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ITC - Still A Tobacco Company

By Sunil Damania | 10/24/2011 3:11 PM Monday

ITC, India’s largest company by market cap in the FMCG space, has been one of the topmost wealth creating companies over the last decade or so. Its market cap improved substantially from Rs 20000 crore as of March 2001 to the present Rs 1.56 lakh crore. One of the main reasons for the company to outperform on the bourses is that, a decade ago the company made an announcement to diversify into other FMCG products so as to reduce its dependence on the cigarettes business. This de-risking strategy was appreciated by the investing fraternity since cigarettes as a product has been facing a lot of regulatory pressures from across the world. Very recently ITC was in the news as one of the NGOs raised questions about LICs investment in the company even as the government is spending huge amounts on tobacco related illnesses. LIC is the second largest shareholder in ITC with a 12.72 per cent stake in it.

But even after more than 10 years the ‘FMCG-Others’ segment (as defined by ITC) has not yielded the desired results and hence the obvious question that comes to mind is whether ITC can repeat its outperformance on the bourses over the course of the next one decade? We have our doubts. It is time that the more than four lakh shareholders of the company ask the ITC management several questions that will help them understand about the kind of growth that can be expected from the company going forward. Our sincere efforts to meet Y C Deveshwar, chairman of ITC, could not bear fruit due to his “several pre-commitments”.

Even our detailed questionnaire sent to him and the head of the company’s corporate communications department was not responded to on the pretext that the company’s shareholders knew everything that needs to be known. “We believe that our shareholders have been adequately and comprehensively informed of all developments including all the statutory requirements,” the corporate communication head replied. Shareholders of the company can decide for themselves, after reading this story, whether they were aware about the information that has been spelt out here.

ITC is a hugely diversified company having various revenue streams ranging from paper to hotels, packaging boards to soaps, branded flour to garments, and the IT & ITES business. The company has been making constant efforts and more so from 2001 to diversify its revenue streams so that it can have a good and balanced portfolio. In fact, in most of the interviews granted by the management to the media, emphasis has been placed on how ITC has a well diversified business. However, our study of the last 10 years’ balance-sheet of the company paints a different picture altogether.

ITC continues to rely heavily on its cigarettes business which is its core, to be its revenue driver. Our study shows that for the year ending March 2002, revenue from cigarettes (excluding trading in tobacco) contributed up to 81 per cent to the company’s consolidated topline. Even after 10 long years the scenario is not much different. The cigarettes business continues to dominate the topline with a share of 65 per cent in revenues. This is despite the fact that ITC has launched a host of new products in the non-cigarettes segments in the last 10 years to drive its topline as well as its bottomline. The picture is more worrisome when we look at the bottomline since the company’s dependence on cigarettes continues to be very high with more than 80 per cent of its profit (earnings before interest and tax) comes from the cigarettes business.

 

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