Researchscope

ITC’s innovative e-Choupal scheme has made significant progress. Since its June 2000 launch, the model has become rural India’s largest internet-based initiative covering 1,300 choupals linking 7,500 villages. ITC plans to extend its reach to one- lac villages over next 10 years. ITC will likely invest Rs 0.5-0.75 bn over the next five years.

• The choupals are likely to significantly strengthen ITC’s agri-trading business. The initiative creates an enviable agri-commodity sourcing capability and IT-enabled infrastructure for rural distribution. Revenues from the initiative will likely reach Rs 4 bn in F2003 and Rs 12 bn by F2007 and could reach Rs 22-25 bn if the model is extended to other commodities.

• We retain Equal-Weight rating and introduce price target of Rs 700 Cigarette volume and mix improvement will likely drive 16% earnings growth over next two years. A premium of 12% on EV/EBITDA to a global tobacco sector average seems justified by higher profit growth.

• We have an In-line view on the Indian Consumer industry. Sluggish demand growth and intense competition continue to dominate the sector. Valuations have now become accommodative.

Summary and Investment Conclusion: Equal-Weight: ITC has been aggressively pursuing its innovative e-Choupal (a choupal is a village gathering place) scheme since its launch in 2000. The e-Choupal network is expected to build and extremely strong and unique rural sourcing and distribution infrastructure by leveraging on the company’s relationship with the farmer community.

From a modest start in 2000, it has already set up nearly 1300 e-Choupals, covering 7500 villages and serving almost one million farmers at an estimated investment of Rs 100-150 million. ITC will likely to generate revenue of Rs 4 bn from this project in F2003. ITC has proposed to extend the reach of e-Choupals to one-lac villages over the next decade. It will likely invest Rs 500-750 mn to create this network and could, on a conservative basis, generate Rs 12 bn revenues by F2007, we estimate.

If the model can be successfully replicated for more commodities, we calculate the company will generate close to Rs 22-25 bn in revenue by F2007. ITC has been diversifying into various businesses to deploy the significant surplus cash flow generated from its core cigarette business. It has significance operations in hotels, paper packaging and agri-commodity businesses. While some of the earlier diversification efforts (edible oil and financial services) have been unsuccessful, ITC management has expanded into such operations as greeting cards, lifestyle retailing, foods and e-Choupals over the past two years. The infrastructure creation through the e-Choupal model looks unique. Also, with strengthening of ITC’s agri-commodity business, the network will offer new revenue opportunities:

• The infrastructure should enable ITC to become a reliable supplier of goods and services and buyer of quality and cost-effective farm produce.

• The infrastructure should allow ITC to form alliances and partnerships with other consumer companies to distribute their products through the supply chain.

• The digital infrastructure can possibly be used for channelising services such as credit, insurance, health and education and serve as a foundation for creating a futures market later.

We believe that the capital commitment from ITC will be marginal compared with other highly capital- intensive projects undertaken by it as well as its free cash flow. We expect the project to become profitable and fund its own growth within the next three to five years. The agricommodity sourcing and trading business tends to have a high turnover and low margins (2-4%). However, better exploitation of the infrastructure through other services should accelerate the margins and profitability of the e-Choupal project in the long term. We like ITC’s foray in this diversification on account of its synergy with its agri-commodity business, low capital commitment, limited downside risk and upside potential if the innovative model proves to be successful.