The outgoing chairman believed in building for the future; for his successor, the challenge will be to maintain the momentum, says Ishita Ayan Dutt.
Five hundred rooms. A 37,000-square-feet pillar-less banquet. Eight to ten restaurants. That’s ITC’s luxury hotel, Royal Bengal.
Set to launch next year, the hotel promises amenities that would lead people to believe that Kolkata is the hub of economic activity in the country. But with the number of investment proposals at 67 (according to the Department of Industrial Policy and Promotion’s annual report for 2015-16) amounting to an investment of Rs 17,615 crore, the reality in Bengal is a far cry.
ITC is unperturbed by these numbers. Between the ITC Sonar and the upcoming Royal Bengal next to it, there would be some 1,000 rooms, 15 restaurants and a sprawling banquet area, making it a destination of sorts.
The giant leap of faith is in sync with the underlying philosophy of ITC’s longest serving chairman and chief executive officer, Yogesh Chander Deveshwar: build for the future.
Steadying the ship
Rewind to 1996 when Deveshwar took charge of ITC; the company was facing its worst crisis: charges of FERA violation and a battle for control with its single largest shareholder, British American Tobacco. Against this backdrop, Deveshwar built the ITC of today.
“A retrospective excise demand of Rs 803 crore, on the very first day of my assuming charge as chairman and CEO, amounting to three times the annual profit, imperiled your company’s financial stability. The shareholders and the members of the board stood divided on the future direction of the company,” Deveshwar told shareholders at the company's annual general meeting in July.
The solution was to create new revenue streams, apart from cigarettes.
Deveshwar had inherited the hotel and paperboard businesses from his predecessors, which he grew. The hospitality business operated 12 hotels in 1996 when he took charge; it now has over 100 properties across four brands: ITC Hotels, WelcomHotels, Fortune and WelcomHeritage. And in the paperboard and packaging industry, ITC is the market leader. To these he added FMCG and information technology.
The FMCG business has 25 mother brands that have a turnover of over Rs 12,000 crore. This includes Aashirvaad (over Rs 3,000 crore); Sunfeast (over Rs 2,500 crore); Bingo (Rs 1,000 crore), Classmate (Rs 1,000 crore); and Yippee (close to Rs 1,000 crore).
The goal is ambitious: turnover of Rs 100,000 crore from the non-cigarettes FMCG business by 2030. But Deveshwar will not be in the driver’s seat to target this turnover.
With effect from February 5, 2017, Deveshwar will slip into the role of a non-executive chairman for a period of three years. Sanjiv Puri has been appointed the chief operating officer, making him the frontrunner for the top job.
Challenges for successor
Analysts are by and large happy with the performance of the non-cigarettes FMCG business.
“Ninety to 95 per cent of all new FMCG launches fail. In that context, ITC has managed to create brands that are category leaders in some segments,” says Abneesh Roy, senior vice-president (institutional equities), Edelweiss Securities.
ICRA analyst Mahi Agarwal says: “The other (non-cigarette) FMCG segment of ITC has grown rapidly with revenues more than doubling over the past five years, and the challenge for the company will be to maintain the pace of growth and improve its margin.”
An Edelweiss research note after first quarter results said that FMCG sales grew 9.5 per cent year-on-year (5.0 per cent in Q1 FY16, ahead of market; HUL reported 3.6 per cent year-on-year growth) aided by growth returning in noodles and new launches: dairy whitener, Aashirvaad Sugar Release Control Atta, Fabelle chocolates and so on.
Roy, however, said that investors were waiting for growth to be back in double digits. The real areas of concern, according to him, were hotels and paperboards that had long gestation periods.
Agarwal, however, believes that given the regulatory environment for cigarettes, the main challenge for the company would be to quickly grow other business segments in terms of their contribution to the company’s overall profits, since cigarettes still drive around 85 per cent of ITC’s profits before interest and tax at present.
“With GST coming in, there is talk that cigarettes will be either kept out of its purview or would attract higher tax rates. Also, the size of pictorial warnings has increased from 40 per cent to 85 per cent on the cigarette packs, which may have a significant impact on consumption,” she cautions.
The game changer
The best is yet to come, Deveshwar had said at the AGM. The real game changer, according to some ITC officials, is the integrated manufacturing hubs.
To illustrate with an example, a low margin product like a Rs 5 Bingo! packet of chips was being produced at the company’s Haridwar factory in Uttarakhand, stored at a warehouse in Delhi and then sold in the East or North East where it’s a market leader.
The integrated manufacturing hubs will change all of that. In the next three years, 20 such hubs would come up across the country. The first two will go on stream by December in West Bengal. ITC has bought the land for all of these projects.
State-of-the-art cold chains to cover farm produce, including fresh, frozen and dehydrated fruits and vegetables, will be part of these manufacturing hubs. The food wastage, mostly in the form of perishables, is estimated to be Rs 92,000 crore (Rs 920 billion), and that’s the value that ITC is looking to unlock.
So the growth, as ITC sees it, will come from expanding the basket of offerings as the company gets into newer categories.
ITC’s Life Sciences Centre is working on delivering products of the future aimed at nutrition, health and well-being. “Even the land for the medicinal plants has been bought,” an official close to the development adds.
Multiple projects with an investment outlay of Rs 25,000 crore (Rs 250 billion) are in the process of being executed.
Deveshwar’s only regret is the pace of execution of these projects. “Most of the delays in the investment take place on account of the permission that is required,” he said at the AGM.
Over to the successor now - to make it happen.
Photograph: Rupak De Choudhury/Reuters