How tobacco-to-hotels major ITC rose to the challenge during pandemic

ITC Chairman and Managing Director Sanjiv Puri's three years in charge have seen structural shifts that steadied the cigarettes to hotels major against a tough business environment

After fielding a barrage of questions the last two years — on the stock performance, demerger, et al — ITC Chairman and Managing Director Sanjiv Puri may breathe easy when he addresses shareholders virtually at the annual general meeting on July 20; the company clocked in its highest-ever net sales in FY22, net profit growth was back in double-digits and the scrip that had sent the meme machine on overdrive outperformed the broader benchmark indices the past six months by a long chalk.

Analysts are gung-ho about ITC’s prospects across segments. The heavy-lifting cigarettes — accounting for 37 per cent of gross revenues and 78.7 per cent of profit before interest and tax – staged a recovery with volumes surpassing pre-Covid-19 levels in H2FY22; the non-cigarette fast-moving consumer goods (FMCG) business — a major diversification for the company — saw profit before interest and tax grow more than 11.6 per cent in an inflationary environment; the hotels division is poised for a bounce-back; and the play in the agri-products and paperboards segments has upped significantly in terms of revenues and profits.

So, even as the world is in the grip of headwinds with rising interest rates and liquidity crunch, the market appears to have found a safe haven in ITC.

Brokerage firm Motilal Oswal expects the company to post 15 per cent earnings compound annual growth rate (CAGR) over FY22-24 — a marked change from a 5 per cent CAGR over FY17-FY22. In FY22, profit before tax grew by 15.5 per cent. But getting there entailed structural shifts in strategy steered by Puri, apart from a receding Covid-19 impact.

Puri slipped into the role of chairman in May 2019 after the death of Y C Deveshwar, ITC’s diversification strategist. That he would bag the top job was a foregone conclusion by then.

Succession planning in ITC had been in the works for a while, but it started taking shape when Puri was made president, FMCG business, in 2014, a position carved out for him. From there, the rise was steady: Puri was appointed to the board in 2015; made chief executive officer in 2017; re-designated managing director in 2018; and finally became chairman in 2019.

At the helm for the last three years, Puri’s strategy, according to ITC insiders, was focused on: Identifying growth drivers in each of the businesses; pursuing acquisitions as an additional growth option; restructuring of portfolio and cost takeout; using digital technology to power different businesses; and capturing evolving consumer trends.

Numbers show that the non-cigarette business is reaping its dividends (in cigarettes it’s a market leader by a wide margin). Since FY20, revenues from the agri-business have increased 178 per cent; from paperboards, paper and packaging, 69.8 per cent; and non-cigarettes FMCG grew 24.75 per cent. Profit before interest and tax from non-cigarettes has grown 42 per cent from FY20 with the FMCG clocking a 120 per cent increase.
 

ITC’s diversification – as part of a strategy to de-risk its tobacco-focused business model – goes back a long time. Paperboards and hotels were the early ones. The two-decade-old non-cigarette FMCG is relatively new with many new categories— like juices, dairy, chocolates, coffee, frozen snacks, etc —added in the last decade.

Much of the non-cigarette FMCG segment – which now accounts for 23 per cent of gross revenues – has been created organically with acquisitions few and far between. But Puri has the mindset of looking at acquisitions as a driver for accelerating growth, a company source said.

So, at the peak of the Covid-19 pandemic, in July 2020, ITC made its largest acquisition, Sunrise spices, for a total consideration of Rs 2,340 crore, adding to the top line and bottom-line of the FMCG segment.

The high-margin spices business was generating a lot of interest and there were other private equity and strategic players in the fray, sources close to the deal pointed out, which is why it went through despite the pandemic. 

Smaller acquisitions followed in FY22 – like minority stakes in Mother Sparsh, a premium ayurvedic and natural personal care start-up, and Mylo, a one-stop platform addressing parenting needs of consumers.

“The last three years have seen a good scale-up through acquisitions. ITC has the muscle power in terms of advertising budget and distribution, which it can use to take small acquisitions to the next level,” said Abneesh Roy, executive director- institutional equities, Edelweiss.

Internally, structural changes were made on the digital front and cost management. Puri – who led ITC Infotech from 2006 to 2009 – made sure that every business looked at digital technology as a primary core strategy, and it paid off.

For instance, in the paperboards and specialty paper business, various initiatives for digitalisation and implementation of Industry 4.0 technologies enabled margin expansion by 230 basis points over the last two years.

On the cost takeout front, the cash-guzzling lifestyle retailing is being phased out. But the non-cigarette FMCG business has been strengthened in other ways as well. Foods – at 82 per cent of segment revenues – have been organised into clusters with chief operating officers (COOs) in charge, many of whom have been lateral hires from Dabur, Unilever, Britannia, and so on.

What lies ahead? According to analysts, ITC is in a good place currently. “All businesses are firing – cigarettes are doing well after a long time; FMCG margins may be under a tad pressure but have more than doubled in the last 3-4 years; paperboards margins are at an all-time high. The agri-business is doing well, and even hotels should become profitable,” said Amnish Aggarwal, director-research at Prabhudas Lilladher.

The ITC stock was on pins and needles till about last year. Punitive taxation on cigarettes -- the segment that moves the needle for the market -- following the goods and services tax (GST) regime in 2017 had led to a drop in the share of legal cigarettes. But the last two years have been stable on the tax front, enabling the legal industry to claw back. And in H2FY22, ITC’s cigarette volumes crossed pre-Covid levels.

The cigarettes division has not been Puri’s only challenge. In FY20, he was confronted with an economic slowdown that actually set off the disruption in supply chains. Then Covid-19 followed, impacting many of the business segments. But Puri has charted his own course to steady the ship.