ITC in Pain

The biggest news for today was that the Australian government banned the branding of the cigarette packets. What it meant is that the cigarette companies have to sell their products without the logo of the company. This is a serious issue as far as the brand marketing is concerned. After all, we feel a sense of pride while smoking off Marlboro and look with awe at Philips Marlboro to have given us that. The news hit all the global cigarette makers as was expected and almost all of them registered losses in today's trade.
Philip Morris (-0.5%); British American Tobacco (-1.9%); Imperial Tobacco (-1.7%)


ITC shares fell 3.6%!







The question is Why a big conglomerate which boasts of more than 60% revenues from its non-cigarette businesses like FMCG, Agri-Products, Paper, Hotels etc gets hurt so bad everytime its cigarette business faces challenges?


ITC used to garner almost 90-92% of its bottomline from its cigarette's business before 2002. At this juncture, ITC thought of reducing its dependence on Cigarettes as they(Cigarettes/Tobacco) are being targeted by the regulators worldwide for being the biggest reason for the avoidable deaths. In the past 10 years the company has invested around Rs 5000 Cr into its FMCG business with launches of numerous brands  every year and most of them being advertise by big bollywood names (Remember SRK eating SunFeast Biscuits and Kareena bathing with Vivel Soaps).
Cigarettes still make about 75% of the company’s bottomline while its FMCG arm has lost about 2500 Cr in the past 10 years!!! Hotels, Agri-business and Paper & Paperboards business together garnered about Rs 460 Cr while Cigarettes alone fetched Rs 1145 Cr of profits for the quarter ended June'12.


The company’s portal says that it has been cutting down its losses from its Non-Tobacco business and its somewhere in the range of Rs 200 Cr. For the quarter. Adding the above mentioned non-tobacco business profits which are mentioned on its portal, we see that the total loss through its FMCG business (excluding Cigarettes) is of the order of Rs 660 Cr - A huge sum for such a conglomerate which has been in the FMCG business for the past 10 years. The loss must be a little less because it includes the losses incurred due to some other businesses from ITC stables which are not properly mentioned in its financial statements for example its IT arm: ITC infotech which is said to be among the top in its category!


With renewed pressure on its Cigarettes business, what will ITC do now? Put more impetus on its soap and biscuits (Read FMCG-non tobacco) business which is accumulating losses? Most  likely. Because even though the demands for cigarettes among the smokers is pretty inelastic (i.e. does not change much with the change in its price), the ever increasing cost is discouraging new customers to join the death-bandwagon! It was clearly evident in its current results where the volume growth saw a meager 1.3% increase.
If the present trend continues, we are going to witness a plethora of consolidation,/takeovers in such businesses as the lesser peers will find it hard to survive. ITC itself has to turnaround its non-tobacco  businesses in a big way if it wants to protect it's around 6% weightage in the exchanges.