View: Why ITC Must Read Tobacco Leaves


After being the target of a million wild internet memes, last Tuesday decided to speak out: But the tale of capital spending and new business investments, dividends, spinoffs and risk reduction does not nothing new but looks like cold smoke in the room.

A good conglomerate is one that is constantly evolving. It nourishes new ideas and new businesses, divests itself of obsolete ones. The primary mandate of a group CEO should be portfolio balancing. Despite all his idiosyncrasies, AM Naik, the boss of L&T was forced to take tough calls and create energy-hungry technology services and financial services companies; sold cement and machinery to bring attention back to what the company has done best: engineering. Now his successor is building on this. Like L&T, it’s time for the Rs 74,000 crore colossus that is ITC, also a board-run company, to get rid of its boredom.

Investors love men and women who pursue bold ideas. Otherwise, why idolize Jeff Bezos, who even from his garage has dared to be the world’s bookseller or Tesla boss Elon Musk, who, after radically transforming one of the world’s most entrenched industries, is now trying to capture the dioxide of carbon from the atmosphere for the production of rocket fuel. Closer to home, Deepinder Goyal, Falguni Nayar, Sameer Nigam and Amrish Rau have established themselves as entrepreneurial pin-ups.

In the first quarter of FY20, after spending $ 90 billion over the past decade, Mukesh Ambani was looking at very high liabilities, lower refining and petrochemical margins, slow business deployment, and a low average revenue per user for Jio. Reliance Industries (RIL) stock usually coated with Teflon has been downgraded. In late 2021, thanks to a $ 44 billion fundraising blitzkrieg, the same investors praise Ambani’s quest to free up RIL’s $ 180 billion net debt balance; The telecom and retail verticals have emerged as market leaders, giving Ambani, its chairman, the leeway to ‘catalyze’ an additional $ 200 billion in investment over the next 10 years, primarily in the industry. green energy. Very few around the world have successfully pivoted the way RIL has shifted from fossil fuels to 4G mobility and the new economy. Bernstein Research once described RIL as India’s answer to Exxon, AT&T and Amazon all rolled into one. It is clearly becoming the reverse. Ambani is still restless.

See how the markets have rewarded them. If you had invested in Tesla in 2011, you would have a five-digit return (17328%). Over the past decade, investments in RIL have yielded six times the return, while ITC shares have gained only 70%, even compared to a 270% jump in Sensex over the same period of 10 years. And Nestlé India has rebounded by 360%.

For a business that has regaled everyone with award-winning marketing campaigns, its current communication or awareness is outdated. Management is struggling to get through new organic thinking that is not progressive. Why else would a company that is such a dominant force in its core business, with $ 8 billion in reserves, be relegated to being the cheapest FMCG stock in the country, trading at 19 times the multiples of PE? when produced locally?

jumped to an impressive 53 and HUL jumped to 80 in the recent Covid rally before settling to 65.

Tobacco is poisonous all over the world and Big Tobacco all over the world must have inhaled that stench. Philip Morris, maker of Marlboro, took over a UK manufacturer of asthma inhalers this year. As smoking goes out of fashion with increased regulatory control and tax cuts, BAT, which owns almost 30% of ITC, is betting on £ 1bn over the next 2 years to roll out ‘more eco-friendly’ products lungs “. ITC has only taken small uncomfortable steps so far. If R&D is a direct indicator of a company’s ambitions, then President Sanjiv Puri’s team has a lot to catch up with. This is where it needs to be transformational. In an era when the Ayurvedic wellness industry has grown into a multi-million dollar business, what is stopping ITC from breathing fresh air and being ready for the future?

Over the years, the wise men who ran the company, understood the evolution of consumption habits and diversified to avoid risk, but they remained the longest dependent on nicotine. 85% of ITC’s profits came from cigarettes in FY21, even though 58% of its sales came from verticals other than tobacco. By pursuing the topline, the company has become a prime candidate for misplaced capital allocation. If even after 20 years a company generates a return on capital of 11-12% and EBITDA margins of 9% versus an industry average of 30% and 13-23%, then maybe it is time. for some serious soul-searching.

Fortunately, ITC under Puri emphasizes buying rather than its traditional obsession with building. With its weight, I would have expected ITC to make a game of gambling short of Eveready which has a very similar distribution channel to that of a cigarette giant. If there is coffee, buy and rebuild ailing Café Coffee Day, which still has a nationwide network of institutional stores and sales. Better yet invest and work with upcoming D2C brands to target millennial audiences. Bottom line, rather than dispersing so little, focus on a few brands and build them well.

To be sure, ITC’s large quasi-state ownership – with government insurers, the Unity Trust of India Specified Company (SUUTI) owning nearly 30% – has become a value trap, hampering large-scale reorganizations. , splits and splits as has been the practice of the industry worldwide. Unless its hotels, technologies, and tobacco-free consumer products are streamlined into independent businesses, real value will never be unlocked. If historical conglomerates like Tata, Reliance, Piramals can seek external capital, so too can ITC. Finally, having only one female Chief Operating Officer (COO) is as baffling as the overwhelming dependence on in-house talent. It’s time to read the smoke signals.


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