Editorial

ITC decides on strategic diversification

THE tobacco major ITC’s recent merger with its paper and paperboards subsidiary ITC Bhadrachalam represents a strategic move to diversify into related areas of future growth. ITC now holds 41.46 per cent of BPL’s paid-up capital, and post-merger its share will be 61.6 per cent. The swap ratio is one ordinary share of ITC for 16 BPL shares. The merger benefits ITC in more ways than one. For starters, it can avail of tax benefits of approximately Rs 70-100 crore by way of tax write-offs in the current year adjusted against BPL’s losses. Shareholders too will be better off, with earnings per share possibly amounting to Rs 52 in the current year and Rs 53.4 and Rs 53.5 in subsequent years. This is because the holding company’s investment stands cancelled upon merger, as the share-swap ratio may result in the rise of only Rs 2 crore in ITC’s equity capital. The merger evidently signals a gradual shift in focus from cigarettes to paper and paperboards, hotels, greeting cards and lifestyle retailing as future growth areas. Additionally, the scaling down of cigarettes’ importance in ITC’s product portfolio could well be in response to the growing clout of the anti-tobacco lobbies and obliging governments worldwide. The ever increasing fiscal imposts on cigarettes, abetted by a ban on related advertising and on public smoking, have together made smoking a costlier proposition.

The merger with ITC Bhadrachalam also makes sense from a long-term perspective. BPL has turned around with a net profit of Rs 35 crore in the year March 2001 as against a loss of Rs 32 crore last year. There will be greater operational synergies from ITC’s speciality paper division as well. To be sure, BPL has suffered in a market of falling paper prices and cyclical demand. But with the financial clout of ITC and its marketing and distribution network, matters can look up in the near future. BPL’s Rs 90 crore worth exports will get a further boost with technological upgradation and capacity expansion of paperboards benchmarked against global standards. BPL’s specialised products developed for applications such as liquid packaging and quality graphic-printing has already succeeded in Afro-Asian markets. ITC’s decision to merge with a company having tremendous growth potential clearly adds to shareholder value.