New Delhi: ITC Ltd’s consumer goods business presents the “maximum potential for value creation in the future”, the cigarette-maker’s newly appointed chief operating officer (COO) Sanjiv Puri said on Thursday in one of his first interviews.
The segment, which does not include cigarettes, allows the company to “leverage its enterprise strengths to the fullest”, said Puri, explaining why ITC expects to ramp up revenue from branded packaged foods and personal care products to Rs.1 trillion by 2030.
Puri, 53, was appointed COO of ITC in July, and is seen as the likely successor to Y.C. Deveshwar, who will step down as executive chairman at the end of his term in February 2017. Deveshwar will continue to helm the company as non-executive chairman for at least three more years to oversee the emergence of younger leaders, ITC said in June.
Deveshwar spearheaded the drive into the packaged consumer goods market to derisk ITC from its over-dependence on the cigarettes business.
ITC had ventured into the business with “some advantages”—derived from its robust cigarette distribution network—and “built new ones” as it launched businesses “ground up” through the past 15 years.
At some point, Puri expects the consumer goods business to be taken abroad, too, but clarified that there were no immediate plans to do so.
For now, he wants to focus on the domestic market where the company is trying to get every product right. If it can achieve that, profitability will come on its own, he said.
ITC has started to supply small quantities of its consumer products abroad, but it isn’t backed by any marketing push. “We want our brands to grow and generate enough resources to support their expansion abroad,” Puri said, adding that this is going to take a while.
“The company’s constant endeavour to enter higher growth segments, especially in the branded packaged foods segment, has aided it in carving out a significant place for itself in the Indian FMCG (fast-moving consumer goods) market, with revenue of Rs.9,704 crore in FY16,” broking firm icicidirect.com had said in a recent research report.
It said it expected ITC’s consumer goods business to grow at a compound annual growth rate of 12.6% over the next two years. “We believe ITC has an edge over other FMCG players (because of) its established distribution network of cigarettes,” icicidirect.com said in the report.
But Puri said it’s not just about ITC’s distribution strength. Product innovation is just as important as trade marketing to scale up the business segment. The company has over 350 scientists working for it. It has also secured over 500 patents, according to Puri.
To build the “most competitive supply chain”, ITC has started to build large integrated manufacturing facilities across India, primarily to produce consumables such as staples and juices. But some facilities will also have the capability to produce other consumer goods, according to Puri.
Investment in these facilities will range from “a couple of hundred crore” to Rs.1,500-1,700 crore, said Puri.
According to a recent research report by Edelweiss Securities Ltd, at least 20 such facilities are under various stages of implementation. Puri said ITC is pursuing 65 different projects (not all related to consumer goods) which would entail a total investment of Rs.25,000 crore.
Alongside, ITC will continue to invest in building new hotels at a time when most other competitors have stopped spending on real estate because of what they claim to be excessive room inventory in key markets. For ITC, too, cash flows from the business are under pressure, but it is bullish on the long-term potential of hotels in India.
“We are not in the business for the here and now,” said Puri, rejecting theories that the key to boosting profitability is to remain asset-light. “We are extremely optimistic about the future of this business and about the Indian economy,” Puri said. “You cannot create assets when the upturn comes.”
Unlike other hotel chains, Puri said ITC is “more likely than not” to manage its own properties, especially upscale ones. It takes time to build such properties, he added.
Speaking about ITC’s cigarette business, Puri confirmed that there were small gains in sales by volume in the June quarter, but they could at best be described as “stabilization”. According to Edelweiss’s estimates, cigarette volumes in the June quarter had grown 3-4%.
Makers of legitimate cigarettes such as ITC continue to face pressure from contraband—or tax-evaded cigarettes—and “demand created by legal products is increasingly being fulfilled by illegitimate ones”, he said.
Trade margins that retailers get from suppliers of contraband—whether produced locally or imported from outside India—are “huge” and “by some estimates, tax arbitrage in cigarettes is now more lucrative than gold”, according to Puri.