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ITC looks to accelerate growth in non-cigarette businesses

LiveMint logoLiveMint 11-09-2017 Sounak Mitra

New Delhi: ITC Ltd, the cigarettes-to-shampoo company, is working on an eight-point strategy to reinvent itself and accelerate growth in its non-cigarette businesses, especially branded consumer packaged foods, a segment it entered 15 years ago, chief executive Sanjiv Puri said.

The “create the new ITC” strategy is part of the Kolkata-based company’s plan to reach Rs1 trillion in revenue from its non-cigarette packaged goods business by 2030.

The growth in the branded packaged food business will be fuelled by the company’s entry into fruit, vegetables and sea food, adding one new product every quarter.

The company has also lined up an investment of Rs25,000 crore in 65 projects, including 20 integrated factories for consumer goods with logistics facilities, covering an area of 28 million sq. ft across the country. Of these, three units will be operational this year, and four more over the next one year.

“Given the fact that the capital employed, and people, is disproportionately higher in new business areas, essentially fast moving consumer goods, we’ll grow there faster. We also hope to see the economy get into a new growth trajectory (leading to higher consumption), and we’ll have a faster growth, essentially the non-tobacco segment,” Puri told reporters.

To be sure, about 80% of ITC’s capital expenditure at present is in the non-cigarette business that employs around 88% of the company’s total headcount, according to a company statement. In the year to March, cigarettes accounted for more than 60% of the company’s total revenue of Rs55,002 crore, according to company regulatory filings. ITC has no plans to shift focus from its traditional tobacco business, Puri said.

Under the eight-point strategy, ITC wants to bring in products and services for consumers that are “superior, very distinct or differentiated or new in the market to address future needs of consumers, backed by significant investments in research and development, make strategic investments in creating physical infrastructure and capacity building that would help the company stay closer to the retail market, said Puri. Besides, the company will reinforce its investments in agricultural back-end that it has been building for the past 20 years or so.

ITC also plans to scale up its existing and newer categories in an integrated fashion, boost its last-mile distribution mechanism. At present, ITC products reach about 4.3 million of the estimated 9 million retail outlets in India.

Of this, about 2 million are under ITC’s direct distribution network. In the past few years, ITC has been working on developing a strategy for factory-to-retail point distribution within a day.

ITC’s aim is to create Indian brands that it can take to overseas markets, stay more competitive in the domestic market and, outdistance competition. “There’s a cost to it now, and there will be depreciation and challenges. But, in our India First strategy, we want to create value, capture value and retain value in India,” Puri said.

ITC wants to create brands that will bring royalties to India, rather than pay royalties to multinationals for selling brands owned by them. “At every occasion of consumption, why can’t India have its own brands that are powerful? We should be able to fund our overseas expansions and bring back royalties,” he added.

ITC’s immediate focus is on its packaged foods business, which crossed Rs8,000 crore last fiscal, making ITC the third largest packaged food company in the country. “We want to become the largest food company in India,” Puri said, but declined to give a timeline.

ITC’s internal target is to achieve this within the next three years.

“The market opportunities are tremendous, as the penetration is low and per capita consumption is very low. Food particularly is a very big opportunity for us. This is a segment where our enterprise strengths best match the opportunities in market. We have a very strong agri-backend, the expertise of the hotels that are known for the quality of cuisines, so the expertise on food, and we have very strong trade marketing and distribution apparatus from our traditional business that we can leverage. The advantage is we can integrate all competencies to support our new business like food,” Puri said, adding that a team of 350 scientists at ITC’s research and development centre at Bengaluru is working on “products for tomorrow and day after” that are linked to health and wellness.

To do this, ITC wants to launch one new product each quarter, mainly fruits and vegetables. “We are going to bring in many of these items to the consumer either in fresh form, or in a shelf-life enhanced form which could be either frozen, dehydrated or puree,” said Puri.

In June, the company launched prawns under the ITC MasterChef brand. “Next month, we’ll launch potato in fresh form in—low-sugar, and anti-oxidant rich. We are also working on dehydrated onions that will be in market by end of the year. Every few months, we’ll bring a new commodity in market,” added Puri.

For potatoes, the firm may create a new brand and fruits may be sold under the B Natural brand.

Among ITC’s portfolio of packaged food products, Ashirvaad atta (wheat flour) is the highest revenue earner at Rs3,500 crore, followed by biscuits brand Sunfeast, which crossed Rs3,000 crore.

According to Puri, ITC would gain from cross-leveraging trade-marketing and distribution strengths from its traditional cigarettes business to reach more consumers with its packaged food products, a highly under-penetrated segment.

Cigarettes, however, will remain one of ITC’s key businesses. “The idea to invest in new businesses is not to divest the core businesses. Divestment does not make sense. It will be extremely negative for the country and that would end up with illicit trade growing up,” Puri said.

He however expressed concern over the rapid increase in taxation on cigarettes in recent years and said regulations should not discriminate against the cigarette industry.

ITC has also started experimenting with cultivation of medicinal plants in a 110-acre plot near Bhopal in Madhya Pradesh. The company is working on health and wellness products—in both the food and personal care segments—which can be termed therapeutic.

Last week, investment firm Macquarie downgraded ITC shares to ‘neutral’ after cigarette volumes declined “significantly in July-August”.

Jefferies also downgraded ITC to ‘Hold’, citing regulatory uncertainties leading to pressure on cigarettes volumes. Jefferies estimated 11% earnings per share (compounded annual growth rate) over FY2017-20.

“Other FMCG businesses have seen healthy performance from packaged foods brands such as Sunfeast, Aashirvad, Bingo and Yippee, while personal care categories have been subdued. We remain positive on foods and stationery part of the portfolio. However, a slew of new launches like juices, dairy, chocolates, etc., and personal care losses would limit segment margin expansion potential,” Jefferies said in a note on 6 September.

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