The FMCG business is fast turning into ITC’s big growth driver. The segment is even outperforming the cigarettes division, says YC Deveshwar, chairman, ITC.
In an interview to CNBC-TV18, Deveshwar says he is expecting Rs 1,500 crore in the topline by FY2017.
"Many of our categories within the others have now turned around. The major drag now is our three-year old personal care business which requires a huge amount of investments. I am very satisfied with the progress and the growth rate of above 25%,” he says.
Deveshwar further adds that the growth rate of other businesses other than cigarettes is growing faster by a significant margin and also the bottomline of the other businesses is growing at a significant pace.
"That is transforming the total composition of our portfolio. We expect to generate a profit of Rs 1500 crore from other FMCG divisions. We have a target of Rs 15,000 crore for our topline," a confident Deveshwar adds.
The ITC chairman says that at the end of the day, it is the sentiment that drives economic growth, and it’s unfortunate if many business leaders appear on the front pages of newspapers and say - everything is gloom and doom.
Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying videos.
Q: Are there any visible signs of consumption drying up as far as the rural economy is concerned?
A: At the end of the day, it is the sentiment that drives economic growth. It’s unfortunate if most of our business leaders appear on the front pages of newspapers and say - “Everything is gloom and doom” because then we are talking ourselves into a slowdown.
Q: Do you believe corporate India is talking itself into a slowdown?
A: It has on occasions. This is something that we have to be very careful about because who have a lot of credibility. They have to know how important they are and every word that they speak, what multiplier that speech has and it can ricochet back to them from elsewhere.
Q: You are almost sounding like the government. The Prime Minister chided corporate India for being too negative and for being too anti-government?
A: This is also a factor. The consumption story has not been completely extinguished. At the end of the day, coalition politics is now becoming very evident, political self interest has overtaken the economic self interest of our society. Corporate India is also trying to influence various political parties to at least have a minimum common understanding.
So, at the end of the day there is something in the structure of our democracy and our politics that we are unable to separate the collective good from our segmented self interest.
Q: Do you believe that sentiment is far worse than reality?
A: Initially I did feel that. For example, let me take ITC’s own case. We want to invest and we have projects. What is standing in the way is some of the approvals, which are not always related with the Centre, it’s also related with issues of land, issues of permissions with the state governments and so on and so forth. So, it is an all embracing problem on our society and there is no point of badgering only the central government because we may be finding it easier to punch at the wrong bag as the problems are quite spread out.
Q: The biggest problem in the coalition equation at this point in time is in the state that you are currently headquartered in. Mamata Banerjee is the biggest issue at this point in time as far as this coalition government is concerned? How hard is it for you operating in the state?
A: We have no problem in operating with the state. They are actually very supportive of ITC. ITC is the only company in the top 500 companies that has not left Kolkata and Bengal and we want to continue to be there. I have to say that we have no reason to complain, but even there we find it extremely difficult despite the government wanting to help us out due to the issue of land.
Q: On the India story, the government is projecting between 7-7.5%? Corporate India says - we would be happy if we do between 6-7%. You are operating across the board pretty much with a pulse on the rural economy as well as the urban economy. What’s your own sense?
A: Firstly how we operate and how we plan is by creating a robust strategy. Under all circumstances we must do better than our competitors. That’s what we are concerned with because at the end of the day there are so many other factors beyond the control of our company. That is why I never offer a comment after a Budget because I accept my limitation that it is not possible after listening to a Budget speech to come out on television and begin to articulate what is good and what is not so good, because the challenges of our society are huge.
The thing is a lot of people are now investing overseas which is becoming very fashionable. Let me say that unless an investment overseas is going to stimulate the Indian economy, back home by virtue of the fact that you have now got access to markets overseas, India is going to be a source of fulfilling that demand and you are going to create livelihoods in India. But servicing Indian capital overseas and creating livelihoods overseas I am afraid that if you ask me even at this stage of life I am in, I would say that I would hesitate.
Q: You are sounding like a nationalist?
