In strategic shift from tobacco, FMCG now increasingly powering ITC’s growth

Diversified conglomerate ITC appears to have identified the rapidly expanding fast-moving-consumer-goods (FMCG) segment as its main growth driver, with financials showing encouraging performance in the group’s overall matrix.

The latest fourth quarter and full year results for 2020-21 show some interesting trends. Revenues from the FMCG business (ex-tobacco) grew 16 percent for ITC in 2020-21 compared with a peer group average of 8 -9 percent. The comparative figures stand out even more on a quarter-on-quarter sequential basis over the last four quarters.

In the first quarter of 2020-21,  ITC’s FMCG segment revenues grew 19 percent compared with a decline of about 2 percent reported by the peer group.; followed by 15 percent in the second quarter against peer group average of around 8  percent. In the third quarter, ITC’s FMCG business segment grew 11 percent compared with an industry average of around 10 percent.

It is only in the fourth quarter that the industry average growth of 20 percent outperformed ITC’s FMCG business growth of 16 percent. This is mainly because of a low base—peer-group revenues had fallen (-) 7 percent in the fourth quarter of 2019-20 compared with  ITC’s 5 percent growth in the segment revenues on a comparable basis.

For The Future

ITC 2.0, under new chairman Sanjiv Puri, who completes two years at the helm of the tobacco-to-hotels conglomerate, is turning out to be a story of a major improvement of the FMCG business with a sharper focus on innovation, bold acquisitions, and impactful marketing campaigns.

A disaggregated analysis points towards a strategic tilt towards FMCG in recent years, with consistent improvement in margins - a key concern over the years.

Sample this.  Between 2017-18 and 2020-21, earnings before interest taxes depreciation and amortization (EBITDA) margins in the FMCG segment have improved by 500 basis points. In 2020-21, the EBIDTA margin stood at 9 per cent, up 180 basis points over the previous year.

The company appears to be shedding its traditionalist approach on acquisitions in the FMCG space, which may well hold pointers of what could be coming. ITC appears to be increasingly looking at acquisitions in the FMCG space to accelerate growth. The company’s presentation clearly identifies ‘value accretive M&A’ as one of its strategic pillars to grow the FMCG business.

Acquisitions Are The Way

The company’s quarterly presentation clearly identifies “value-accretive M&A” as one of its strategic pillars to grow the FMCG business.

In May last year, it announced the decision to acquire Kolkata-based spice maker Sunrise Foods Pvt. Ltd (Sunrise), seen as part of a broader strategy to fortify its position in the country’s highly competitive FMCG market.

The acquisition, which was completed in July, involved buying out Sunrise in an all-cash deal of Rs 2,150 crore.

Recent acquisitions such as Savlon and Nimyle have added product strength to ITC’s FMCG business portfolio.

ITC acquired Savlon from Johnson & Johnson in 2015, foraying into the disinfectant and antiseptic products market. Savlon crossed Rs 1,000 crore in consumer spends in 2020-21, from Rs 250 crore in the previous year, making it the largest brand in the company’s personal care products portfolio, overtaking Vivel.

What has driven this performance in the (ex-tobacco) FMCG segment? The company’s quarterly presentation holds some clues. ITC has launched over 120 new products during the year, ‘structural advantages’ of purpose-led brands arising out a ‘distributed manufacturing’ and ‘agile supply chain’, as some of the key drivers of growth.

Cross-segment synergies will be critical to sustain the growth trajectory of the (ex-tobacco) FMCG businesses and also to scale up nascent categories and products such as B Natural juices, Fabelle chocolates amongst others.