Coming up next, ITC as India's #2 FMCG player - DNA, Mumbai
May 21, 2013
Gestation periods are long in the business under normal market conditions and longer given the competitive intensity in India.
Twelve years after entering the fast-moving consumer goods business, cigarette major ITC has steered it into the black.
That's no mean feat, say analysts, because gestation periods are long in the business under normal market conditions and longer given the competitive intensity in India.
But now that the inflection point has been transcended, they expect ITC to go neck and neck with biggies Hindustan Unilever and Nestle.
Arnab Mitra and Akshay Saxena of Credit Suisse point out that ITC's FMCG business had sales of Rs 7,000 crore last fiscal and at the current pace of growth, could deliver Rs 8,500 crore in this fiscal.
At that topline, ITC will outgun Nestle as India's second-largest FMCG business (excluding spirits and paints makers).
Others concur. "It may take them a little more than a year, but by sales it will not be surprising to see the company in the top two," said another analyst with a foreign brokerage house, who did not wish to be named since he's not authorised to speak to the media.
Harsh Mehta and Krishnan Sambamoorthy of HDFC Securities said ITC has been growing way faster than peers in the FMCG space. "The growth has been in the range of 20-30% in the past decade and is expected to maintain this pace going ahead, which is better than several other players in the consumer space," they wrote in a note.
However, getting into the top league on profitability will remain a challenge for a few more years. That's because the company is still in the expansion stage and is believed to be entering new categories such as dairy, juices and even oral care.
And this will require huge investments which will affect margin expansion.
So what's the reason behind the success?
It's a cussed adherence to the premiumisation strategy, which means going for the top end consumer.
Over the past decade, there has been significant uptrading among consumers as standard of living improved and hundreds of millions could afford to be more aspirational.
The finance ministry's Economic Survey data show India's per-capita income nearly doubled in the last five years from Rs 35,825 to Rs 68,747.
Not surprisingly, the premium segment has been generating good revenues and driving growth for various incumbents.
ITC also cracked the code with top-end products such as Dark Fantasy Choco Fills biscuit, multi-grain Aashirwaad atta and Fiama Di Wills body wash.
The sales of value-added and premium products, which continued to grow at a faster clip, helped portfolio premiumisation and enriched ITC's sales mix," said Abneesh Roy of Edelweiss Securities in a note.Another step that has come in handy is aggressive advertising and investments in the brand.
"This has been possible because the cigarette business is a massive cash cow. ITC has also managed costs well through backward integration, which, in turn, has had an added benefit: it expanded their distribution reach in the rural areas," said another analyst with a domestic brokerage, who, too, sought anonymity.
