Business Today




there is no reason to panic. “In three years up to FY20, our EPS has gone up by 47 per cent. Our ROCE has gone up 24 per cent, we have robust cash flows, sharper capital allocation and much clearer dividend policy.”

The advantage of having all businesses under one umbrella is the synergy they can derive from one another. “The FMCG business, the new baby, has been built leveraging a lot of enterprise strengths. For instance, we are using our agri-business expertise to build our frozen snacks portfolio. Our hotel business’ strength of understand­ing cuisines enables us to understand consumer palates and what is required in a kitchen. We are, therefore, able to launch relevant products,” says Puri.

He, however, says that nothing is cast in stone. “At one point of time, hotels and paperboard were separate companies, we brought them in with a purpose, and these businesses have acquired scale and market standing over time. We periodical­ly review how to organise ourselves in the context of competitiv­e environmen­t, external challenges as well as business strategy and maturity.”

Though demerger of the hotel business isn’t on the cards anytime soon, Puri admits that the existing model is causing stress on its balance sheet. Soon, it plans to move to an asset-light, management contract model. “At the moment, there is demand destructio­n in this segment. We will continue to examine alternativ­e structures in line with industry recovery dynamics. An enterprise exists for stakeholde­rs, not just for today, but for tomorrow as well. It must add value to all stakeholde­rs on a sustained basis. We have to recognise that.”

Consumer Bandwagon

ITC sees the next wave of value creation happening in its FMCG business, but industry isn’t particular­ly gung-ho.

Though its consumer business showed promise in initial years, it has not lived up to it. Apart from atta and a few categories in snacks, it doesn’t have market leadership in most other segments. In the ` 40,000 crore branded biscuits market, while Britannia and Parle have 30 per cent and 27 per cent market shares, respective­ly, ITC is a distant number three at 11 per cent.

“There is lack of clarity on what they are trying to build. They are doing many things. The turnover is growing but there is no clarity on what winning means in terms of market share and profitabil­ity,” says a former CEO of a leading FMCG major. He says operating margins of the non- cigarette FMCG business have been in the region of 6 per cent, as opposed to HUL’s around 22 per cent.

Though FMCG has been a star performer in FY21, with Savlon growing 13.9 times and Nimyle 4.5 times, experts say most recent launches have been Covid- centric and one isn’t sure if the performanc­e will last in the longer term.

Be it food or personal care, ITC has been a late entrant in most categories. “ITC has done better in food than in personal care,” says Roy of Edelweiss. “They should exit soaps and shampoos, as they don’t have a right to win there. It is completely dominated by large MNCs who have been around much longer. They have created strong brands and have access to global R& D, which is a huge advantage. ITC, on the contrary, is a strong No. 2 only in deodorants, and that’s not a segment where margins are high,” he adds.

Roy says FMCG EBITDA margins, despite improvemen­t by 180 basis points, are still way behind the likes of HUL. This raises the question if the company should focus on fewer categories and brands instead of adopting a carpet- bombing strategy? The company, after all, is in 14 food segments. Its FMCG portfolio has 25 brands. It has forayed into chocolates, which is dominated by Mondelez (with over 50 per cent market share) and has, therefore, had no choice but to operate in the luxury segment, which is highly niche. “ITC has invested heavily in attempting to innovate, but product innovation has not made too much of a dent on consumer mind- space,” says Raghu Vishwanath, MD of brand valuation company Vertebrand. Vishawanth believes that stock prices are as much a function of perception as profit. “People need to believe in long- term equity and sustainabi­lity of the brands, irrespecti­ve of the financial muscle of the organisati­on.”

A senior stock market analyst says the debate on margins, profitabil­ity and scale has put ITC in a chicken- andegg situation. “Deveshwar’s target was to have ` 1 lakh crore of sales by 2030. With its existing core, ITC can’t achieve that number. In order to get scale, they have to be much more diversifie­d and that’s going to impact margins. So, they can either focus on scale or profitabil­ity.”

FMCG Strategy

The ITC management isn’t concerned that it’s not leading in categories where it operates. Nor does it consider a presence in multiple categories a bad idea. “We are creating a new core for the future with innovative offerings in various stages of developmen­t. Some of them are being scaled up, some of them are being piloted or incubated. The idea is not necessaril­y to scale up every category at the same time. We will progressiv­ely scale up as we validate the concept or business model in select markets,” says Puri. One example of ITC exiting a non-performing business is lifestyle retail. Industry believes it was a smart move. “There is absolutely no right to win for any FMCG company in retail. ITC should take similar decisions in businesses such as personal care,

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