Cigarettes major ITC’s foray into the fast moving consumer goods space has been inexorable. Within FMCG , ITC has expanded aggressively building an impressive portfolio with mega brands such as Aashirvaad and Sunfeast. The foray is, however, seen as capital guzzling with poor profitability. In a freewheeling, two-hour chat with Business Line at its Virginia House headquarters in Kolkata, Chairman and Managing Director Sanjiv Puri explained the company’s strategy and its plans. Excerpts:


It has been more than two decades since you diversified into FMCG. How far have you achieved the objectives? The perception is that you have a great portfolio of products but margins are poor.

FMCG has made good progress in recent years. Margins are up by 640 basis points between FY17 and FY21 while the top-line is up from around ₹ 10,000 crore to close to ₹ 15,000 crore in the same period.

The addressable space for our FMCG portfolio – we selected areas where there is headroom to grow in the branded play – is about ₹ 5 lakh crore. Second, we have largely done this organically at 1.7x the topline. If we had done this inorganically, it would have happened at a rate of four to five times.

We have certain mega-brands like Aashirvaad and Sunfeast which we need to fortify and scale up. Each has room to grow. Second, these mega-brands now allow us to address adjacencies and particularly the value-added adjacencies.

If you look at the journey of Aashirvaad, it is the undisputed market leader (in atta), and it has happened because of the quality of the product. It is about working with farmers and growing the right varietals. It is a fairly extensive programme. We started with atta, then we went into value-added segments of multigrain select and further upped that and went into sugar-release control atta. Then we launched a range of Aashirvaad Nature’s Super Food – like millets and so on.

Then Aashirvaad has gone into an organic range of atta and pulses. Recently, Aashirvaad has gone into vermicelli. In Kerala, we have launched rotis – ready to eat, ready to cook, ones. And then, Aashirvaad has gone into salt, spices. So the brand is now getting into value-added spaces.

When we entered FMCG, we started with the idea of getting scale. And looking at the synergies we have in agri, hotels, in cuisine besides distribution, etc, you will appreciate that the best fit for us is foods. And in today’s competitive market it is important to go into areas where you can bring something to the table, where you have the right to win. That’s why there is a lot of thrust on foods. That’s why having built the base, now there is more focus on value-addition.

All our products are differentiated. For instance, in vermicelli we have a superior product, which does not lump up; our ghee has a distinct aroma. So the idea is that Aashirvaad will be a strong centre-of-plate brand and will straddle many more spaces, and many value added spaces.

Also read: ITC’s FMCG business on its own feet now: Sanjiv Puri

There is no doubt about your portfolio spread. But, a lot of this is available in the unbranded segment. So isn’t the scope of margin improvement limited?

In our whole strategy of margin expansion is scale, mix enrichment, bringing in back-end efficiencies, and leveraging digital. This is what is giving us our route to improvement in margins.

The fact is that in atta itself, we have experienced what we can do by bringing back-end efficiencies and by providing a superior product. Our atta is at a little premium but consumers value it.

Moving towards branded penetration is where it will evolve over time. Between the time we started and now, the penetration of branded atta has increased substantially. As the economy improves, people's incomes rise, they will move towards branded stuff. Actually that’s the opportunity. And that’s why these segments can become sizeable.

The ready-to-eat segments are value added, with higher margins. Vermicelli has just been launched. Some of these are new launches or are still being rolled out. So the right time to talk about it would be a year-down-the-line. But there is an opportunity.

Spices, for instance, is a ₹50,000 crore market, and it is a value added game. That’s where we are investing both from Aashirvaad and then through the recent acquisition of Sunrise.

Then, we have dairy. As far as fresh dairy – paneer, milk, lassi - is concerned it is a challenge. Fresh dairy is a huge market. But we are only in Bihar and Kolkata, and we intend to establish our model before scaling up. Our products are superior and the portfolio can be differentiated.

If we discover it does not work, then we would not hesitate to pull out. In businesses, you have to accept that everything does not succeed. Sometimes it may not work. For example, I did not see any synergies in lifestyle retail. I did not find it having a strategic fit with ITC. So we shrunk it.

So, one is scaling up existing brands, addressing adjacencies and then the third vector is identifying categories of the future. The areas we have identified, in personal care, are naturals and hygiene. In foods we identified home convenience food, snacks for home consumption through ITC Masterchef, cooking gravies and pre-prepared gravies. These are not small; already Masterchef is a decent-sized business for us.

In hygiene, we got the opportunity to buy Savlon and today it is many times the size it was earlier (at the time of acquisition). It also has a full range of portfolio like soaps, handwashes, disinfectant sprays and a lot of equipment to deal with Covid.

Naturals venture started with acquisition of Nimyle and our centre of excellence platform of neem in our R&D. During the pandemic we came up with fruits and vegetable wash. It’s a very niche segment; but it will start to catch on.

Juices are an old category; but we have upped the game. B Natural is still not a big player but we are building it up. We also have a co-branded offering with Amway’s Nutralite and there are premium fruit beverages in Aseptic PET bottles with no added preservatives. So we are layering the portfolio through value addition.