A: No, I am an Indian and I am very proud to say this.
Q: But why is it wrong for an Indian company to have global aspirations or to deploy assets and capital outside of India and more importantly corporate India is saying at least in sectors like mines, coal, etc when we are being forced outside?
A: Look at it like this. If you are looking for energy security for India and you want to go and get mines overseas or you are looking for security for raw materials for India, for manufacturing in India, all of this is very good as part of the Indian strategy. But if your thought process is I want to make money out of my capital, I don’t care where I invest, then it’s as good as being a foreigner and investing somewhere and creating livelihood somewhere.
Q: You have an obligation to your shareholders. If you feel that opportunity overseas gives you better returns on capital then what is the problem?
A: I am of the belief that before shareholders come society.
Q: If creating a sustainable profitable business requires you to look outside then why is it a problem?
A: It is not a problem for capital but it is a problem for the country because we are trying to attract foreign capital and charity begins at home.
The issue is, if by saying ‘I am going to take my capital out’ then you will create pressure on somebody to create consensus quickly, which is not going to happen.
Q: So you are saying corporate India needs to puts its money where its mouth is. If you are crying about the lack of foreign investors or foreign investments coming into India then show me the money, put down capital on India yourself.
A: No, I agree. Honestly, that is my view. Our strategy is very audacious and a difficult one of creating Indian brands which are competing with the world’s finest multinational companies who are operating in India. India is now a global market where all the multinationals are operating and we want to create Indian brands because we believe that India will never be able to raise its head high unless it has its own intellectual property and unless it has own Indian brands.
We are giving out so much of royalty. Every time you use soap or shampoo etc some royalty goes out. If you have a burger, royalty goes out. So, I think that Indian capital has the first obligation to its own society to create prosperity in India.
Q: It’s not as simple and it’s not as black and white as you make it so?
A: At the end of the day we need to invest in India. This is a land of opportunity. The growth rate at 7% is higher than most countries. Few countries like China, Indonesia and some African countries have a growth rate of 7%.
Q: Nobody has a problem investing. People say investment is not the problem but approvals are?
A: It is but to run away from here is not the answer to the problem.
Q: Some people seem to take that route or say we will take that route?
A: People are ready to nourish more capital than nourish the country. Our threshold of patience is therefore lower. I would rather say, let’s stick it out here. If you want to create some pressure, yes do. If you want to make a false move and say, I am going out then unless you do something out of the blue.
Q: You believe it’s a false move and a threat?
A: Don’t run away with the capital from here because this country needs it.
Q: You believe it’s a threat?
A: Yes, Most industrial houses have their heart in India but it is their frustration that is speaking.
Q: The last conversation we had you said as far as some of the new businesses were concerned you were continuing to be in investment mode for some of the others. The investment phase was over. As far as the FMCG business is concerned, give me a sense of what the outlay is looking like for the year ahead and whatever you can share in terms of profitability as far as those individual segments are?
A: I have earlier made a statement that our foods business has turned around and I have also earlier made statements that in the other FMCG categories since they are all clubbed together, every time we enter a new category it requires new investments and it drags all the other FMCGs down as well. But I think many of our categories within the others have now turned around.
Broadly the major drag now remains to be our newest business which is the personal care business which is just about three years old. I am very satisfied with the progress that we are making. Our growth rate there is more than 25%.
Q: In the personal care segment?
A: No, all put together. I can only give you those figures that are in the public domain. I don’t want to be caught by SEBI. I know UK Sinha is a very fair man but I must stick to the rules. We are going very well apace. Our growth rates of other businesses other than cigarettes are growing faster than cigarettes by a significant margin and also our bottomline of the other businesses are growing much faster than the cigarette business.
That is transforming the total composition of our portfolio and that is a direction that we have taken. Our brands are doing very well. For example, our Ashirwad brand is almost an Rs 1,200 crore brand. Our Sunfeast brand at the current run rate is a Rs 1,800 crore brand. Our Bingo brand is somewhere around Rs 450-500 crore. These are ballpark figures, they cannot be absolutely assured. Our newest entry into the noodles business, our Yippee brand has already become the No. 2 brand to Maggie and that’s saying something because we have been there only for a year.
