ITC's Cigarette-Business Volumes Rebound To Peak Levels

Sales volumes of ITC Ltd.'s cigarettes have posted a robust recovery as it reached near its peak level that was seen in financial year 2013, thanks to rational taxation, rollout of new variants and a dip in illicit trade.

Cigarette volumes had declined 20% between fiscal 2013 and 2019–20 due to a sharp rise in taxes. However, the company managed to claw back sales from illicit trade from fiscal 2022 as the taxes remained relatively stable and due to portfolio interventions. The cigarette volumes in 2022–23 were 0.96 times of fiscal 2013, according to an investor presentation.

"The focus remains on maximising cigarette potential within the tobacco basket, reinforcing market standing and towards portfolio intervention in differentiated formats to counter illicit," ITC Chairperson Sanjiv Puri said.

The per-capita consumption of cigarettes in India is one of the lowest in the world. The legal cigarette accounts for mere 9% of the total tobacco consumption, which translates to 80% of the tax revenue. Other forms of tobacco like biri and illicit cigarettes account for a third of legal cigarettes.

ITC is a leader in every market with its micro-market strategy, price laddering and regional customisation. It has a leading local brand in every geography— Navy Cut, Bristol, Capstan, Flake, American Club, Silk Cut, Scissors and Players.

The new launches in the cigarette segment have increased five times over the last five years, now accounting for 17% of overall volumes, ITC said.

Gold Flake is ITC’s largest trademark. The new launches over the last five years account for 19% of Gold Flake's portfolio, according to the presentation. The company has recently launched Gold Flake Mixpod and Indie Mint, leveraging ITC's capabilities in advanced-filter technology and capsule manufacturing.

The other flagship brand, Classic, has been present in the market for more than 40 years. Over the last five years, Classic has launched four new variants, which contribute 25% of the classic portfolio.

"As the government is losing large revenue from illicit trades, we are hopeful about some strict actions," Sachin Bobade, vice president of research at Dolat Capital Research & Development, said in a note after attending the investor meet. "However, we remain negative on volume performance until firm action by the government."

ITC is diversifying from traditional business of cigarettes to non-cigarettes, including fast-moving consumer goods, agri, paper and hotels, to drive profitable growth. The non-cigarette business grew 2.5 times over the last 10 years.

The Kolkata-based conglomerate has also delivered resilient performance in challenging times. Between fiscals 2018 and 2023, the overall revenue has increased 11%, while the revenue in the non-cigarette business rose 14%. The Ebitda margin has grown 310 basis points in the last three years. The share of the non-cigarette business in segment Ebitda has increased from 18.1% in fiscal 2018 to 27.3% in the last fiscal. The return on capital employed of the non-cigarette business improved from 11% to 22%.

Nielsen said ITC emerged as India's fastest-growing food company, achieving a remarkable growth rate of 1.8 times that of the industry, according to the presentation.

Its FMCG reach is at 7-million outlets with direct reach at 2.6 million, which has increased three times from fiscal 2018–23. The business has launched 300 new products in the last three years.

Within brands, Aashirvaad has crossed Rs 8,000 crore in consumer spends last fiscal, while Sunfeast crossed over Rs 5,000 crore. Other brands like Bingo! chips, Yippee! noodles, Sunrise spices, Classmate notebooks and Mangaldeep incense sticks commanded upwards of Rs1,000 crore in annual consumer spends in 2022–23.

Power brands have delivered a CAGR of over 12% over the past 10 years and new-growth engines would grow faster on account of low base.

The packaged consumer goods business, excluding cigarettes, has grown five-fold in revenues since 2009–10 to Rs 19,123 crore as of March 2023. "Achieving such scale inorganically would have been three times as expensive as per analysts," Puri said during his presentation.

The rural markets are seeing green shoots, but the management said that it has not yet witnessed a recovery yet, indicating that rural sales would take some more time to recover.

Puri has guided Ebitda margin expansion by 80–100 basis points every year on a base of 10% in the last fiscal. A basis point is 0.01 percentage point.

Of the 100-bps expansion, 30–40 bps will be generated from value-added premium products, 20 bps from scale and balance from cost optimisation.