We have been experimenting with coffee. In the North, there is a preference for beaten coffee (Dalgona Coffee); we created offerings in beaten coffee. We are open to inorganic growth across the three vectors.

All these launches must be eating up a lot of capital?

Our portfolio today has some brands that are standing on their own feet and generating surpluses. And some brands that are in investment mode. That’s why net-net our margin is not similar to industry. I have built manufacturing facilities with proximity to the market for structural advantage. Wherever possible I am building an agri backend and de-layering my supply chain.

Is it right to conclude that you are still in the investment phase?

These facilities are gestating. But for Phase 1, we have built most of our facilities. Subsequent additions will be calibrated. There are gestating costs of facilities and there are gestating costs of brand building, where segments are new. But our belief is progressively to have the same trajectory of growth in the future that we had in the past; and year-on-year keep improving our margins.

So when will margins begin to expand?

Margins are going to keep improving. As our older brands progress, they will keep generating value which will be deployed to create the newer brands; and part of it will be surplus. So our strategy would be to see that the net surplus keeps on increasing.

It should keep moving the way we have moved on in the last four years. Very clearly we want to grow. And grow with year-on-year improvement of margins; say about 100 bps improvement in margins every year.

Over time what will happen is that the newer things will consume a smaller portion of the surpluses we generate.

In terms of capital allocation, how much will FMCG be consuming from your total free cash?

FMCG without inorganic is already cash flow positive. So whatever funding we have to do for capex, we can do it using this cash. Only if we have to acquire a company, then ITC will have to do it. Four years back this situation did not exist.

In our whole strategy of margin expansion is scale, mix enrichment, backend optimisation, bringing in back-end efficiencies, and leveraging digital. This is what is giving us our route to improvement in margins.

Digital is becoming a very important play. And digital is across the value chain – products, marketing, operations. In every facet we are going to explore what digital can do. So we have numerous projects at the back end, creating the next gen supply chain design which through digital can become more agile and efficient. In the front end, we have marketing command centres called Sixth Sense, which are constantly garnering insights from the internet space, which helps in product development strategy. Then we have digital for trade engagement, we have an e-store, we have launched a platform called Happy Tummy – associated with some of the products like multigrain atta. So digital is an area of deep investment.

Enhancing accessibility is equally important. In rural markets, our stockists are up 2X since last year; market and outlet coverage is up 1.4 times; we are also developing alternate channels for some of our special products like with Amway. We have also developed alternative channels from some of our other branded products which are in QSR or other food offerings.

Would you look at smaller packages to address the bottom-of-the-pyramid segment?

There are some offerings, including in Nimyle floor cleaners (at ₹ 1). We are quite focussed on that (small value packs). For instance, in fragrances, to improve penetration we got into pocket perfumes; we created smaller SKUs on handwash. We pioneered the pocket perfume segment – and now everyone has an offering in the category.

The hospitality business is also eating up capital. What’s your strategy there?

This sector certainly has a long gestation period. And the gestated properties certainly have a good capital productivity. The newer ones there are a challenge. What we have said, since 2017, is we will take an asset right approach in the business. Earlier we had greater focus on building our standing in the industry; so we built iconic properties and developed cuisines. Now, our approach is asset right. We renovated our brand WelcomHotel.

Between owned and managed, we already have 20 WelcomHotels and by the end of this year, it should go up to 25. And there is a good pipeline. We have recently launched two more brands – called Storii for curated nature-based experiences; and Mementos, which will be luxury properties and unique ones.

The second strategy in hotels would be to get the best out of each property we have; sweat the asset.

One such successful learning from the pandemic was the out-of-home cuisine. And because of ITC’s stature in cuisine, it has done quite well. Hopefully, it will open us a new vector of revenue on an ongoing basis. That’s broadly the idea – asset right, sweating assets to get the highest level of productivity.

And, as part of our strategy, and to improve profitability, we are making investments in renewable energy (at the hotels). We have the lowest heat and light load in the industry.

Fortune is an asset light model; run more on management contracts.

Like the Taj has a clear segmentation in hotels, what is yours?

ITC Hotels is a luxury brand. WelcomHotels is upper upscale – a segment that is expected to grow well. And that is where we are witnessing a lot of traction. Mementos is going to be above WelcomHotels, but may not be above ITC Hotels. But it will be a luxury, unique property, a signature property. Storii is a curated experience. This will be again WelcomHotel or WelcomHotel plus category.

The two brands – Storii and Mementos – were launched two months back and are generating quite a bit of interest. Below the WelcomHotel range, as the business hotel, we have Fortune. So we have Fortune Select and Fortune Inn at the bottom.

Then for tourism purposes we have Storii – at the premium end; and we have WelcomHeritage – at the popular end.

So we have a fully segmented portfolio here.

How do your margins compare here?

Margins are actually the best in industry – compared to any of the Indian chains. My statement is based on FY20 numbers though. My depreciation is high, my profitability is better.

You also invested in other hotel companies, like EIH. What is that for?

Just as an investor. I can also at the right time consider what I can do with the investment. Capital appreciation also happens there.

On the agri-business side, how are the e-choupals faring, and what is your strategy here?

