Building up a cigarette company for the future

After a stint spanning more than two decades, Y C Deveshwar steps down tomorrow as CEO, leaving behind an ITC very different from the one he inherited

On February 5, when Yogesh Chander Deveshwar steps down as chief executive officer after a stint spanning more than two decades, he will be leaving for his successor an ITC very different from the one he inherited.

Deveshwar donned the role of ITC's executive chairman in 1996. Since then, the company's revenues have grown tenfold to ~51,582 crore and profit before tax 33 times to ~14,958 crore. Total shareholder returns have grown at a compound annual rate of 23.3 per cent. From fewer than a 100 stock keeping units (SKUs) in 1996, the distribution highway now handles over 1,500 SKUs of multiple businesses, directly servicing over two million retail outlets across trade channels in 100,000 markets.

But that is the ITC story in numbers. Deveshwar's biggest achievement is that the ITC of today is more than just a cigarette maker. ITC is no longer just defined by its cigarette brands, India Kings, Classic, and Gold flake, it is also identified by Sunfeast cookies and biscuits, Bingo! snacks and Aashirvaad staples and ready meals. Fast-moving consumer goods (FMCG) businesses, nurtured over the last decade or so, have crafted a portfolio of 25 mother brands commanding consumer spending of more than ~12,000 crore.

The Aashirvaad brand has crossed the ~3,000-crore mark, Sunfeast over ~2,500 crore, and Bingo!, Classmate and Yippee have exceeded ~1,000 crore each.

As Deveshwar said at his last annual general meeting in the joint capacity of chairman and chief executive, "Compared to the size of ITC in 1996, the non-cigarette businesses alone represent a size akin to creating five ITCs of that time."

ITC's non-cigarette businesses have grown 17-fold in the last two decades and registered a net segment revenue of ~23,000 crore. The share of cigarettes in total revenue has steadily been coming down: From 56 per cent in 2012-13 to 42 per cent in 2015-16. Yet analysts grumble new businesses do not enjoy the profitability of the cigarette business. That may be so, but it is in step with Deveshwar's philosophy of “building for the future”.

It was not easy getting where ITC is now in the noncigarette business.

Diversification was not new for ITC. Since the late 1960s, almost every ITC chairman has tried his hand at it. But by the time Deveshwar took charge, most had failed, or were faltering. Ajit Narain Haksar had opened ITC's first hotel in Chennai, the ITC Welcom group Hotel Chola, in 1975, followed by paperboards. Jagdish Narain Sapru led the foray into financial services and took the iconic Bukhara restaurant to New York, apart from setting up the edible oils business, ITC Agro Tech. Krishan Lal Chugh set up the trading company, ITC Global Holdings Pte, but his stint was more memorable for a public spat with British American Tobacco (BAT), the singlelargest shareholder in ITC, over a foray into the power business, which the multinational had blocked. BAT had even tried its hand at taking control of ITC.

The biggest challenge for Deveshwar was to restore the reputation of the storied Viginia House, corporate headquarters of ITC, tattered by an investigation by the authorities under Foreign Exchange Regulation Act, against 14 members of the then current and past management, including two chairmen. A restrospective excise demand of ~803 crore, amounting to three times the annual profit of ITC at that time, was made on the very first day Deveshwar took charge.

The challenge, as Deveshwar told shareholders recently, was to steady the ship first and articulate a superordinate vision for the company. And how.

Much to the angst of BAT, Deveshwar stuck to diversification even though there were exits from financial services, edible oils, and overseas restaurants. FMCG, hotels, and information technology were identified as new areas of growth.

From 12 hotels in 1996, ITC has grown to over a 100 properties across four brands, ITC Hotels, Welcom Hotels, Fortune, and Welcom Heritage. There is a lot more coming; 10 hotels are in construction in the luxury and five-star segments, while 30 hotels are on the drawing board in the midmarket to upscale segments. And that when most peers have gone asset-light. The mantra, here, too, is long term.

In 2000, ITC launched its most-awarded initiative, the echoupal, a model that enables farmers to obtain information on mandi prices and good farming practices. Constrained by regulations, it has worked wonders for the food business, which is ITC's biggest success in the FMCG segment.

In food, ITC is number three, with revenues of ~7,100 crore; it is eyeing the top slot.

That is part of a bigger target to grow the FMCG business to ~1,00,000 crore by 2030.