Foods give ITC an appetite for diversification, recipe for margin expansion

The largest chunk of the tobacco major's non-cigarettes FMCG portfolio is growing rapidly on the back of hectic brand building, acquisitions, and new ventures

The slow-cooked whole black lentils in a tomato gravy, “Dal Bukhara”, a signature dish of ITC Maurya that has often earned high praise from some of the world’s most powerful leaders, including US President Bill Clinton, hit the supermarkets in a ready-to-eat format in 2001.

The launch under the “Kitchens of India” brand had marked ITC’s foray into the non-cigarettes fast-moving consumer goods (FMCG) space. In the next two decades, an avalanche of launches across multiple vectors – foods, personal care, education and stationery products, agarbattis – followed to create one of India’s largest FMCG players.

Revenues started kicking in and soon FMCG became second only to tobacco. In contrast, the bottom-line (reported as profit before interest and tax or PBIT in the segment results) has been a slow starter. But if last year’s numbers are any indication, the company’s FMCG (non-tobacco) business appears to be coming of age.

At Rs 1,386 crore, the non-cigarettes FMCG segment clocked its highest PBIT in FY23, up 48.23 per cent from Rs 935 crore in FY22, the previous best. Revenues from the segment in FY23 at Rs 19,153 crore were higher by 19.53 per cent from Rs 16,023 crore in FY22.

Amnish Aggarwal, director- research, Prabhudas Lilladhar, reckoned that EBITDA margins hit double-digit in FY23 for the first time. “For the last six years, EBITDA margins have been expanding year-on-year (YoY). In FY17, it had stood at 2.5 per cent and FY22 ended at 9 per cent. Last financial year, it was at 10.2 per cent.”

In its post-Q4FY23 results report, Motilal Oswal mentioned, ITC’s earnings outlook is better compared to other large-cap staples players in FY24 and FY25.

The foundation was in preparation for some time; investments in manufacturing (the Integrated Consumer Goods Manufacturing and Logistics facilities) and digitalisation are long-running initiatives that are now bearing fruit.

There are about 11 ICMLS across the country – most were established in the last three to five years.

An integrated digital architecture covers 200 factories, 50 warehouses, 2,200 distributors, and more than 17,000 stockists besides 2.5 million retailers leading to efficiencies, according to company sources. 

Add to this, a focus on premiumisation and portfolio strategy and you have ITC’s recipe for margin expansion. While cost take out was in focus, beefing up distribution channels has been in the works too. The market coverage has been stepped up to approximately 2.1 times pre-pandemic levels.

ITC straddles a wide range of businesses – cigarettes, hotels, agri business, paperboards, paper and packaging – but it’s the diversification in FMCG (read foods), that draws on the institutional strengths the most. Foods is the biggest chunk in the FMCG portfolio. Be it agri for sourcing or hotels for cuisine expertise or paper for packaging – the foods business is really the sum of many parts.

When it comes to revenue, the FMCG segment accounts for the largest chunk (22.83 per cent) after cigarettes, which still leads the pack with 37.27 per cent of revenues and 75.42 per cent of PBIT (in FY23). But FMCG has now started contributing to the bottom-line more meaningfully.

The non-cigarette FMCG segment was painstakingly put together over the years with brands built from scratch. At the back-end, it's powered by 400 scientists at ITC’s Life Sciences and Technology Centre in Bengaluru, the research and development platform.

In the last three years, the company has launched 300 products. It peaked during the Covid-19 pandemic in FY21 at 120; in FY23, it was still at over 90.

“ITC is one of the most aggressive FMCG companies in terms of innovation and product launches,” Aggarwal said.

Adding to the homegrown brands – there are five perched at Rs 1,000 crore in terms of consumer spend – are now a string of acquisitions, a distinct trend in the last five years.

The big-ticket Sunrise happened in July 2020, followed by Sproutlife Foods, makers of Yoga Bar healthy foods. In between, it invested in D2C brands Mother Sparsh and Mylo. Not that ITC was shy of acquisition earlier – it bought brands such as Savlon, B Natural, Nimyle – but the scale has notched up recently.

Post the acquisition, Sunrise has joined the elite Rs 1,000 crore club along with Aashirvaad (over Rs 7,000 crore), Sunfeast (over Rs 4,500 crore), Bingo!, Yippee!, and Classmate.

Sproutlife is a work in progress. ITC acquired 39.4 per cent on May 4 and is expected to complete 100 per cent acquisition in three to four years.

New revenue streams such as food tech are also getting added to the non-cigarettes FMCG business. Leveraging the strengths of its foods and hospitality verticals, ITC set up a string of cloud kitchens in Bengaluru – the brands are available on delivery platforms. So far in a pilot phase, food tech will branch out to one or two other cities this financial year, company sources said.

Though this is more on the QSR trajectory, the opportunities in the FMCG space are also immense with an addressable market size of Rs 5 trillion. And there is room for growth in revenues and profitability.  

“Given the size of the FMCG business, there is a lot more scope for margin expansion - we expect 100 bps this year,” Aggarwal said.

But there is a buzz around ITC and it’s certainly not just for the non-cigarettes FMCG business. The heavy-lifting cigarettes has bounced back in the last five to six quarters. The hospitality segment is on a stellar run with leisure and business travel picking up – the asset right model is also working in its favour. Margins have expanded in the rest of the businesses as well.

That is reflecting on the ITC stock, which has outperformed the broader benchmark indices by a wide margin. Perhaps it’s also helping drown out the clamour for demerger of businesses and concerns around ESG (environmental, social and governance) with its tobacco play.