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ITC's fiscal 2012 spend at a decade high
Mint - 29 Jun 2012

Investments were Rs.2,332 crore in 2011-12, more than double the amount the firm spent in the previous year.

ITC Ltd invested Rs. 2,332 crore across its key business segments in fiscal 2012—its highest in over a decade and more than double the amount it spent in the previous year—while most other firms were deferring spending in a slowing economy.

“We believe that companies such as ITC are engines of growth for the Indian economy and, therefore, play an important role in not only fuelling economic activity but also in creating larger societal value for the nation,” executive director Pradeep Dhobale said in a statement on Thursday. “ITC continues to invest in its diverse businesses given the long-term growth opportunities and positive economic prospects of India, as well as its own competitive strengths.”

The cigarettes-to-hotels conglomerate spent Rs.720.7 crore on building and refurbishing hotels—up from Rs. 322.3 crore in the previous year—and Rs.593.8 crore (Rs.249.5 crore in the previous year) largely to raise the production capacity of its paper and paperboards manufacturing facility at Bhadrachalam in Andhra Pradesh.

During the year, ITC built hotels in Chennai, Gurgaon and Bangalore, and expanded its ITC Sonar property in Kolkata, said a company spokesperson, adding that constructions at Kolkata, Gurgaon and Bangalore had not yet ended.

In fiscal 2012, ITC invested Rs.585 crore (Rs.312.9 crore in the previous year) on its cigarette manufacturing facilities to improve production standards. Capacity expansion in this business is restricted.

A part of this investment could have been aimed at expanding in the sub-65 mm cigarette category—an opportunity created by changes in tax laws introduced this year, said Rajesh Agarwal, head of research at Eastern Financiers Ltd, a broking firm in Kolkata.

ITC declined to disclose details of investments made into each category.

The company spent Rs.272.8 crore (Rs.112 crore in the previous year) on its other consumer goods businesses, in which it managed to cut losses significantly in the past few quarters—loss narrowed to a record low of Rs.16.7 crore in the quarter ended 31 March.

Analysts at JP Morgan India Pvt. Ltd said in a month-old report that they expected this business segment to turn profitable in fiscal 2014, while those at Citigroup Global Market Inc. said in a report this week that it could break even in the second half of this year.

In the past six years, ITC has substantially stepped up investments to build capacity, spending on average Rs.1,700 crore a year, according to the Citigroup report. “Going forward capital expenditure is expected to remain in the range of Rs.1,500-2,000 crore per annum,” it said.

ITC’s management prefers to plough back profits to create productive assets than to pay “hefty dividends” to its shareholders, said S.P. Tulsian, an independent equity analyst. “Its continuing investment towards capacity expansion inspires confidence in the growing consumption demand amid a slowing economy.”

For years, Indian consumer goods companies had scaled down capital expenditure by outsourcing their manufacturing needs, according to Anand Shah, a research analyst at the Indian arm of Elara Capital Plc.—a foreign institutional investor in India.

But the trend is reversing, he said, adding that one of India’s biggest dairy firms, for instance, is again investing in building capacity after almost a 10-year pause.

The case of ITC, though, is different. It is cash-rich and a new entrant in the consumer goods business, Shah said. So it is building capacity. Unlike most other competitors, it is able to invest in building hotels despite adverse market conditions because of the robust cash flow from its cigarette business, he said.

The Citigroup report goes a step further: measuring ITC’s capital expenditure as a percentage of its operating profit from the cigarette business, it says the ratio has come down from 45% in fiscal 2007 to 33% in the year ended 31 March.