Somehow, the investor community is not very enthused with ITC anymore. Part of this has to do with falling cigarette volumes which has deprived the stock of its sheen, and part of it has to do with the allure of software. There was a time when ITC posted the highest volumes on the stock exchanges and moved the market either way - single-handedly. Not anymore. The once upon a time market leader is now relegated to the back-benches.
ITC is India's largest manufacturer of cigarettes with a market share in excess of 65 percent. The company has brands across the five cigarette segments - king-size (India Kings, Wills, Classic, Gold Flake, Benson & Hedges, 555), longs (Wills), filters (Gold Flake, Bristol, Wills, Capstan, Berkley, Scissors), plains (Gold Flake, Berkley, Scissors) and micros (Berkley, Scissors, Bristol, Capstan). Given ITC's brand appeal and distribution strength, it comes as no surprise to anyone that it has market leadership in all the cigarette segments. The variety in ITC's product profile can be gauged from the fact that it has 4-5 brands in each segment. Equally impressive is the company's enormous distribution reach, covering the length and breadth of the country with over 2 million outlets rivaling Hindustan Lever and Colgate.
In addition to cigarettes, which contribute to over 85 percent of total revenues, ITC's has its fingers in tobacco exports, paper, printing, agri-products exports and hotels. Over the past few years, it has restructured by exiting from finance and oilseeds. It is now concentrating on hotels (ITC Hotels), packaging (ITC Bhadrachalam) and of course - cigarettes.
ITC is run by a professional management, although British American Tobacco (BAT plc) does have its way around the company with its equity stake of more than 40 percent. ITC's alliance with BAT affords it access to the latter's overseas range - 555 and Benson & Hedges. After BAT's takeover of Rothmans, ITC can also expect to leverage the Rothmans and Pall Mall brands in future.
But despite its obvious strengths, things aren't exactly hunky-dory for India's premier cigarette manufacturer. Legislation on cigarette sales in some states has hit volumes. Kerala, which imposed a ban on smoking in public places and Tamil Nadu, which levied a luxury tax on cigarettes have witnessed a decline in cigarette sales. Several states have imposed restrictions on cigarette sales at railway platforms. Add to this the rigid advertising constraints within which cigarette companies have to function, and one begins to realise why the going is far from good for these companies. And the problem of smuggled cigarettes has been the bane of the local industry for some time now.
Cigarettes apart, even the hotels and paper businesses are mired in problems. A downturn in the Indian paper industry over the last 4-5 years has seen ITC-Bhadrachalam post heavy losses, leading to an erosion of networth. ITC was forced to pump in more money in the business to ensure that ITC-Bhadrachalam did not sink. The hotels business is also far from being a winner. Like the paper business, ITC Hotels is facing the brunt of a decline in the fortunes of the hotels business.
This only serves to underscore the importance of ITC's cigarette business. So long as hotels and paper businesses suffer setbacks, it will be cigarettes that will propel growth. Given the 4-5 percent projected growth in cigarette volumes over the next few years, ITC will continue to pursue a price-led growth. The company has launched two international brands - Benson & Hedges and 555, under an agreement with its international parent, BAT. It is likely that in the future more such brands would be introduced. This will enable ITC to capitalise on demand for foreign brands, which is currently met by the black market or through direct imports.
However, there are concerns voiced from several quarters about ITC's wayward ways. The company's retailing foray is disturbing. Moreover, it continues to pump in funds in hotels in Delhi and Bombay, with another couple (in Calcutta and Bombay) on the anvil. The investments amount to over Rs 2.5 billion annually and there is a view among analysts that this would be better utilised in reinforcing the company's core strength - tobacco.
And of course, there is always infotech (IT) - the darling of every other Indian corporate. But to be fair to ITC, it entered the IT arena long before the Indian investor community fell in love with Infosys, Wipro, Satyam and Mastek. There is some talk of ITC drawing out elaborate plans to tap its IT potential.
All said and done, the future clearly belongs to cigarettes. But with stiff competition from 'bidis' - the poor man's cigarette and impending excise-related litigations, the company will have to tread cautiously for it will be cigarettes that will rescue the company from going up in smoke.