ITC takes the inorganic route to develop its business outside cigarettes

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Diversified conglomerate ITC Ltd is exploring inorganic opportunities to grow its non-cigarette FMCG business. The company, which has mainly focused on the organic path for segment growth so far, plans to incorporate inorganic as an “important driver of growth” in the future.

According to Sanjiv Puri, president of ITC, most of what the company has built in the FMCG segment has been done organically. The company’s turnover in the non-smoking sector has grown 20-fold over the past two decades. However, the bottom line is at 18X, mainly because a lot of the growth comes from new FMCG businesses being built.

Also read: ITC analysts meet: is split on the table?

“We recognize inorganic. Most of what we have done is built organically, so now we want to make the inorganic an important growth vector given that we understand this space with our experience of over two decades, ”Puri said during of the company’s first analyst meeting on Tuesday.

Since the company announced its very first analyst meeting, the market has been in the throes of a possible split from its non-cigarette FMCG business and hotel business.

Potential areas

According to Abneesh Roy, executive vice president of Edelweiss Research, the company reiterated the assessment of the structure of the hotel business as reported in fiscal year 2020 and said it continues to examine it. He also identified Infotech as a high potential area and declared himself open to mergers and acquisitions in the segment.

According to Puri, the company and its board periodically review all options to spin off, list and release the value of the companies and the final decision would be made whether this creates lasting value for shareholders. “Nothing is set in stone. Unlock decisions depend on the maturity of the business and the business environment, ”he said.

The company’s script closed at 228.30 yen, down 2.73% from BSE on Tuesday.

Speaking about the growth potential of the FMCG business, he said the country’s demographics are favorable and the expected GDP growth will create enormous leeway to increase consumption. The government’s panoply of reforms will only push growth further.

“In FMCG products in particular, per capita consumption and penetration are considerably lower, which represents the kind of potential that exists,” he said.

The company has identified seven key areas with respect to the FMCG sector, including portfolio revitalization and active management; recognize inorganic opportunities; accelerate exports by actively exploring possibilities in proximal markets and by exploring and developing new routes to (access) markets on the distribution front, among others.

ITC, Puri said, would continue to fortify strong brands and use them to develop adjacencies in higher value areas.

Investment plan

ITC has estimated the capital expenditure at 3,000 crore per year and around 35-45% will go into FMCG to build more lines and improve capacity.

The company is also working on cost management and looking at it end to end. “The entire value chain is scrutinized to eliminate the cost of each item by removing it, reducing it or reorganizing it,” he said.

ITC maintained its EBITDA at 9 percent through cost reductions, using more effective marketing, shortening the distance to market and increasing prices in a calibrated manner.


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