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'We are future ready'

ITC, which recently completed 100 years, has come a long way from being a pure tobacco company to become a well-diversified fast moving consumer goods (FMCG) company.

business Updated: Oct 09, 2010 12:26 IST
HT Correspondents

ITC, which recently completed 100 years, has come a long way from being a pure tobacco company to become a well-diversified fast moving consumer goods (FMCG) company. Up ahead: tobacco, while growing in absolute terms, will fall as a percentage of the R26,260-crore company, as it aggressively transforms its business mix in favour of four key businesses — FMCG (including cigarettes), agribusiness, paper, and hotels.

"Our future is very secure," ITC Chairman YC Deveshwar (63) told Hindustan Times (See interview). "The endeavour has been to de-risk the company against the diminishing prospects of any one business. ITC's ability to adapt to change is far superior to that of any narrowly-defined organisation."

With the global anti-tobacco movement gaining momentum and the government increasing taxes on it regularly, the threat to the high-margin cigarettes business has increased. But Deveshwar, by reducing its contribution to half of total revenues, has made a virtue out of it. "The ability to proactively and pre-emptively manage change, and constantly deliver superior value is the main source of competitiveness."

ITC has been able to make this change — which is still work in progress — without changing its essence. "We have been able to adapt to change but the character of the company has remained the same," ITC Executive Director K. Vaidyanath (60) told Hindustan Times. "Besides, our core competency is not in making cigarettes. It is in brand management, distribution and business leadership."

Technically, ITC's diversification began in 1975, with its entry into hotels and the next year into paperboards. "The priorities of the government then were very different," ITC Executive Director Kurush Grant — at 52, the youngest director on the board — said. "The focus was on industrial licensing, backward area development, core sector development, import substitution, foreign exchange earnings. So ITC diversified into areas that were priority development areas of the government — hotels for foreign exchange earnings, paperboards for backward area development."

Beyond the strategy lies execution, where the company whose market capitalisation stood at R1,32,089 crore on Friday, making it India's ninth most valued in the country.

"ITC has a 3-tiered governance structure," Deveshwar said. "Strategic supervision by the board; strategic management by the corporate management committee; and operations management by chief executives."

Grant, who oversees eight business heads, outlined the FMCG strategy: "ITC had some unique advantages which could be leveraged by the FMCG businesses." In foods, ITC Hotels has "some of the best chefs in the world" he said. "This provided an understanding of the Indian palate. Combined with this understanding was our blending capabilities, agricultural sourcing and manufacturing abilities which helped us to deliver to the consumer a high quality product. Today, we are No. 1, 2 or 3 in every category that we are present in."

The eChoupal — a 2004 Harvard case study — that is the backbone of the company's agriculture business is a "proactive approach to selling," S. Sivakumar, divisional chief executive of Agri Business, told HT. "ITC eChoupal is a 2-tier physical and digital infrastructure in a hub and spoke configuration," he said. "While the agri procurement leverages this infrastructure to discover prices in the villages to directly aggregate produce from small farmers, the FMCG distribution leverages the same infrastructure to offer products of multiple categories and reach them directly to rural outlets."

The packaging for these products, as well as for other companies, is taken care of by the paper business that will see R6,000 crore being pumped into the business over the next 7-10 years, said Pradeep Dhobale, chief executive (paperboards and specialty papers business). "To sustain its pre-eminent position in the paperboard segment, we are in the process of setting up a state-of-the-art board machine which is expected to be operational by early 2012."

Checking into hotels, the business is going to see an investment of R9,000 crore over the next seven to 10 years. "We have already over taken Oberoi and are close to catching up with the Taj," said Nakul Anand, divisional chief executive (hotels). The company expects to have up to 60 new hotel properties operational within the next four years. "It's an important division that will contribute significantly to the bottomline."

All told, the company has plans to invest R23,000 crore over the next decade. Where will the financing come from? "ITC is virtually a debt-free company," Vaidyanath said. "Our free cash flow generation is adequate to finance our growth in the near to medium term, while our huge capacity for financial leverage presents an opportunity to lower our cost of capital and finance much higher levels of investments."

Speaking to those leading this diversified conglomerate, it seems that neither money and opportunities nor distribution and leadership are a constraint for ITC. As Deveshwar puts it: "We are future ready." Voices from top brass