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| What does a company do when it has excess cash? Plough it back into the business, pass it on to shareholders as dividends, or diversify into new business areas. Tobacco major ITC is doing all these, yet there seems to be something amiss.
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| ITC has grown rapidly over the years to become one of India's biggest private sector companies in terms of net sales of Rs 8,816.11 crore (2000-01). Thanks to its core business, ITC has been able to grow the market and create a near monopoly status for itself with a 70 per cent share in the Rs 11,000 crore domestic cigarettes market.
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| But if one were to go by the experience in the developed world, tobacco is perhaps not the best business to be in, in the next few years. In order to sustain long term growth, ITC has been on a diversification spree.
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| Even as it made it's first foray into non-tobacco business way back in the 1970s with its hotels venture, the company has been speeding up its diversification act in the recent years, into areas as diverse as sportswear, papers, and hotels. Its latest foray is into the branded atta market. But going by past experience, ITC hasn't been able to make decent returns on any of its diversified business areas.
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| "Either, the management isn't choosing its business well, or is unable to compete with companies which are solely focused on these specific areas" says an industry expert. Either way, for ITC lifetime shareholders, it's time to take relook. Given the inherent strength in its core tobacco business, ITC's medium-term outlook looks secure.
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| A sinister past
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| ITC, way back in the 1970s diversified into hotels and the manufacture of paper and paperboards. Apparently, back then, both these moves were perceived as prompted by the government's objective to encourage the inflow of foreign exchange and improve self-reliance, respectively.
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| However, there are no such figleaves around any other diversifications that were to follow. The 1980s saw ITC diversifying into financial services and retailing of branded edible oils. In fact, in the 1990s, the former chairman, K L Chugh's grandiose plans of venturing into areas as diverse as power and infrastructure got quashed, thanks to stiff resistance from BAT, the UK-based tobacco major that has a 33 per cent stake in ITC. BAT believed that ITC should stick to the family's core business of tobacco and financial services.
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| ITC tried to steer the financial services boat, with little success though. The fallout: the business was finally sold off to ICICI. Meanwhile, the ordeal, led by lack of focus, took its toll on the company's hotels and paper business too.
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| A discomforting present
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| The management's conviction to grow the business empire by diversifying, is quite understandable, however, what is not quite easy to comprehend, is the company's choice of businesses.
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| Apart from the hotels, paper and paperboards businesses, which ITC had diversified into much earlier, the recent diversifications has been into lifestyle retailing (the Wills Sport brand of relaxed apparel was launched in Q1FY02), upscale ready-to-eat packaged foods, greeting cards and gifts ('Expressions' brand).
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| With a view to generate 40 per cent of the company's total revenues from non-tobacco business, ITC has targeted to invest around Rs 2600-2800 crore in diverse businesses. In FY99, the company decided to invest Rs 1,500 crore to expand its hotels business over the next five years. However, much to the relief of the shareholders, the company has now decided to go slow, and invest only 65 per cent of the targeted amount (less than Rs 1,000 crore).
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| The market's confusion with the choice of businesses that ITC has ventured into, to fuel growth, gets only worse considering that the company has not focused (well, almost) on any of the faster growing new economy sectors.
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| As on March 31, 2001, ITC had invested a small Rs 13.29 crore for 100 per cent equity in its subsidiaries ITC Infotech India and ITC Infotech, put together. And, both the companies are loss making.
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| What's more, in what seems like yet another bizarre diversification move, ITC is reportedly preparing to jump into the organised branded atta segment. The concern: None of the organised branded atta manufacturers are yet to make any profit (See box: A sticky affair).
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| Benefits of selling a vice
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| ITC has almost never had to worry much about making money from its cigarettes business. This is almost evident from the fact that the company's earnings, over the years, have only continued to rise. This, regardless of the fact that cigarette volumes have been stagnant in the recent years.
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| In fact, over the last three-four years, volumes have actually declined. As long as the company succeeded in progressively driving earnings, ITC wouldn't be bothered much about which direction the volumes took.
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| The 15 per cent excise hike on cigarettes in the last budget resulted in ITC losing around 7 per cent in volumes, according to analyst estimates, during the current fiscal. However, the hike in prices, to accommodate the increased duty, also resulted in topline growth (7 per cent for 9 months ended December '01).
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| However, this time around (Budget-03), the finance minister's decision to spare the cigarette industry from any further excise hikes, has brought some cheer to the industry. Although no duty hikes do not guarantee volume growth, selective price hikes in some of its products will have a positive impact.
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| "Considering that volumes had dropped, we may see some growth on the lowerbase,"contemplates Jamshed Desai, analyst at Taib Securities. According to the market, Wills Navy Cut Lights (priced at Rs 2.5 a stick), launched in Q3FY02, is receiving a good response.
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| However, analysts believe that the brand is cannibalising Gold Flake Lights (priced at Rs 3 a stick). Nonetheless, one can't say for certain that this should be harming ITC's margins.
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| Smoking up good money
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Barring ITC's core cigarettes business, which contributes almost 85 per cent to its revenues, almost all the other diversified businesses contributes little towards the company
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