Smoking Out Its FMCG Counterparts
Is ITC’s ambition of achieving Rs 1 lakh crore turnover by 2030 in the FMCG business a realistic target?
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Many years ago, Y.C. Deveshwar embarked on a mission to transform ITC to an FMCG major. It was a plan to introduce everything FMCG from biscuits to snacks and soaps and more. It worked wonders as ITC achieved Rs 10,000 crore turnover in the business, leaving some well-entrenched big FMCG brands way behind. Two years ago, Deveshwar embarked on another plan - this time, to boost FMCG revenues to over Rs 1 lakh crore by 2030. In FY17, ITC's new FMCG segment crossed Rs 14,000 crore of consumer spend. But the new target still calls for expanding the FMCG business seven times in the next 13 years.
After he first announced the new vision, Deveshwar delegated the next part of the growth plan to his successors. The man behind ITC's insatiable growth stepped aside early this year after 25 years at the helm; and his next in command Sanjiv Puri has taken up the mantle of running the business and gunning for the growth targets.
The scale and size of the target is huge. FMCG revenues have to increase by 14 per cent every year for the next 13 years if this division has to hit the coveted Rs 1 lakh crore mark. Will the company be able to scale up to a size never seen before in the FMCG business?
Sanjiv Puri, CEO and Executive Director of the ITC Group, in an exclusive interview to BW Businessworld, said he is optimistic. "FMCG is the space where there is a lot of opportunity because the market is set to grow. Penetration is low, per capita is low so there is a lot of headroom to grow. This is the area where we have done quite well in a short span of time."
The cumulative sales of ITC's non-cigarette FMCG brands has crossed the $2-billion mark in the fiscal ending March 2017, at Rs 14,000 crore of consumer spend growing by 16 per cent over the previous year, the company disclosed in its annual report.
ITC, which has built several mega-brands in diferrent verticals over the years, has today created FMCG brands that are posing a major challenge to other established players in the space. It's the third largest food and beverage FMCG player in the country having overtaken established names like Hindustan Lever, a few years ago. It is poised to be the largest foods company in India within 2 years.
Focus on FMCG
ITC's 25 FMCG brands span packaged food, personal care, education and stationery products, apparel, agarbatti and matches. Of this, Aashirvaad, which operates in packaged atta, ghee, spices and instant meals is the largest brand. Aashirvaad atta is a Rs 3,500 crore brand in consumer spend growing by over 16 per cent followed by Sunfeast, (biscuits) at over Rs 3,000 crore. "ITC has the advertising and marketing muscle apart from innovating newer products," says Abneesh Roy, Senior VP at Edelweiss Financial Services. "These are the things required for an FMCG firm to succeed apart from a strong supply chain and distribution network. Their target is achievable they have done well in key segments," he says.
Others like Classmate stationery products, Yippee! instant noodles and pasta, Bingo! chips and Indian snacks are over Rs 1,000 crore each and Vivel soap, Mangaldeep agarbatti and Candyman confectionery are over Rs 500 crore each in terms of consumer spend. ITC is the market leader in packaged atta, premium cream biscuits and notebooks and is the second largest player in snacks, instant noodles, deodorants and incense sticks.
ITC also prides itself on new product launch capabilities and its ability to nationally rollout different brands in the country. "Last quarter, we launched 15 products. This was possible because we have a large distribution strength of 30,000 people," says B. Sumant, President, FMCG Business, ITC.
The company's packaged food business is already profitable; but its other FMCG businesses are yet to deliver optimistic numbers. But at the operating level, ITC's other FMGC business turned profitable back in FY14. While its foods business is expected to be a major contributor to its goal of achieving the mega target from its non-cigarette FMCG businesses by 2030. It is more than likely that now with the focus on introducing more brands and improving penetration, the contribution to profits can begin by 2020.
Puri notes, "In a year where we also had demonetisation, a growth of 13 per cent in foods is significant." He pointed out that ITC's focus is on creating the supply chain infrastructure, which is going to give the company the scale and also deliver fresh products at the lowest cost. ITC is embarking on strengthening its infrastructure and is currently looking at creating 20 integrated consumer goods manufacturing units.
There are challenges however, to be the undisputable number one in FMCG as the company is competing with established players in various categories. Its latest acquisition B-Natural is competing with decade-old brands such as Dabur's Real and PepsiCo's Tropicana. The company has made three acquisition - Savlon, Shower to Shower and B-Natural. "We may look at more acquisitions to remain competitive in the market, and to grow both organically and inorganically in the personal care space where we look to add significantly to the entire FMCG revenue target," says Sameer Satpathy, CEO, Personal Care Products Business, ITC.
