Six years after it entered retailing, food and rural marketing, half of ITC’s sales come from these businesses, not cigarettes

Last month, when shareholders of ITC Ltd cleared another five-year term for chairman Yogesh Chander Deveshwar starting next February, the obvious question was: what next? Deveshwar’s first five years had begun in turmoil, with ITC under attack from the taxman and Deveshwar himself getting criticised when he dared to dream about growing ITC’s paperboards business, then a separate company. Over the next five years, Deveshwar unleashed an array of initiatives aimed at entering new business areas by capitalising on its core competencies.

Deveshwar today basks in the success of his model: multiple drivers of growth that draw on ITC’s inhouse talent and a huge cash reserve that its core cigarette business churns up. As some of India’s biggest groups prepare to get into the farm-to-table foods retailing business, the Rs 16,510-crore ITC is patted on the back for its e-choupal model that it hatched in 2000.

The numbers do all the talking today. In the latest quarter, the ITC’s non-cigarette divisions fetched over 50% of net sales (Rs 9,791 crore), against 15%-20% a few years ago. Renaming the cigarettes business as the “fast-moving consumer goods” segment, Deveshwar has divided it into two — FMCG cigarettes and FMCG Others. It is in this segment that ITC has put its diversifications, from branded packaged food and lifestyle retailing to greeting-gifting-stationery, safety matches and incense sticks. The FMCG Others category alone fetched sales of over Rs 1,000 crore in 2005-06, although startup and brand building costs left it with a loss of Rs 172 crore.

Among the other three segments, agribusiness topped 2005-06 sales with Rs 2,678 crore, paperboards, paper and packaging followed with Rs 1,896 crore, and hotels reported sales of Rs 783 crore. On the profits front, barring FMCG (Rs 2,537 crore), paperboards, paper and packaging topped with Rs 351 crore, followed by hotels with Rs 258 crore and agribusiness with Rs 91 crore.

Insiders credit ITC’s successful foray into new businesses to the management structure in the organisation. Each business is run by a chief executive who is empowered to do so without interference but is also monitored. At the top is the board of directors, headed by Deveshwar, which does the strategic supervision. A step down is the corporate management committee, again headed by Deveshwar, which has all the wholetime directors as well as people from senior management and is responsible for strategic management. Below this are divisions (if the business is big enough) or strategic business units (if it is part of a segment), run by a chief executive.

The corporate management committee has, apart from Deveshwar, directors SSH Rehman, A Singh and K Vaidyanath, other veterans like KS Vaidyanathan, R Srinivasan, Anand Nayak, RG Jacob and BB Chatterjee. Then come the actual business heads, people like Kurush Grant of the India Tobacco division, P Dhobale of paperboards & speciality papers, RS Naware of foods and S Sivakumar of international business. Virginia House in Kolkata houses only the cigarettes and corporate headquarters. The foods business is controlled out of Bangalore, agribusiness and paperboards, paper out of Hyderabad, lifestyle and hotels out of Delhi and agarbattis, matches, packaging and greeting, gifting and stationery out of Chennai. ITC’s cigarettes business is the cash cow that funds its growth into the new and older areas. This is extremely important since ITC can spend in say, hotels, when a purely hotels group could be hit by a slump.

In hindsight, ITC has identified businesses that require significant capital commitment upfront and three-five years to break even, and used the money from the cigarettes business. “There is a strategic and a financial aspect to it,” said a Mumbai-based analyst, who requested anonymity. “The strategic aspect is to de-risk its business from tobacco.” Since cigarettes are the only organised sector — most of the tobacco consumption in India is in the form of bidis and gutka —it bears the brunt of taxation and compliance.

Yet, ITC’s near monopoly in cigarettes gives it a tremendous leverage on the trade and distribution channel.

Also, cigarettes throw up “phenomenal’’ amounts of cash. “This cash gives ITC tremendous leverage in investing in businesses that require high capital commitment and which have long break-even periods,’’ says the analyst.

ITC’s structure has evolved over the past few years as it went beyond its older segments of cigarettes, paper, hotels and agribusiness. First came the e-choupals, basically internet kiosks manned by villagers to offer farmers the best prices for their produce. Together with this, the e-choupals offer information on weather, farming techniques and fertilisers. In return, ITC gets to buy choice produce.

Next, ITC sold e-choupal distribution channel to companies selling fertilisers, tractors and insurance products. ITC has been setting up rural malls branded Choupal Sagar. Farmers can drop into any of the 10 choupal sagars operational in three states to get their grain or soya graded, sell their produce for cash and buy necessities ranging from diesel to clothes, farm implements to fertilisers. Last year, ITC reported channel transactions worth Rs 100 crore, selling the products of 45 companies, via the network of 6,000 choupals in Madhya Pradesh, Uttar Pradesh, Haryana, Uttaranchal, Rajasthan, Maharashtra, Karnataka, Andhra Pradesh and Kerala. By the end of this year, ITC aims to have 49 Choupal Saagars.

Three years ago, ITC began packaging atta drawn from this unique channel under the Aashirvaad brand. At that time, regional brands dominated branded atta. Today, Aashirvaad atta leads nationally in the segment with a 45% market share. Two years ago, ITC put the atta into biscuits, which it began selling under the Sunfeast brand (sales: Rs 700 crore against Britannia’s turnover of Rs 1,500 crore). ITC also sells Sunfeast pasta and Aashirwad-branded spice powders.

Money is the least of ITC’s issues. Last year, its board cleared a Rs 15,000-crore capital expenditure plan for various businesses over the next few years. One such business could be hotels, where the problem is in getting land and clearances. India needs 130,000 rooms to service the five million tourists expected in 2007 but has only 103,800 rooms in the approved category. Which is what prompted Deveshwar to say: “If I had land, I would spend Rs 15,000 crore on hotels alone!” In paperboards, where ITC is the market leader with a 90% share in the value-added segment, it is putting Rs 2,500 crore in a new plant and aims to spend Rs 1,000 crore in diversifying into coated and uncoated paper.

In packaged foods, after having gained a foothold for its brands by getting the products made by third parties according to its specification, ITC is setting up its own factory in Uttaranchal and plans another in West Bengal. As for the losses, analysts said the payback is in the brands.

“Brand building expenses typically gets expensed in the P&L itself,” says the analyst. What matters is the capital being pumped in, and whether the losses remain flat or decrease. “Over time, one would expect the capital requirement to start reducing and stop, while revenues grow and the profits appear,” he said.