair oils and large-pack biscuits and (2) high visibility of HUVR's Ayush range even in the rural markets.

Wholesale limping back to normalcy; companies stepping up efforts on direct reach

We visited Bihar (Patna, Hajipur and Bidupur) and met several FMCG distributors, wholesalers and sub-stockists to get an on-ground view on post-GST rollout scenario; key takeaways are -

- Underlying growth at the retail level is healthy and organized players (especially in foods like biscuits) are benefiting from lower competitive intensity from local players post GST rollout.

- Salience of wholesale in Bihar is relatively higher at 50-60% (especially in urban Patna as it acts as a feeder market) and wholesale continues to remain a key drag. Most wholesalers have registered for GSTN but many aren't yet sharing their GSTN number with distributors and continue to operate a hybrid model (~60-70% business through GSTN and the rest as unregistered sales) due to scrutiny scare (afraid to show full scale of operations) and wafer-thin margins.

- Most companies are investing heavily in expanding their direct reach which is helping recoup part of sales lost due to disruption in wholesale. Frequency of retail visits to wholesalers is decreasing as retailers are buying from expanding network of sub-stockists. We see this transition as a long-term positive for FMCG companies given better control on channel.

- GST return filing (especially uploading) has been a big issue for most wholesalers/distributors and is extremely time consuming (even though most have required data ready). Another issue highlighted by a few channel partners was lack of acceptance of Rs5/10 coins; several distributors turned down retail/wholesale orders as many were paying with bags full of coins which banks aren't readily accepting.

Few local-level observations (cannot be extrapolated at national level) -

Foods - (1) Parle and Lays were dominant in snacks/chips, (2) biscuits was dominated by Parle with strong presence of local players like Biskfarm and Anmol; surprisingly, biscuits was largely sold in larger/family packs versus most other products/categories which were dominated by smaller SKUs/LUPs and (3) Nestle baby food/nutrition range and Horlicks were highly visible across GT/chemists.

Beverages - (1) CSD was dominated by Coca-Cola with limited visibility of PepsiCo and (2) Maaza was the most visible brand in Mango juices followed by Frooti; we saw very limited presence of Mango Sip (largely in by-lanes/interiors of old Patna city).

Others - (1) hair oils is a big segment in Bihar; most visible brands were - Bajaj ADHO in LHO, Nihar in CNO, Himgange in cooling, Dabur Amla in Amla and Sesa and Kesh Kanti in ayurvedic hair oils, (2) Cibaca Vedshakti has started gaining visibility even as feedback on recall was mixed, (3) facewash segment was dominated by Himalaya and Clean & Clear and (4) HUVR's Ayush range and even recent launches like Citra were quite visible across stores.

Source: Equity Bulls

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