Cigarettes, The Profits Hub
The removal of excise and other duties by Central Board of Excise and Customs (CBEC) has come as a relief to the heavily taxed cigarette business. Analysts believe the scrapping of excise duty can give ITC the scope to roll out low-cost cigarette models and gain further market share.
ITC is already the market leader in cigarettes with a share of nearly 80 per cent. Under the GST regime, cigarettes have been put in the highest tax slab of 28 per cent. "Tax burden has reduced. It will increase the consumption of cigarettes thereby lowering the prices and increasing the volume sales for ITC," says Anita Rastogi, Partner Indirect Tax and GST, PwC.
Though 58 per cent of ITC's net revenue now comes from non-cigarette segments, a major part of its pre-tax profits still come from the cigarette business.
Additionally, a GST compensation cess, comprising a 5 per cent ad-valorem tax and a specific component-based on cigarette length is likely to be imposed. According to analysts, the GST Council's move to put a cap at which cess could be levied on tobacco products is a welcome development for cigarette makers such as ITC as it provides a certainty to the tax regime for them.
Significantly, ITC has been marking an increasing presence in the non-cigarette FMCG segment, hotels, paper and agri-business, with the legal cigarette industry facing continuing pressure due to the cumulative impact of steep increase in taxation and regulatory pressures.
The company is also exploring the possibility of entering the healthcare space in the country by setting up multi-speciality hospitals. ITC has 13 businesses, which operates on its unique revenue-profitability model - the 'triple bottom line' model, which focuses not only on economic value creation but also on creating environmental and social capital. This has helped the company grow multi-fold in the last two decades making it a $8 billion enterprise with a market cap of over $60 billion.
ITC has 100 hotel properties across the country and investments have been made on guest experience, on reservations, revenue optimisation and getting the cost structure right. "Green hotels also makes you competitive on your power cost, which are significant. We are working on an asset right strategy. Besides commercialising the properties under construction, we will enhance our focus on managing other properties," said Puri.
These days, ITC is well-entrenched as an FMCG brand with sizeable market share and a clear path to growth and profitability. As an FMCG player, ITC has clearly established its footprint in various households. It has beaten some of the older players in the FMCG sweepstakes in various categories. And if the analysts are to be believed ITC's investments in infrastructure, manufacturing facilities, and distribution will probably deliver a steady growth of over 15 per cent in revenues till FY30. Thus, ITC's transformation as an FMCG company would be complete. It is something that Y. C. Deveshwar would be proud of.
* ITC became the fourth firm to cross Rs 4 trillion in terms of market capitalisation
* The risks in its core cigarette business are receding, with CBEC removing excise and other duties on tobacco which will benefit ITC to drive in volume growth in its cigarette business
* ITC has 13 businesses. Its unique revenue/profitability model which is the 'triple bottom line' that is responsible for the company growing multi-fold in the last two decades making it an $8 billion enterprise with a market capitalisation of over $60 billion, while at the same time creating environmental and social capital for the country
* The cumulative sales of ITC's non-cigarette FMCG brands has crossed the $2-billion mark in the fiscal ending March 2017, at Rs 14,000 crore of consumer spend growing by 16% over the previous year
* FMCG is ITC's fastest growing business apart from major businesses such as paperboards, agri, cigarette, hotels and IT. Cigarette, however, contributes the largest - 42% share of the entire revenue while 58% revenue comes from other businesses.
SUUTI's ITC stake a blessing in disguise for the government
The Indian government holds a substantial stake in ITC, not directly, but through Suuti, which stands for Specified Undertaking of the Unit Trust of India. This entity was formed back in 2003 when the UTI Act was repealed forming distinct entities.
With the formation of Suuti, the government got a sizeable stake in the diversified conglomerate ITC. Till early this year, Suuti had held 11.12 per cent of ITC's shares, or 134.51 crore shares.
But in January, the government sold 2 per cent stake in ITC through a block deal to LIC for a consideration of Rs 6,700 crore. Now Suuti's stake in ITC is just a little over 9 per cent. ITC's total market capitalisation stands at about Rs 4.05 lakh crore, which, in turn, values the government's stake in ITC at a whopping Rs 37,000 crore.
Recently, a PIL was filed against the government and the state insurer, LIC, which holds substantial stake in ITC arguing that insurance companies and the government should not hold stake in companies that promote tobacco consumption. For now, though, the government via Suuti continues to hold the stake, and given that the government has set an ambitious target of disinvestment of Rs 72,500 crore in the recent Budget, the Suuti stake could be quite handy.