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Cigarettes will grow, but we hope other FMCG grows faster
The Financial Express - 11 Jul 2012


For the March quarter, India's largest cigarette maker ITC posted a net profit of Rs. 1,614.36 crore, up 26% from the same period last fiscal. While revenue from non-cigarette consumer goods rose 23%, ITC's losses in the segment was reduced to Rs. 16.68 crore against Rs. 67.84 crore a year ago. ITC's cigarette sales rose 17.4% from a year ago to Rs. 3,249.88 crore and accounted for 47% of the total, contributing 77.5% to the company's pre-tax profit of Rs. 2,268 crore. In FY11, cigarettes contributed about 65% of its revenues and 81% of its profits. With India in the grip of a slowdown, Kurush Grant, executive director, ITC, who oversees ITC's FMCG businesses, including cigarettes, foods, personal care and education and stationery products, tells FE's SudiptaDatta how ITC plans to combat it. Edited excerpts:

It's a difficult time for the industry with a set of dismal numbers coming in from the economy. What are you doing to battle the slowdown?

The slowdown will impact different parts of the FMCG business differently. The FMCG business is all about selling small amounts of things to lots and lots of people, and since a very large chunk of it comprises daily necessities, the impact of the slowdown tends to have a laggard effect. In that sense, the FMCG industry is a boring industry, it doesn't shoot up or down dramatically. Upgrading or downgrading happens constantly, and is not dependent on just one factor. Having said that, we are doing very well and part of the reason is that we are growing relatively new businesses. But we also have to be clever in the way we handle costs.

You are already in cost-cutting mode. What are some of the things you are doing?

One of the things we are doing is going for decentralised manufacturing. As we reach size and volumes in our various non-cigarette FMCG businesses, we are opening up new centres of manufacturing. Especially for foods and stationery, this model will reduce costs. Freight costs are very high. We are going about it in two models: either setting up our own factories or looking for partners who will manufacture on our behalf. We also do other things to manage costs, like looking at commodity prices. We do some smart buying, hedging. As you know we are clued in to what is happening in the agri commodities space. Because of our e-choupal network we are able to buy at a rate better than the market, giving the retailer a better price.

Talking about your cigarettes business, there's been a change in the taxation policy. How will it impact the business in the long term?

On a highly taxed item as cigarettes, single point taxation is the best policy. It's good for the industry, good for revenues and prevents litigation. Total tobacco consumption in the country accounts for 13-14%, but 90% tax is collected from cigarettes. It will be good for us in the long run.

The cigarettes volumes have fallen in the last quarter and yet cigarettes contribute almost 80% to your profits. Will we see new launches, more price increases?

Our policy, going forward, is not to reduce profits from cigarettes, but increase the turnover of the other businesses as well. In the long run, cigarettes will grow, but we hope our other businesses grow at a faster rate.

The losses in the non-cigarette FMCG sector appear to have been arrested. You have been talking about break-even for at least a year now...

We will break even when the time comes. In the FMCG space there is a lot of competition historically, and we are in different segments from biscuits to staples to soaps and shampoos. As long as we are paranoid about quality - and the guts of a brand is a great product - and can give a product different and superior to our competition, we will get there. In the food business, for example, we will launch new products and variants within a category. The personal care business is very competitive, but we are confident we have good products. We have 250 scientists working at our Bangalore R&D centre on products. Some of the things that they were working on years ago are seeing launches now.

What are your views on the policy freeze in the UPA2 government?

The delay in pushing through the GST is a matter of great concern. It would have helped the industry and removed bottlenecks in pricing and other issues. Also required is urgent reforms in infrastructure, be it roads, airports, ports. If you plan for the future, you plan for success.

Among the new businesses you plan to launch, there's been a lot of talk about dairy. When are you planning to launch it?

The dairy initiative started as part of CSR. We work with a lot of farmers and we wanted to do something to improve milk yields. There is requirement for milk in the market, that's for sure. At the moment we are concentrating on the back-end, we will launch the dairy business when that is in place.

You are sitting on a lot of cash. Will your investments plans be hindered by the slowdown?

We plan to spend upward of Rs 20,000 crore over the next seven to eight years on our various FMCG businesses, but we will invest carefully.

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