India’s largest cigarette maker, ITC Ltd, which also makes paper and paperboard, is betting that India’s growing middle class will pay a premium for branded paper cups and plans to roll out its Spectra brand, in a test market now, across India.
ITC supplies the disposable cups to hotels and restaurants as well as to beverage companies such as Coca-Cola India Inc., PepsiCo India Holdings Pvt. Ltd and Nestle India Ltd.
“Given the rapid changes in lifestyle, we feel that the time is right to enter the consumer segment to popularize at-home consumption,” said Pradeep Dhobale, chief executive of ITC’s paperboards and speciality papers business. “We will gradually enlarge the market coverage.”
Spectra paper cups are being tested at some 400 stores in Hyderabad, which is close to a Rs35 crore paperboard factory that ITC is setting up.
According to an internal ITC assessment, the market for disposable paper cups in India is about Rs1,000 crore annually. “We are trying to create a new category space with Spectra,” says Dhobale. “We have leveraged ITC’s strengths in producing world class paperboards, state-of-the-art printing and nationwide distribution to create Spectra.”
ITC is betting Indian urban consumers will pay more for convenience, hygiene and fun. The company says that of the about four billion cups bought each year, a tiny portion is used at home.
“The growth prospects are huge in this business,” claims Gibson Vedamani, chief executive officer of Retailers Association of India, an industry lobby.
With Tata Tea Ltd, Hindustan Unilever Ltd and coffee chains such as Barista and Café Coffee Day expanding their retail vending operations, ITC is planning to boost sales to such customers as well.
ITC currently produces 400,000 tonnes of paperboards and fine paper a year.
The segment contributed around 11% to its total revenue of Rs5440.1 crore and 12% to the profit before tax of Rs1028.8 crore in the second quarter ended September. Cigarettes account for 84% of the company’s profits.
“Paper cups may not generate huge revenues, but it is a logical progression for their paper business,” notes Anand Shah, an analyst with Angel Broking Ltd, a Mumbai-based brokerage.
ITC has already announced plans to invest Rs2,500 crore by 2009 to make more paper products and also to increase its production capacity by more than five times to 200,000 tonnes.
The Indian Paper Manufacturers’ Association estimates that the rapidly increasing consumption of paper and paper products could lead to a shortage of around 30 lakh tonnes of paper and paperboard by 2010.
On average, paper prices have gone up by about Rs2,500 per tonne over the last one-year.
India imports paper from countries such as Finland.