PAYOFF TIME FOR ITC
INDIA'S LARGEST FMCG FIRM'S CIGARETTE AND HOTEL BUSINESSES CONTINUE TO WEIGH ON VALUATIONS, MAKING INVESTORS RESTLESS. CAN A DEMERGER HELP IT ATTRACT INVESTOR ATTENTION?
When Sanjiv Puri took over as Chairman and MD of ITC from Y.C. Deveshwar, his mandate was clear — carry forward the vision of transforming the cigarette company into a diversified consumer- centric conglomerate. ITC’s dependence on cigarettes had begun to dent its stock market performance even during Deveshwar’s tenure. In his 21-year stint as Chairman and CEO, ITC entered many consumer categories, including staples, snacks, biscuits and personal care. By the time he hung up his boots, the FMCG business was a sizeable ` 10,500 crore.
Under Puri, the FMCG business is now almost ` 15,000 crore. FY21 has been one of the best years for the non- cigarette FMCG business with EBITDA margins at 9 per cent, up 180 basis points over FY20. “Our segment EBITDA margins have improved by 640 basis points between FY17 and FY20. In FY21, ITC’s FMCG revenue grew 16 per cent on a comparable basis, which is nearly double the industry peer group average and all of that is led by organic growth. Almost 75 per cent of our FMCG portfolio has grown by as much as 20 per cent,” says Puri.
Despite disruptions caused by the pandemic, ITC’s revenue grew 3.3 per cent to ` 53,155.12 crore in FY21. Its profit after tax fell 13.3 per cent to ` 13,389.80 crore but is still 40 per cent higher than rival Hindustan Unilever’s ( HUL’s) ` 7,963 crore.
However, none of this has rubbed off on the company’s stock market performance. ITC’s stock was at ` 202 on July 2, 2021, down 16 per cent from ` 245 on June 30, 2016. In contrast, stock prices of HUL and Nestle have sky-rocketed and are at ` 2,475 (` 898 five years ago) and ` 17,698 (`6,488 five years ago), respectively.
Why isn’t ITC able to win attention of investors? “More than 80- 85 per cent EBIT still comes from cigarettes. EBIT margins of cigarettes have gone up. Hence, dependence on cigarettes remains high. Therefore, overall multiples have been coming down. FII shareholding has come down 13-15 per cent in the last three-four years,” says a senior stock market analyst.
Most new businesses are still in the investment phase and haven’t matured enough to impress stock markets. Analysts say even if ITC is able to expand EBIT and EBITDA margins of non- cigarette businesses by 15 per cent in the next five years, they would be one-fifth its cigarette margins. “For transformation, the share of cigarettes in EBIT has to come down from 80 per cent to 60 per cent in the next five years,” says an analyst.
Multiples of cigarette companies have halved globally. Investors are shying away from investing in tobacco companies on fears they may not abide by global environment, social and governance ( ESG) norms. ITC has been hit despite having the best ESG scores in the world. “In the last four years, Sanjiv Puri has made positive changes. ITC has huge financial muscle. It is the largest FMCG company in profits. It has all the components to win. ESG is the only reason the stock is not moving,” says Abneesh Roy, Executive Vice-President ( Research), Edelweiss Securities.
The other factor going against the diversified conglomerate is its hotel business. The past year has been especially difficult, with hotels not being allowed to operate due to the pandemic. ITC’s hotel business shrunk 65.8 per cent in FY21. “ITC has best-in- class hotels, but since the business is tied to macro factors, investors find it much riskier. That’s the other reason why the stock gets a lower valuation,” says Roy.
The Puri-Deveshwar strategy is to make ITC future ready. ITC has adopted an aggressive innovation and product launch strategy. Puri has not only taken his mentor’s vision forward but also crafted new growth drivers. He ramped up FMCG investments both organically and through acquisitions — ITC acquired Savlon, Nimyle and Sunrise brands. He also made moves in agri-business by getting into value- added products. It recently launched frozen vegetables, fruits and sea-food under Farmland and Kitchens of India brands. Puri claims ITC is well on its way to achieving the ` 1 lakh crore sales target by 2030. “We are serving 3.6 times the markets we served earlier, we are covering 1.6 times more outlets, our stockist outlets have been multiplied four times.”
Not only has it strengthened its core portfolio of staples (Aashirvaad Atta), biscuits (Sunfeast) and snacks ( Bingo, Yippee! Noodles) and entered into adjacent categories ( pulses, cakes and masalas), it has forayed into dairy, chocolates and coffee too. In one year, it has had 121 launches, right from a host of Covid-19 products (surface disinfectant sprays, surface wipes, clothes disinfectant spray and vegetable cleaners) under the Savlon brand to ready-to- eat food and snacks.
Arun Kejriwal, Founder, Kejriwal Research and Investment Services, finds brand extensions in a highly commoditised segment like staples unique. “This is a segment where they are capitalising on their agri- sourcing strength. They have direct control over the price and quality of what they are buying and are able to do the right kind of value- addition for the consumer.”
Over the past three years, Puri has hired a lot of senior people. Ali Harris Shere, former CMO of Britannia, was brought in to give a facelift to the biscuits and cakes business, while Sanjay Singhal was hired from Dabur to head the dairy and beverages business. “They have got good lateral hires from other FMCG companies. It is a large business for ITC and getting the best talent from outside and not fully depending on internal talent is a good strategy,” says Roy of Edelweiss.
In paperboards, it tried to improve efficiencies by investing in pulp made from hard wood. “Across the world, pulp is made with soft wood. India doesn’t have soft wood. So, we invested in innovative technologies to convert hard wood into soft-wood pulp. This has been a significant intervention and given us lot of efficiencies,” says Puri.
Way back in 2000, Deveshwar gave Puri the task of setting up an ecommerce business. Since the idea was way ahead of its time, the project never took off. He says creating tech- based business practices had always been his passion, and the moment he took over as head of ITC, digitisation was among his top priorities. While the ITC e- store launched during the pandemic last year is the most obvious intervention, almost 10 per cent noncigarette FMCG revenue, says B. Sumant, Executive Director, has been coming from ecommerce. The company