When ITC Chairman YC Deveshwar moved into the hot seat five years ago it seemed that he was taking over a troubled empire. Former Chairman K L Chugh had just departed after a long-running battle with key shareholder BAT Industries. And ITC’s profits had been hit by dud investments in global trading and businesses like ITC Agrotech.

Fast-forward five years and times have changed. ITC’s net profits have leapt to a mind-boggling Rs.1,006 crore on net income of Rs.4,341 crore. The company has turned again into a profit-making juggernaut that is bringing in richer returns each year.

Back in 1996 when Deveshwar moved to the helm net profits were Rs.261 crore and net income was Rs. 2,608. This year profits are up 21 per cent from one year ago. Each year profits have risen by over 20 per cent.

"Continuous investments in brands coupled with effective cost management including interest cost have enabled growth in profits", said the company in typical management jargon when it released its first quarter results last week.

How did Deveshwar do it? The company doesn’t admit it, but Deveshwar must take credit for swiftly closing down the failed diversifications on which crores had been spent. Net profits took a hit in 1996 after he closed down the unprofitable diversifications. But, the company hasn’t looked back since then. At this year’s annual general meeting, shareholders are expected to give Deveshwar a five-year extension to his tenure till 2007, presumably in appreciation of his success in building up ITC’s net profit.

Ironically, now that ITC is flush with cash it is again looking at diversifications. It will be investing heavily to build new hotels and in the infotech business. It is also getting into the greeting card and fashion businesses. Total investment in non-tobacco lines is expected to be around Rs.2,000 crore in the next five years.

For a company where earnings per share has grown four times in the last five years, ITC Ltd is remarkably shy about talking on the reasons behind its success. But, it is clear that focusing firmly on the tobacco business has helped it to power ahead. "Every aspect of the cigarette and tobacco business has been toned up to improve margins", says a top-level executive.

The Indian tobacco industry has undergone changes during the last five years and ITC has, not surprisingly, been the biggest winner. More expensive products have become popular and this has obviously helped the company’s profits. For instance, Indian customers are now smoking filter cigarettes and top-hinged packs have taken over from the old slide-type packs. "From only 5 per cent of sales, hinged packs now account for half of the company’s sales", said sources. In addition, filter cigarettes now constitute nearly 80 per cent of sales. Heavy sponsorships and advertising has helped build up the more expensive brands.

"This is in contrast with the general trend in the fast moving consumer goods (FMCG) category, which has seen a shift to smaller packaging units like shampoo in satchets, and aggressive price cuts" said a professor of marketing at the Indian Institute of Management in Joka.

Company insiders also insist that internal restructuring has helped towards the surge in profits. In the last five years the different wings of the company have worked more closely together than in the past. In the past, the concept of separate business divisions had resulted in managers having little or incomplete knowledge of what others were doing.

Businesses like greetings cards and lifestyle retailing were greatly aided by the hotels division’s understanding of how to create the right environment and the tobacco division’s skill in consumer research and assessing preferences.

The new businesses were being built up by a team comprising new employees as well as managers drawn from older businesses. The paper, printing and packaging business helped start up the cards line. As the cards business grew, that in turn has helped the older business group focus on more profitable and superior products grades based on consumers’ preference.

The strength of the ITC name came in handy in the selection and opening of stores, with 25 being inaugurated in two months and new ones coming up now at the rate of one every other day. Similarly, the ITC brand helped the company move into the high quality end of the garment retailing business without a hitch.

ITC believes that the hotel industry has been a good fit with the tobacco business. In a high revenue business like cigarettes, hotels offered substantial depreciation benefits (Rs. 139 crore in 2000-01) and also help to build up the asset base. The name of the game in the hospitality industry is staying power, for hotels take about five years to earn back their investments. "Cigarette revenues sustain the business for the period, for from then on, every rupee earned is free," says an executive.

So, it isn’t surprising that ITC is drawing up big plans in the hotel industry. The company will invest Rs.1,500 crore to build 1,500 new rooms in three years. Occupation is not expected to be a problem, as long as the economy is growing. Deveshwar was once the head of ITC Hotels and this business is reportedly close to his heart.

Despite the huge profits from the cigarette industry, the company is aware that the good times may not last. The Government is tightening regulations and ITC has been forced to stop sponsoring the Indian cricket team. In such a situation, keeping up brand loyalties will get more difficult all the time. Initiatives like setting up `Wills Sport’ stores will only have a limited impact owing to the small number of such stores and their upmarket profile.

ITC’s brands will also be under attack from foreign brands beamed through satellite TV channels to Indian homes. The immediate danger is clearly the inflow of foreign cigarettes through informal channels. Following the lifting of quantitative restrictions, foreign brands are now sold with impunity by retailers.

The company also faces a threat from an unexpected quarter. For years it has battled bidis that have burnt a hole in the cigarette market. Now, however, it is facing a threat from chewing tobacco. The market share of cigarettes in tobacco sales has declined from 19 per cent five years ago to 16 per cent today, and most of the market share has gone to chewing tobacco. Even the poor man’s bidi has been hit by the sudden fondness for chewing tobacco. Chewing products now constitute 36 per cent of the tobacco market and there are no prohibitions on advertising and sponsorships.

It isn’t surprising, perhaps, that the focus is again turning to new businesses, ITC has invested around Rs. 500 crore on its non-tobacco businesses. That is slated to climb to around Rs.2,000 in the next five years. As much as Rs.800 crore will be spent to build up the infotech business. ITC has already made significant investments to web-enable the Indian farmer. ITC’s web plan for the farmer, christened `e-Choupal’, is about populating India’s agricultural villages with Internet kiosks. Farmers use this technology infrastructure to access on-line information from ITC’s farmer-friendly websites.

The lifestyle retailing division will be setting up 50 stores in the country by March 2002 besides a master design facility at Gurgaon and a cutomised online fashion consultancy.

Tobacco will get investments in the region of Rs.500 crore or so in the next five years. The size of the tobacco business in 2000-2001 was Rs.7,890 crore out of ITC’s total sales of Rs.8,678 crore, against the previous year’s tobacco sales of Rs.7,170 crore out of a total of Rs.7,953 crore.

In other words, by 2006-7, when Deveshwar’s extended time ends, there will be a new look ITC. The cigarettes and hotels blue-chip would be a retailing powerhouse with an established new economy business.

PRADEEP GOOPTU