Q: So when you say the foods business has turned around what is the projection now in terms of growth and profit?
A: In the fifth year I expect we would produce Rs 1,500 crore of profit from our other FMCGs, so that’s the target that we have for ourselves and we would have a sort of a topline of about Rs 15,000 crore.
Q: There was a lot of talk on new launches in the FMCG space. Specifically dairy, where do things currently stand on that?
A: What we are doing as a strategy is we are embracing the entire value chain right from the consumer down to the first step in the value chain. We have already begun with animal husbandry programs whereby we are helping the farmers to upgrade the quality of their milch animals and to increase productivity and improve milk yields.
Q: So for now it seems like you are working on the backend?
A: Yes, we are working on the backend. We are doing a CSR program.
Q: When will that turn for profit?
A: The moment a couple of dairies are successful and we are able to deliver high quality products.
Q: So broadly given the kind of growth scenario that you are anticipating?
A: I have made statements that everything that can be categorised as fast moving consumer goods businesses we will be in sooner or later. That is our vision. That is our aspiration and we want to be the number one fast moving consumer goods company, because we want to build Indian brands. We are investing heavily in research and development and we are investing heavily into building Indian brands.
Q: What’s the outlay in terms of investments for this financial year across businesses - cigarette and FMCG?
A: Our investments are in the pipeline. We have 45 projects that are under implementation. I have to say that the problem lies in execution. We should be spending Rs 25,000 crore of investment in the next five years, but I am afraid every year whatever we plan we end up doing a much lesser amount because there are hurdles in execution.
Q: Your tenure has been extended, there was the possibility of perhaps appointing a group level CEO. You do have individual business CEO’s. any movement on that front?
A: This is something that we don’t talk about and once these things are done – we don’t talk about it five years in advance.
Q: So, there is no plan at this point in time?
A: There are plans, but not to be discussed on television programs.
Q: Are there plans for appointing one 5 years down the line or perhaps even earlier than that?
A: I don’t want to share anything.
Q: But is that a good idea?
A: There are people who can speculate.
Q: But are you looking at the possibility of a CEO?
A: Of course we are always. That’s my duty. When I became the Chairman of ITC the market cap was Rs 5,000 crore and today the market cap is Rs 1 lakh 92 thousand crore odd. It is my duty to make sure that this company is an institution and has a life of its own. I have said many a times that it should be there when my grandchildren grow up; they should have an option to be able to serve ITC the way I have done.
Q: What do you intend doing with EIH and Leela? Leela clearly seems to be in trouble. They are going the CDR route. Both companies still prefer Mukesh Ambani as the white knight and not ITC?
A: We have nearly Rs 5,000 crore of temporary surplus cash, which will overtime as investment plans fructify will all get consumed, but this temporary surplus liquidity has to be invested somewhere. Most of it gets invested in risk free or nearly risk free instruments.
Q: Are you worried about the Leela investment?
A: Whenever we invest in equity, we invest in those areas where we are in business because we understand that business. As a result of that comprehension, we ended up buying East India Hotel shares at Rs 35. Similarly we made that investment as treasury operation and whether we would sell or buy depends upon what is the market condition and what is attractive at that point in time.
Q: Are you worried about your investment in Hotel Leela specifically because they are clearly facing a huge fund crunch and are in negotiation with bankers?
A: Worse comes to worse, we have the ability to create synergy out of the hotels business. If any management gets into a situation where they can’t help, that’s when we invest and that’s why we are secure.
Q: You are holding on to both?
A: Yes. That’s why we are secure that it will not. Yes, of course, the value can be destroyed. But we haven’t invested so much as to keep me awake at night.
Catch the exclusive interview on Saturday, 21 April 2012 at 11.30 am and 8.30 pm only on CNBC-TV18.