In agri-business, there are three broad areas that we are focusing on. The starting point is obviously the competitive advantage it gives our foods business in terms of sourcing, quality and efficiency. Now building on that, we are ramping up value-added agriculture. Value-added means both from the type of crop and value addition to the product. So we are getting in medicinal and aromatic plants, we are getting in organic. And we are also focusing on value-added spices for export. It’s a common facility – it also does work for our foods facility. But we are making a fresh investment now as the spices business is scaling up for exports.

Raw material for spices business comes from agri-businesses. In our case, we produce what we buy. We work with the farmers to create. It’s not exactly contract farming.

Value-added agri is a space we are scaling up. For example, we are putting up a nicotine plant in Mysuru. It is pharma-grade nicotine that will be up next year.

Secondly, we are also orchestrating value-added agriculture. It is going to be powered by FPOs (Farmer Producer Organisations). We are going to have 4,000 FPOs benefitting about 10 million farmers across a range of crops. And these will be guys doing climate smart agri, market linkages and so on and so forth. We have done pilots with 2,50,000 farmers and the GHG emissions dropped by some 47 per cent; incomes improved between 40 and 80 per cent. It's going to empower farmers, improve agri incomes, improve crop quality and improve competitiveness.

The third piece is e-choupal. We did the pilot successfully with Andhra chilli crop. We are going to bring state-of-the-art technology to farmers. Today, there are about 1,000 agri-tech start-ups and each of them have a point solution. You need to integrate the pieces and provide a full solution to the farmers; personalised hyperlocal solutions based on climate, soil conditions, etc. So we are launching ITC MAARS (metamarket for advanced agriculture and rural services). It will leverage the e-choupal infrastructure.

ITC MAARS will start with the crop advisory facility, taking all the inputs and recommendations. Then it will make connections with the input markets and connect to the output market. And rural services will be something beyond that like directly linked issues of insurance and financing. But beyond that there could be other possibilities over a period of time.

ITC Infotech seems to be gathering momentum. Any special focus?

We are providing a lot of thrust there. There has been a new leadership team and they have done well. We are leveraging the domain strengths of ITC in some areas. The idea is to develop a company that is focused on some domains, on capabilities that are relevant today and tomorrow instead of spreading ourselves too thin. We are open to inorganic even in IT. We remain very committed to the IT business.

It has had periods when it had grown well and when it had not. But now, we are giving it thrust and support.

Any idea of listing it to unlock value?

We shall see. We keep evaluating these things from time-to-time.

Are there any proposals to spin off some of your businesses into separate companies?

Essentially, in the FY20 annual report we had said that we will look at an alternate structure hotels business. The issue of how we organise ourselves also depends on what will create a sustained value to all stakeholders. Enterprises do not exist to tackle short-term issues. I would be failing in my responsibilities if I looked at it from that viewpoint.

It is a question of business context, maturity, and strategy.

At one point, hotels and paperboards were separate. We brought them in. Now we see hotels have matured. So we are saying asset right.

Nothing that way is cast in stone. An enterprise has to look at all these factors and make a decision.

Any comments on the stock price of ITC?

Our role is to create sustained value. Between FY17 and FY20, EPS went-up by 47 per cent, ROCE went up by 1100 bps or from 61 to 72 per cent.

Of course, it is a matter of concern (stock pricing); and I have said it in the AGM too. If you look at how we have addressed the issue, we started creating multiple drivers of growth especially in the consumer side. We realised that our traditional business could have headwinds in the future. And the other vector that we are now trying to scale up is the IT side which has immense potential. That’s the whole philosophy of diversification.

We have said in our annual report that ESG is an issue. But ESG is something that is evolving. Is ESG about exclusion or about the manner in which you conduct business or your transition path or is it about the new areas you are getting into?

The larger point is, there was foresight that we will have to become future ready in our business portfolio and that’s why the consumer side was picked up. And, we went into something that best matched our enterprise strength.

So, do you think valuations will catch up?

That’s for the market to determine. From a management perspective, I think the right things to do are create sustained value, grow newer segments, deliver superior performance and be competitive.

How do you see the ongoing economic recovery?

Recovery is certainly fast-paced. And many of the high frequency indicators show that too. Leisure travel is doing very well. Corporate travel is picking up but not fully there.

Jobs are one issue and private capex is another. So I think it is absolutely right to focus on capex. It will create livelihoods. And hopefully, once done, it will kick start this virtuous cycle of consumption, investment, and so on. We are seeing some early signs of a diversification capex, like some people getting into new lines. Inflation and supply side bottlenecks are immediate concerns. Inflation in many commodities is unprecedented. A lot of it is hopefully transitory.

How is rural demand shaping up for FMCG products?

I see good recovery sequentially. The trajectory will be known fully in the next quarter-or-two because of the base effect. In Q2 of last fiscal there was so much pantry loading. And there was so much frantic buying in hygiene products. We saw in our results that while these items moderated (hygiene); out of home consumption picked up; discretionary spending smartly picked-up. But again, there is a base effect. I would rather wait for a couple of quarters to look at it with a normalised base.