'We'll put 10% of PBT in new areas'

Q&A: Y C Deveshwar

about this, the company's new growth drivers, including urban retail, and their increasing share in the company's top and bottomlines. Excerpts:

Tobacco's still 70 per cent of your topline, and 83 per cent of bottomline. Most of your new initiatives, the choupal and FMCG are still loss makers, and their expansion is funded through tobacco. So when you talk of Corporate Social Responsibility (CSR) "" carbon and water positive, and so on "" it sounds a bit hollow.

It is not my remit to shut down the tobacco business as long as the law allows it "" but our presence here also means tobacco is in responsible hands, it would have been smuggled in if we were not in the business! What's important is the new drivers of ITC's sales and profits.

Our CSR effort is unrelated to tobacco, it is about creating value through business models that are sustainable, in paper, in our agri business through choupals, in other areas. Today, except for getting solid waste contribution to zero (where we're 90 per cent there already), we're not a drag on the environment "" we replenish more water and reduce more carbon emissions than we create. We are the only Indian company to produce chlorine free paper "" our water discharge is so safe, it is being used for irrigating crops. We did this in 2002 even though the tough emission norms come into effect only in December 2008.

Does CSR pay?

For society, there's no doubt. Many of our competitors use imported pulp to produce paper, we do social forestry since that's where the employment is created "" we've greened 63,000 hectares with 254 million saplings, creating employment for 600,000 tribals. The impact on water, carbon and so on is obvious. From a commercial point of view, there are huge savings in electricity and other costs "" making existing paper mills environment friendly will cost Rs 50 crore per lakh tonne capacity which is a large sum of money but we've already done it. By the end of the month, we'll do TV ads "" they'll bring a lump to your throat "" telling customers that they can save the environment while buying our products. Unlike other such programmes in the past, our products don't cost more, so I think this will get consumer power behind CSR ... others will have to follow suit.

How fast are your non-tobacco businesses growing?

Our non-tobacco business comprised 38 per cent of net turnover in 2003-04, and this was up to over 51 per cent in the second quarter of this year. While our tobacco business grew 13 per cent last year, non-tobacco grew 53 per cent.

But your FMCG, minus the cigarettes, is cash negative.

We can be cash positive in no time, the day we decide to slow down investments. No one in the world has created 20 new brands, 13 of them big ones such as Aashirwad wheat flour where we're the number one after just three years with a 52 per cent market share; our market share in biscuits is today around 10 per cent. To create new brands, you have to spend like the existing number one, but without the revenue base "" we've done precisely that, hence the losses. Our aim is to be the number one player in each segment.

In Q2 this year, our hotel net revenues were Rs 185 crore versus Rs 267 crore for the top competitor, but our PBDIT was Rs 73 crore versus their Rs 84 crore "" so we're getting there (our PBDIT to sales is already higher). For paperboards, paper and packaging, we were below the market leader in the September quarter (Rs 522 crore versus Rs 577 crore) but our PBDIT was higher (Rs 142 crore versus 134 crore).

Your board doesn't look at the losses?

It does, but you have to look at the balance and at the value created. On an annualised basis, my FMCG business will be worth around Rs 2,000 crore by the end of the year. If you go to buy this business, you'll spend at least Rs 2,000 crore to do this. So, I've created value of Rs 2,000 crore by spending a few hundred crore rupees. Five years from now, the turnover will be Rs 5,000 crore. I'm happy to spend up to 10 per cent of my PBDIT on creating new businesses at any point in time, today this is around 5 per cent.

Has e-choupal 's progress slowed?

We've changed the model from simply having e-choupals to having a Choupal Sagar for 25-30 e-choupals, this is a 100,000-150,000 square feet space with a trading area, weighing facilities, telemedicine kiosks, shops for various products, specialists to give farmers guidance on crops ... we have radio feeds all the time in each area (we have 6,500 e-choupals in 38,000 villages in nine states) giving information tailored for that area only ... I don't derive profits from choupals, I derive value. We source 70 per cent of all our raw materials through e-choupals. Choupals allow me to buy 18 grades of wheat and blend them differently for each market. It is because of my e-choupal initiative in Uttar Pradesh that I got into the wheat brand, I had no way of selling all of this otherwise.

The choupals are empowering farmers and, in turn, helping create new businesses for us. We don't brag, but we've got pilot Choupal Fresh that sells fresh vegetables in Hyderabad, Pune and Chandigarh ... once we study the results, we'll ramp up, by how much and when I can't say. Choupals are our supply chain, moving up the value chain is the next logical step.

Are you going to set up big retail formats like Reliance and Bharti are planning?

We don't announce our plans in advance. What I can say is that we're bringing in organised retail in rural areas through Choupal Sagars. We're in the premium-to-mid-range clothing and accessories range already in urban areas with Wills Lifestyle, John Players and so on.Then there's Choupal Fresh for urban retail.