ITC’s new chief will have a tough act to follow

The management change at the top comes when ITC’s flagship business of cigarettes is facing tough times with rising excise duties and health concerns around tobacco

Executive chairman YC Deveshwar will move to a non-executive chairman’s position, making way for a successor. Photo: Mint
Executive chairman YC Deveshwar will move to a non-executive chairman’s position, making way for a successor. Photo: Mint

The baton is being passed at ITC Ltd. Executive chairman Y.C. Deveshwar will move to a non-executive chairman’s position, making way for a successor. The new chief has not been announced yet, making the transition incomplete. As of now, Deveshwar will guide and mentor a new executive management. The market will be watching to see if this means business as usual or a new ITC could be in the making. The company’s share fell by 1.12% on Wednesday.

The new chief has big shoes to fill. This change comes when its flagship business of cigarettes is facing tough times. Rising excise duties on cigarettes and public health concerns around tobacco pose a serious threat. ITC’s cigarette volumes have been declining, unthinkable a decade or even five years ago.

Fiscal year 2017 is the first year in many which is seeing a milder increase in excise duties. But the government’s compulsion to tax to grow revenues and the anti-tobacco lobby’s pressure to curb consumption are unlikely to go away. The proposed goods and services tax is an opportunity. Managing to get cigarettes under it will be a big victory, as it will mean a more certain and level tax regime.

Another key task for a new chief will be to assess ITC’s diversification bids. The hotels business has proved tough for most Indian firms and ITC is no exception. ITC says paper and paperboards are strategic for the packaging used by its cigarettes division. Segment-wise data for the company is available since FY03. If we look at the increase in profits between then and FY16, cigarettes contributed to 84.4% of that, paper 5.9% and hotels only 0.4%. The consumer goods business contributed 1.7% but that’s a different story.

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The consumer goods business was Deveshwar’s master stroke, although a cigarettes-consumer goods combination was first made famous by RJR Nabisco Inc. The consumer goods business contributed to 31.3% of incremental sales in this 13-year period and is now more than half the size of the cigarettes business. ITC’s focus was on building scale in the original segments, moving quickly to achieve this, and then identifying new ones.

But profitability has played second fiddle to sales growth. In the 13-year period, the consumer goods business has reported slender segment profits in only the past two years. It is still nowhere close to what consumer goods firms earn. The pressure on cigarette sales and profits may have made ITC a bit cautious in recent years. The new chief executive may examine whether a rethink on the growth-profitability mix is needed, including a focus on fewer categories and brands.

ALSO READ: The house that Yogi Deveshwar built

He or she no doubt has a tough act to follow. Deveshwar’s term has seen a good mix of sales and profit growth. Sales grew at a compound annual growth rate of 14.3% while Ebidta (earnings before interest, taxes, depreciation and amortization) increased by 18%. That is better than Hindustan Unilever Ltd’s (HUL’s) comparative figures of 11.9% and 14.9%, respectively. Shareholder wealth has risen by 51.8 times since March 1996, compared with HUL’s 18 times. The initial phase of a new appointee’s tenure may be to simply do things better. Eventually, the new CEO will need to chart out a course that leaves a lasting imprint on ITC’s future, just as Deveshwar did.

The writer does not own shares in the above-mentioned companies.

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