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ITC: Entering non-smoking zone

Oct 13, 2003

Tobacco major, ITC Limited, is seeing an upswing on the bourses in recent times. In this article, we take a look at the reasons for the same. ITC dominates the Rs 130 bn Indian cigarette industry with around 70% share. The company has emerged as a strong No. 3 in the Indian luxury hotel segment (capacity over 1,500 rooms) and also runs the largest packaged board business in Asia. It is one of the largest exporters of agri/marine products in Asia. Its new businesses include garment retailing, packaged foods, greeting cards, matchsticks and incense sticks.

The growing awareness on harmful affects of tobacco as well as the government’s punitive tax policy forced ITC to move towards de-risking its tobacco dependent revenue profile. In FY00, the company identified hotels, paperboards, garment retailing, exports and packaged foods as its non-tobacco focus areas.

Segment Dominance Revenue
Cigarettes Over 70% share 74.0% 91.0%
Paperboards/Packaging Packaging board – No. 1 in Asia 9.8% 10.7%
Agri business One of the largest exporters in India 13.9% 4.0%
Hotels ITC Group ranks No. 2 1.6% 0.5%
FMCG (Others) 15% share of greeting cards market 1.0% -5.8%

The effects of the strategy have begun to take shape. Till FY03, ITC had invested over Rs 8 bn in setting up new hotel capacity and is already the No. 3 player in this business. It plans to hike capacity to over 1,750 rooms by FY05. This business contributed nearly 2% to ITC revenues in FY03 and is profitable. Similarly, by FY03, ITC had opened 48 ‘Wills Lifestyle’ stores, but the business has still to turn profitable.

It merged its paperboards subsidiary – ITC Bhadrachalam with itself in FY02. Consequently, ITC now runs India's largest integrated mill and exports paperboards to neighbouring countries and also Malaysia, S. Africa, Iran, UAE and UK. It also supplies high-end packaging for FMCG sector. This business currently contributes nearly 10% to ITC revenues. ITC has targeted Rs 5 bn revenues from foods by FY06 and sees this business as a big growth driver going forward. In packaged foods, its product range includes ready to eat (Kitchens of India), staples (Aashirvaad Atta/Salt), confectionery (Mint-O, Candyman) and biscuits (Sunfeast).

Also, ITC’s Internet-based rural initiative for linking commodity trades throughout India has already connected 10,000 villages with around 2,100 e-choupals (FY03). This network will not only enhance ITC’s rural footprint but will also result in sourcing benefits going forward (for packaged foods and export business). Backed by these initiatives, cigarette share in ITC’s revenues has gone down from 77% in FY02 to 74% in FY03. However, cigarettes still contribute 91% to the company’s PBIT. This is likely to go down as its other initiatives become more profitable. As most of ITC’s capex plans have largely fructified, the company may look at enhancing its shareholder returns going forward.

At the current price of Rs 897, the stock trades at 14.2x our estimated FY04 earnings and market cap. to sales (net) of 3.4x. Given the company’s performance in the non-tobacco businesses as well as its continued dominance of the tobacco market, the company is likely to see encouraging revenue growth going forward. Among the concerns is that non-tobacco businesses like retailing and food are unlikely to be profitable in the next couple of years. But overall, ITC’s strategy seems to be headed in the right direction.

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