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Reading the smoke signals
The Economic Times - 24 May 2002

ITC Ltd has done well to record an 18 per cent hike in its post tax profits despite a slowing economy. In the process, the leading cigarette manufacturer in the country has, once again, shown that with the right strategy mix it is possible to turn up trumps even in a bad year. Thanks to a combination of factors- a steep hike in taxes, contraband sales and, to a lesser extent, increasing awareness of the health hazards associated with smoking, industry wide cigarette sales fell 11 per cent. It is to ITC's credit that it was able to contain the fall in the sales of its own brands at a more modest 8 per cent. Even more creditable, lower sales volumes have not translated into lower realisations. On the contrary, gross income is up by a little over 13 per cent. Part of the reason for this is that ITC, with its strong brand equity, has been able to maintain through price increases. It has also been successful in migrating brands from its premium segments to a larger spectrum; and then piggybacking on that image to hike prices across the board- witness the repositioning of its Classic brand as Wills Classic. Here its dominance in the market helps. ITC brands accounts for a market share of more than 60 per cent in volume terms and more than 70 per cent in value terms.

Clever cost cutting has also helped. Interest costs are down more than 43 per cent; meanwhile lower procurement costs have come via innovative steps in supply chain management through e-choupals- village internet kiosks that provide farmers access to ready information on weather, market prices, etc., and also provide a key link to ITC. Unfortunately, the relative success of its cigarette division has not been matched by other divisions. Last year was particularly bad for the hospitality industry. It is not surprising then that revenue from ITC's hotels' division was only a low Rs 162.38 crore. However, the company is aware that over the long term, its reliance on cigarettes must come down. Hence its dogged perseverance with its hotel ventures as also its foray into retail with its lifestyle retailing business, IT and greeting cards. In the long run, it knows that's where its future lies and is wise to read the smoke signals.