ITC's diversification strategy pays off - The Economic Times
November 01, 2010
Co's Revenue From Non-Cigarette Business Shows Steady Rise; FMCG Business Grows At Fastest Rate In Sept Quarter
Jwalit Vyas & Kiran Kabtta Somvanshi
ITC, often called the elephant that can dance, has once again pleased its investors with better-than-expected results for the quarter ended September 30, 2010.
The company has managed to log a double-digit growth in its net sales and, unlike other FMCG companies, has been able to improve its operating margins on a year-onyear as well as quarter-on-quarter basis.
ITC currently focusses on four-business groups - FMCG (cigarette and non-cigarette), hotels, paper & packaging, and agribusiness. Predominantly still a tobacco company, ITC is steadily gaining success in increasing its earnings from its non-cigarette diversified businesses.
Though cigarettes continue to contribute more than 70% of total net revenues, the operating profit earned from this business has sequentially dropped from 83% of the total profit in the quarter ended June 2010 to 77.5% in the September quarter this fiscal. The cigarette business contributed 62% of revenues and 88% of the operating profits. In the latest September quarter, the y-on-y growth in net sales stood at 16.3% with all the businesses giving a handsome growth while the net profit grew by 23.5%. Logging a growth of 22%, the non-cigarette FMCG business has been the fastest growing business revenuewise. This was closely followed by the agri-business that grew by 21.5%.
Comparison of earnings across segments showed that paper & packaging business had achieved the highest growth of 32% followed by the hotel business. Operating margins have also improved across all its businesses. The hotel business, which had been dented due to recessionary pressures, is now on its path of steady recovery. The only lossmaking business in ITC's portfolio continues to be the non-cigarette FMCG business. It includes packaged foods, garments, stationary products and personal care products.
The earnings still remain negative because of the high costs involved in the business development, brand building and gestation costs of other packaged foods and personal care products. However, the good news for investors is that this fast-growing segment has been steadily reporting declining losses quarter after quarter.
Though ITC continues to invest and grow in its traditional business of cigarettes, it is well-equipped to beat the intense competition in the non-cigarette consumer and agri space due to its large distribution network and the vast experience in handling cigarette brands. Investors shall continue to benefit as the company's strategy of derisking its portfolio is executed successfully.
