Diversification Drive

Updated: May 26 2002, 05:30am hrs
ITC’s performance during the quarter to March 2002 reflects the positive and negative spin-offs of the amalgamation of the paper subsidiary, ITC Bhadrachalam, with itself. The overall OPM fell to 28.8 per cent (39.7 per cent) owing to the lower margin in the paper business than that of cigarettes. ITC received tax benefits owing to the accumulated losses and depreciation of the subsidiary. This is evident from a sharp decline in provision for tax / PBT ratio from 36.2 per cent to 28.1 per cent. However, a high depreciation of the subsidiary took overall depreciation up to Rs 82.7 crore (Rs 36.5 crore) that depressed bottomline. Apart from that, a huge decline in other income at Rs 23.4 crore (Rs 61.6 crore) during the fourth quarter affected the showing.

The merger does not allow a strict comparison of the financials on a q-o-q basis. The topline, including subsidiary sales, shot up 57.3 per cent at Rs 1,713.7 crore. Consumption of raw materials (net of stock variation) also jumped up by 92 per cent at Rs 724.5 crore, indicating higher raw material cost in the paper business. Staff cost rose to Rs 120 crore (Rs 79 crore). Other expenditure too moved up by 87.3 per cent at Rs 376.4 crore owing to the start-up costs of new businesses. Still, the operating profit grew 13.9 per cent at Rs 492.8 crore. The bottomline showed a rise of 6.9 per cent at Rs 296.2 crore.

ITC’s performance has to be viewed in the context of a few factors. The company’s cigarette business has been adversely affected mainly due to the increase in excise duties and smuggled cigarettes. Ban on smoking in public places and anti-smoking campaign has exacerbated it. Therefore, the company has decided to diversify its revenue stream with a better focus on hotels and paper segments besides venturing into new businesses such as branded garments, greeting cards, packaged foods. However, while the hotel segment suffers from a very long gestation period, the other new businesses need heavy promotional expenditure in the initial period. The new businesses have recorded a loss of Rs 73.4 crore for the year to March 2002.

The old cash-rich business of cigarettes has been slowing down. The domestic cigarette industry sales volumes fell by about 11 per cent during the fiscal, but ITC’s sales volume declined by only eight per cent due to its superior competitive capability and market standing.

ITC’s hotel business was severely affected by the unfortunate events of September and December 2001 besides the general slowdown in the global economy. ITC Grand Maratha, which became fully operational in September 2001, clocked cash profits within four months of the commencement of full operations. ITC Hotel Sonar Bangla at Kolkata is expected to commence commercial operations by 2002 end. The ITC Grand Central project that was slowed down temporarily pending statutory approvals is now likely to open towards the end of 2003.

ITC’s paper business has been focussing on technology upgradation, and market expansion for value-added products to counter a global slowdown in the demand and the resultant fierce price competition. The pulp mill modernisation programme at the Bhadrachalam plant may cost around Rs 227 crore. The pulp mill is expected to be fully operational by October 2002. This is likely to enhance the cost competitiveness of the paper business. The division is also intensifying its farm forestry programme in a bid to improve access to cost effective fibrous raw materials.

ITC’s sustained efforts may see hotel, paper and other new businesses contributing more to the turnover and profit in the long term. However, in the short-term, ITC’s fortunes are linked to its cigarette business. Cigarette sales still contribute close to 80 per cent to the turnover whereas the business contributes 94 per cent to PBIT. Moreover, the capital employed in cigarette business is only 40 per cent, which results in a very high ROCE.