By diversifying into other FMCG businesses and scaling them up; these have been profitable for 2 years

At the annual general meeting of cigarettes-to-hotels major ITC on last Friday (July 31), chairman Y C Deveshwar came down hard on what he described as a restrictive regime for the domestic tobacco industry. In the process, Deveshwar informed shareholders of his "back-up" plan — a diversification exercise he initiated over a decade ago — to derisk the cigarette business. The latter gives ITC 40 per cent of its revenues and 85 per cent of its profits.

This initiative, which is a foray into fast moving consumer goods (called FMCG others by the company; here referred to as FMCG), is becoming critical to ITC as regulatory and taxation issues impact cigarette volumes. In the past four quarters, volumes of the country's largest cigarette maker declined 2.5 per cent (Q1FY15), five per cent (Q2 FY15), 14 per cent (Q3 FY15) and 13 per cent (Q4 FY15), respectively. In the April-June period of 2015-16, ITC’s cigarette volume decline was 11-12 per cent, marginally lower than the past two quarters, but still a decline. Analysts expect this trend to remain as the government continues to tax cigarettes, implying that ITC's dependence on FMCG will only grow. At Friday's AGM, Deveshwar said, "As we succeed, we will enter everything that can be termed as FMCG.”

Having crossed Rs 9,000 crore in top line in FY15, and achieved profits, albeit small, for two successive years (Rs 12 crore in FY14 and Rs 31 crore in FY15), Deveshwar knows if there is any segment that can ring fence his firm from the vagaries of the cigarette business, it is FMCG.

In the decade since foraying into FMCG, the company has seen consistent double-digit growth in top line, driven mainly by packaged foods. The latter contributes Rs 6,000 crore to ITC’s FMCG turnover.

While overall growth rates in ITC's FMCG business have slowed in the past two years on account of weak consumer sentiment, Deveshwar, like most FMCG chief executives, remains optimistic. Two years ago, he had said that he wanted ITC to touch Rs 1 lakh crore in top line in the FMCG business. On Friday, he reiterated this point, telling shareholders he had no plans to deviate, even as he maintained that a cigarette exit plan was not on the cards.

"ITC is on the right track. But to achieve the target of Rs 1 lakh crore in 15 years, it will have to significantly scale up the FMCG business," Nitin Mathur, emerging markets consumer research analyst at Societe Generale, said.

Analysts estimate that ITC's rate of growth in terms of top line for the FMCG business will have to be nearly 26 per cent yearly over the next 15 years for it to achieve the set target. While it did see a 26.5 per cent rate of growth in FY13 in the FMCG business, maintaining it has not been easy over the past two years. Top line growth in FY14 and FY15 was 15.7 per cent and 11.3 per cent, respectively. Besides organic growth, inorganic growth is something that ITC is expected to explore aggressively to achieve the above target. That step was taken, when it acquired B Natural, a juice brand from Bengaluru-based Balan Natural Food in 2014, a decade after buying confectionary brand Mint-O from Candico. This was followed by the acquisition of Savlon and Shower to Shower from Johnson & Johnson earlier this year. More buys could be round the corner, analysts said.

Also, work on new categories has begun. B Natural was relaunched under the ITC banner this summer. Dairy products, a category that ITC is keen to enter, will be unveiled shortly, and its multiple launches in food, including biscuits and snacks, will continue.

While personal care remains a bit of a drag, ITC is expected to continue launching products here.

“No doubt, ITC has done well in food, but not in personal care. Brands like Vivel and Fiama di Willis continue to have share below five per cent. ITC will need to focus on this business a bit more," Abneesh Roy, associate director, research (institutional equities), Edelweiss, said.