Focus on FMCG business paying off - The Economic Times
May 26, 2012
ITC's strategy of focussing on the non-cigarette FMCG business appears to be slowly paying off. The business now accounts for 18% of the company's net revenues and along with the agri business segment is now the second-largest segment after the traditional main business of cigarettes.
ITC ventured into this segment more than a decade ago and in that time the segment has grown at a compounded annual growth rate of 55%.
Though it is still incurring losses (Rs. 215 crore for FY12) for the company - given the high investment into brand-building in any consumer-centric business - the losses have been steadily coming down every quarter. Considering the current run rate, the business could well achieve break-even in another couple of years.
Its performance for the quarter-ended March was strong. While the cigarette business grew 17% - largely value-driven - the non-cigarette FMCG business grew by 23%, agri-business 31%, paperboards 6.9% and revenues from hotels dropped by 5%. ITC managed to maintain margins at just above 32%.
Compared to its dominant position in the cigarette business, ITC had to face stiff competition from regional as well as national players in most non-cigarette categories such as biscuits, soaps, shampoos, atta, snacks, noodles, confectionery and lifestyle retailing.
However, the rich cash flows generated by the cigarette business are helping the company create strong brands in the high-clutter category and, thereby, reduce its dependence on the highly taxed and regulated cigarette business.
ITC's agri-business feeds into the cigarette and other FMCG businesses and provides a strong back-end for these businesses.
The company's leadership in the value-added paperboards justifies its presence in the paperboards and specialty papers business, despite the business not being formidable in size (contributing 13% to the company's top line and 10% to bottom line).
However, it remains unclear as to the business plans of ITC for other smaller segments such as its hotel business (that contributes a paltry 4% to its total revenues and 3% to profit).
