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ITC: Agri business profitability improves - Views on News from Equitymaster
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ITC: Agri business profitability improves
Oct 12, 2009

In this article, we discuss the performance of the agri commodity business, one of the important divisions of ITC during FY09. Sales of agri commodity business fell by 27% YoY in FY09. During FY08, the global markets faced rising commodity prices. This trend continued till H1FY09 before declining in the second half owing to the global economic recession. However, in India, the ban on export of rice and higher support prices for wheat, despite a record bumper crop ensured continued buoyancy in food grain prices. Edible oil prices, however, witnessed sharp declines with the government scrapping import duties on edible oils, particularly on palm oil as an anti-inflationary measure. In the wake of Government interventions such as ban on exports, market actions at subsidized prices and continued imposition of stock controls, ITC exited several commodities in which trading had become extremely risky. Accordingly, the existing e-Choupal network was restructured by aligning it to the continuing portfolio of high value segment like processed fruit pulp, frozen foods, organic purees, spices and other niche products. The company also expanded its reach by acquiring customers in the Japanese market.

  2009 2008 Growth 2009 2008 Growth
  Volume (tonnes)   Sales (m)  
Soya Extraction 112812 282603 -60% 1880.2 3837.1 -51%
Soya Oil 15480 56126 -72% 718.9 2694.2 -73%
Soya Seeds 226343 293781 -23% 4775 5119.4 -7%
Rice 17099 129836 -87% 551.5 1705.5 -68%
Coffee 2774 25265 -89% 2741.6 2186.9 25%
Others       3205.6 3573.3 -10%
        13872.8 19116.4 -27%

E-Choupal initiative of ITC continued to deliver value for the company. The company launched 50 new e-Choupals in Tamil Nadu during the year and continued supporting the farmers through this initiative by giving them access to high quality extension services which would help increase the productivity of crops such as paddy. The company during the year sourced high quality wheat through its e-Choupal channel for its branded foods business. The company realized strategic cost and quality advantages through multi-sourcing across geographies and at the same time on operating costs by bringing down freight, warehousing and other logistics expenses. During the year, the company sourced chipstock potato for ‘Bingo!’ potato chips, using this network. Chipstock is a new variety of potatoes with longer storage life. This helped in optimising season and off-season buying, delivering cost savings. The synergies gained from the acquisition of Technico helped enhance the value chain by providing high quality seeds to farmers. Distribution of FMCG products in the rural markets through the e-Choupal network gained traction with the addition of ITC’s personal care products to the portfolio.

Further ITC opened 3 more Choupal Sagars during the year. This brought the total Choupal Sagars malls to 24 across the states of Madhya Pradesh, Maharashtra and Uttar Pradesh. With retail sales growing by 34% YoY, these infrastructure points continued to be one-stop shops for the farming community with a host of services like sourcing, training, soil testing, cafeteria and health clinic. The creation of a distribution centre in Madhya Pradesh during the year helped in reduction of inventory levels and improved margins of the retail stores in the state.

The agri-inputs part of the business grew its topline by a robust 28%. This was supported by the neem-based organic manures, Wellgro Soil and Wellgro Crops which have gained wide acceptance amongst the farming community and corporate houses engaged in contract farming. During the year, ITC introduced a new organic manure, ‘Wellgro Grains’, in pelleted form for food crops such as Rice, Wheat, Maize and Sugarcane. This product has found demand in the states of Andhra Pradesh, Karnataka and Uttar Pradesh.

During the year, the agri commodity segment provided strategic sourcing support to the company’s ‘Aashirvaad’ brand of spices. It also made rapid strides in the export of spices to ‘value markets’ such as Japan, USA and the European Union, growing export revenues by 46%. The company in its endeavour to ensure quality spices developed a farm-to-factory supply chain, guaranteeing specifications and quality attributes. Additionally, ITC commissioned a state-of-the-art grinding cum sterilization facility during the year.

Marketing of Kisan Credit Cards on behalf of the State Bank of India continued to receive a very positive response from the farmers during the year. The quantum of farmer loans facilitated by ITC grew by 31% inspite of the farm loan waiver scheme announced by the Government. The company established four tele-caller centres during the year to assist rural customers with appropriate solutions to their financial needs.

What we expect?
At a price of Rs.251 the company is trading 22 times our FY12 estimated earnings. With ITC’s investment in e-Choupal initiative, the company has got a unique supply chain from farm to factory. This as we have seen is a flexible chain capable of sourcing efficiently any mix of commodities. We believe this chain has given company a competitive advantage not only in agri-trading but also in its branded foods and cigarettes business as benefit is accruing to the company it terms of cost saving and sourcing of quality products. Going forward, we expect this initiative to be beneficial for the company.

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