ITC: Enduring Value

Sab Saath Baadhein

Media Centre

In 10 years, Deveshwar wants ITC to be the number-one FMCG player 30 Jun 2011

Business Standard

Yogesh Chander Deveshwar, who was recently appointed chairman of ITC Ltd for another five-year term, has led the cigarette giant’s successful foray into the FMCG sector. In six years, it has become a Rs 5,000-crore business. In an interview with Surajeet Das Gupta and Ishita Ayan Dutt, he says he wants to treble the company’s FMCG business number-one, adding product categories such as dairy and beverages, in the next 10 years

For ITC, 83 per cent of profits still come from cigarettes and FMCG’s contribution is negative, though the new businesses are important as a percentage of your sales. When do you see that threshold changing and these businesses standing on their own?

You should look at how each business is operating in its own competitive environment. Our paper and packaging is the most profitable in that industry, and the largest, so that settles that segment. In hotels, although we are the second- largest, we are the most profitable. If you see our Ebidta margins or PBIT, we are at the top in hotels. We have the most profitable agri business in the country. So far as FMCG is concerned, I would look at how much value we have created. Assuming I put Rs 5,000 crore of our FMCG business on the block for people to bid, my competitors would lap it up. Our estimate is that we will get at least Rs 10,000 crore. That value has already been created.

Within FMCG, our education and scholastics, agarbattis and foods are already in the positive. Our biggest drag is from the latest in the FMCG business, the personal care. International competitors are now going for volume and there is intense competition. We have to also play that game, considering we are newcomers. And yes, there is a price war.

You have got into many diverse businesses. Are there any synergies at all?  

With the prospects of the Indian economy very positive, it is an opportunity for companies like ours to take advantage of this and have multiple drivers. At first sight they may look diverse, but there is synergy within different growth segments. For example, our packaging business is part of the supply chain for our FMCG businesses. Our agri business is the supply chain for the foods business. All those look to be diverse business segments but they have synergies within. So, FMCG is an area where we have now said we want to be the number- one player.

By when? 

Well, I said that six years ago, but we have already accomplished that, if we take cigarettes and FMCG together. Since that time, we have added Rs 5,000 crore of new FMCG businesses. But now we are saying, even if you take cigarettes away, as a vision for ITC, we would like to be the number-one in the FCMG business arena. Since it’s a vision, it’s not something that’s going to happen tomorrow or day after, but this is something that’s worth pursuing, say, over the next 10-15 years.

Today what is the gap between the number-one player and you? 

At the moment, the difference would be around Rs 15,000 crore. With Rs 5,000 crore, we are already perhaps the number-two player in non-cigarette FMCG. With cigarettes, we are actually the number one in FMCG. The FMCG business is not a homogenous business. The range is huge. We are into education and scholastic products, which are doing extremely well and stand at about Rs 500 crore.

Then there are the foods businesses, but there are segments within that business – staples and spices, ready-to-eat, ready-to-cook, biscuits, confectionery. Within confectionery, there is a range. We launched noodles under the Yippee brand, which already has a 10 per cent market share in three months. And there are many more segments, that ITC is yet to look at.

Are you looking at the dairy business? 

Yes. We would look at it in good time. We are already notorious for doing too many things simultaneously. But there is a limit to how many things we should do. In good time, we would look at other segments.

Why are you building so many brands?

What makes us an interesting company is that we are building greenfield businesses in India with Indian brands, and the advantage of Indian brands is that the goodwill remains in India and you don’t have to pay royalty to anybody overseas, unlike some of the other international players. As we go into the future, we are clear that by being merely a commodity player we are not going to get a position of pre-eminence.

India will gain its rightful position if it has access to intellectual property, because tomorrow’s business is going to be of intellectual property and the business of brands. So we must have intellectual property, an R&D base and brands that earn premiums not just in the Indian market but also internationally. We know that the FMCG business is going to triple in size in the next 10 years, so we would like to triple our FMCG business in the next five years. We want to grow faster than the market.

When you say beverages, would that include aerated drinks? 

We have not decided as yet, but that is a large market. It’s not that we have decided to enter, I am only recounting the segments where ITC is not present at the moment, and in good time we would look at it.

Given the value that the FMCG business has created, wouldn’t it make sense to make it a separate company?

It’s too early. We can look at it, when it become Rs 15,000 crore. Also, there are lots of segments. It’s not by accident that we have built so many growth brands so quickly. None of the companies compete with such a wide range.

You have a lot of cash. Would you look at acquisitions? At this moment, you have mostly grown through greenfield ventures.

