ITC Targets Inorganic Expansion, New Market Entry Routes For FMCG Growth

ITC Ltd. plans to fast-track online and direct-to-reach sales channels as well as add newer routes to deepen market reach, its Chairman and Managing Director Sanjiv Puri said.

“We have to be available in all channels,” he said, while addressing the maiden analysts and investors' meet on Tuesday. “Digital is a powerful tool. E-commerce is gaining traction as convenience remains a key trend in consumption so we are investing in training employees to win in this channel," he said. The e-commerce channel currently contributes 7% of overall sales, with personal care segment's share even higher at 14%, said Puri. "The D2C area will also continue to see more investments.”

The cigarette-to-soap maker will also focus on newer routes like on-the-go and strategic partnerships such as the recent tie-ups with Inox and McDonald’s to grow its non-cigarette FMCG business, according to its 290-page presentation. “This shows its out-of-the-box thinking,” Abneesh Roy, executive vice-president at Edelweiss Research, wrote in a note.

The company has built 25 mother brands. A lot of thrust is now on moving beyond the core into value-added adjacencies and new categories, the chairman said. The success of acquired brands like Savlon, B Natural and Sunrise has given confidence to now pursue mergers and acquisition route as ITC eyes value accretive deals in FMCG. According to Puri, the revenue to investment ratio is at 1.7x in FMCG, which could have been 4-5x had the company followed an aggressive M&A route. As for FMCG margins, he told analysts, the business has seen a 20X growth in topline over the last two decades. The bottomline, however, has lagged at 18X because a large component of the growth comes from nascent categories. According to the ITC presentation, 11% of the total volumes come from new products.

For investors, the announcement of Tuesday’s meeting was seen as a welcome step to improve transparency and disclosure levels. But, "no concrete road map was disappointing," brokerage firm Prabhudas lilladher wrote in a note after attending the six-hour-long meeting.

Speculation was rife of a possible demerger of its FMCG and hotels businesses. Puri said that the company is open to demerger of FMCG business and reiterated evaluation of hotel business structure as said in FY20. He also identified ITC Infotech as an area of "strong potential" but there seems to be little chances of its demerger or listing in the near term. Ebitda margins of ITC Infotech improved from 8% in FY19 to 25.2% in FY21 owing to change in leadership and strong business opportunities post the pandemic. During the first half of FY22, its revenue and Ebitda grew 24% and 63%, respectively, the company's presentation showed said.

ITC has also been aggressively participating to avail benefits under the production-linked incentives scheme. It plans to significantly expand its exports business and recoup the investments in the medium term through the incentives given by the government.

"Exports revenue doubled over the past three years owing to addition of more countries. We would further leverage the [PLI] scheme to grow exports in categories like ready-to-eat, marine products, fruits and vegetable," the Kolkata-based company told analysts.

Investors have been concerned about ITC’s stock performance over the past few years. In the last one year, ITC shares rose just 6.98%, underperforming Nifty 50 and BSE FMCG Index. The stock fell 2.73% on Tuesday. The presentation, however, was shared after the markets closed.

Other key takeaways:

Cigarettes:

• Volumes are already back to pre-Covid volumes.

• High cigarette taxation leads to a surge in illicit trade. The management hopes for an equitable and pragmatic taxation policy, going ahead.

• The company wants to maximise cigarettes potential in the tobacco basket, counter illicit trade and continue to reinforce its market leadership to drive future growth in a tightly regulated tobacco sector.

• ITC can make its filters and capsules—one of the very few companies with the capability. It helps save cost.

• The company has an unassailable reach in cigarette distribution.

  At seven million outlets, ITC's reach is two times of nearest competitor. With almost daily servicing to retail outlets, the cigarette maker said it is going to be a tall task for anyone to match such high standards.

Non-Cigarette FMCG

• FMCG’s growth pillars will be fortifying the core brands, addressing adjacencies, leveraging mother brands and building new categories.

• The company will acquire brands which add value to its portfolio and also divest where required like it had done for John Players.

• Win in emerging channels—modern trade, D2C, e-commerce, cash and carry.

• ITC Foods' brands present in 5.63 million stores across the country.

• In the personal care space, the company will develop new high margin opportunities in segments like health and hygiene, skincare and home care. There is a large headroom for growth in this space, ITC said.

• In food business, exports is a big area of focus.

• ITC expects to be able to maintain 9% Ebitda margin in the medium term despite cost inflation

• Brand-wise, Aashirvaad Atta grew 5x with an 18% CAGR, cream biscuits saw a 16% CAGR, the Bingo bridges segment reported a 25% CAGR, and Yippe Noodles posted a 42% CAGR.

• In personal care segment, Savlon and Nimyle have seen strong success after the acquisition (up 14x and 5x, respectively).

Hotels

• The hotel industry is seeing some recovery with mobility improving.

• In Q2 FY22, hotel business was cash positive.

• Leisure travel is doing well, while business travel is still at 40% of pre-Covid levels.

• Just like FMCG, in hotels consumers prefer trusted brands which will benefit ITC.

• Pre-Covid outbound tourism is more, the pandemic should help improve inbound tourism and domestic tourism.

• The focus is on moving toward an asset-light model by increasing managed rooms from 25% to 45% in five years.

In the agri business, ITC MAARS will continue to see more investment, supporting the e-Choupal initiative and creating a robust digital ecosystem to deliver customised solutions to farmers, ITC chairman said.

Over the next three years, the company intends to spend Rs. 3,000 crore per annum towards capital expenditure. A large part will be allocated for FMCG at 35-40% to add new capacity. About 25-30% of the amount will be used to expand capacity of its paperboards business. It will spend around 10% towards capacity expansion of hotels for the next three years. ITC will then taper down its hotel expansion as it is looking at an asset-light model.