ITC's 20% drop in Q2 net could be masking a strategic shift in its FMCG business

 

Diversified business conglomerate ITC's nearly 20 percent drop in profits in second quarter-ended September 30, 2020 may well be masking a strategic shift towards consistently strengthening its fast-moving consumer goods (FMCG) business, a segment that has otherwise remained largely ignored among investors and analysts.

The company's net profit during the quarter fell to Rs 3,232.4 crore during the quarter, compared to Rs 4,023.1 crore in the same period last year, meeting street estimates.

Revenue from the FMCG and 'Others' segment, however, clocked a 18.4 percent growth on a comparable basis (excluding lifestyle retailing business for which restructuring is underway, as also the education and stationery products business that has been seriously impacted by the closure of educational institutions).

A disaggregated analysis points towards a strategic tilt towards FMCG in recent years.

In the current financial year during the quarter-ended September 30, 2020, EBITDA for the FMCG segment grew 66 percent, while EBITDA margins for the segment expanded 300 basis points to 9.7 percent.

In the first half of the year, it launched over 70 new products in what appears to be part of an ambitious expansion plan identifying the FMCG segment as the company's main growth driver, with focus on new products, bold acquisitions and the high-octane marketing.

In May, it announced the decision to acquire Kolkata-based spice maker Sunrise Foods Pvt. Ltd (SFPL), seen as part of a wider strategy to fortify its position in the country's highly competitive FMCG market that is dominated by large corporations such as Hindustan Unilever Limited (HUL) and several local players in diverse regional geographies.

The earnings before interest, depreciation, taxes and amortisation (EBITDA) of the new FMCG businesses has more than doubled in three years— growing from from Rs 456 crore in 2017-18 to Rs 914 crores in 2019-20.

Over an eight-year period, segment EBIDTA for the FMCG businesses has multiplied from Rs 44 crore in 2012-13, a year before current Chairman Sanjiv Puri was elevated to president of the company’s FMCG business, to Rs 914 crore in 2019-20, galloping at a compounded annual growth rate (CAGR) of 54 percent.

These may well be pointers for analysts and investors on what could be coming, particularly in the foods business with brands such as Aashirvaad (Rs 6,000 crore), Sunfeast (Rs 4,000 crore), Bingo (Rs 2,700 crore) and YiPPee (Rs 1,300 crore), achieving significant value and scale.

The restructuring of the lifestyle retailing business with the sale of the John Players brand are all measures to improve profitability of the FMCG segment.

There also appears to be a tactical shift in marketing initiatives with considerable focus on engagements with properties such as IPL, fitness and hygiene through Sunfeast, Bingo and Savlon.