You can grow through acquisition quickly, but as seen with companies that go for acquisitions, they spend the rest of their lives rationalising the brands. Sometimes they increase the number of brands, sometimes they shrink. It is a harder and more arduous and difficult road to grow through greenfield, where we can establish a rational brand architecture. In the long run, it will be more rewarding than if you were to collect a set of brands quickly. That is why all our brands are crafted and they know which areas they will operate in. There is very little confusion as to what brand has to play what role and there are clear segments allotted to each of the brands.

Do you see yourself entering multi-brand retail? 

The answer is no (in capital letters). We don’t want to compete with our customers. Modern retailers are our customers and we don’t want to compete with them. If we compete with them, then our products will suffer.

There were a lot of plans for e-choupal, but has the initial aggression tapered off? You have not grown the e-choupals in numbers at all.

We are waiting for reforms. The APMC Act did not get amended in all the states with fidelity. They did not follow the model legislation from the Centre. So it has in a way become a licence permit raj at the state level. The other reason is that at least three times the Essential Commodities Act has been imposed on us. The moment the Essential Commodities Act is imposed, you cannot store or have a storage facility, and the moment you can’t store, you can’t buy. We have not further expanded because of this problem.

In the hotels business, you are present in four different price segments? Would you explore budget hotels segment?

No we are not looking at that. We have a presence from star to upscale category. We have already signed up 63 hotels in the Fortune category and with all these four segments together, we are nearly 100 hotels.

Your hotels business is stuck in India. Will you look at foreign properties? 

If we get a very sweet deal, we will go, otherwise there are abundant opportunities in India. The question that we ask is, what we will bring to the table that others are not able to. But in India, what we can bring in is distribution, food and beverages expertise, knowledge of the Indian consumer. In India, there is a lot of synergy that we can bring to the table. And the cost of running an operation outside is huge.

You have equity stakes in Hotel Leela and EIH. Is it only a treasury operation? You had once wanted to collaborate.

Yes, I had. But only the media is excited, the other side is not. Otherwise, we are looking at value. We have already made Rs 500 crore from our investment in EIH. We purchased the shares when when they were around Rs 35 a unit. Why we invested only in hotels and nowhere else is because we know the industry. We would also be ready to look at investments in other areas that we know about.

When do you think you can have a scenario where 50 per cent of profits will come from non-cigarettes?

In the next 10-15 years. But it’s difficult to predict, because we don’t know how tobacco will behave with taxation, etc. But other businesses are growing faster than tobacco – both top line and bottom line. But you can’t compare a 100-year-old business with businesses that are six to seven years old.

Lots of people are experimenting with water. Is that something you may look at?

Pepsi and Coca Cola have an advantage in that area. They have aerated drinks, so they already have a cold chain distribution. When you enter it shouldn’t be just water. So that should perhaps be last in our priority list. The whole distribution is different, there are different kinds of trucks, and investments are in distribution.

Most companies create a structure for succession. Is an insider tipped to be your successor?

That will be my preference. What is important is to get the right person. But it’s very far away. It’s not a smart idea to distract people with succession. People have still to perform. The only thing that has happened now is that some flexibility has been built that I could if I chose, a part of this term as non-executive. That’s all. I was advised that you need not do this. But I thought it would be a good idea to bring some flexibility, rather than running to the shareholder again. But it’s still very far away.

There is a perception that ITC is a centralised company and that it has a lot of money, as it has a monopoly over the tobacco market. So it generates cash which it can put in other businesses, make mistakes and still continue. Is that a fair criticism?

People see me as the face of the company, especially in times of difficulty and taking tough decisions, and hence they think that all decisions are mine. But that is impossible to run a company like ITC with such diverse businesses. Each division is run by a CEO. They are in various parts of the country. If I wanted to centralise all powers, I would have had them sitting in Kolkata, which is not the case. Our whole concept is of distributed leadership. My role is like a wholetime non-executive chairman of all the businesses.

Also, it is untrue that we do not have competition. It is an uncharitable way of looking at things. Our foreign competitors are putting FDI in India, despite ban on tobbaco. And after all, who is competing with the objective of letting competitors flourish at our own cost? Incidentally, Philip Morris sold its stake before the change in policy banning tobacco FDI. They are much more aggressive in the marketplace because they are bringing in money through the wholesale route. So it is not that there are no competitors.

Is it also true that tobacco companies like yours are finding it difficult to attract the country’s best talent, which is moving out into other sectors? Is that a challenge?

I can understand that. If it were a pure cigarette company, people would have fear. But with what we have done, this problem should have got mitigated. If there is no talent, how is it possible that we are doing well? Surely we cannot compete with banking and financial services, but the comparison should be with related industries.

© ITC Limited