ITC on a health kick post global anti-smoking regulations

India’s biggest cigarette maker is going on a health kick. ITC Ltd ) sells 80 percent of the cigarettes in the world’s second most populous country where 275 million people use tobacco products. But as India follows the rest of the world in adopting anti-smoking regulations, the company’s core tobacco business is getting squeezed and it is venturing into dairy products, drinks and perhaps even healthy breakfast foods to try to expand its money-losing consumer products business. “Indians are turning health-conscious in their food choices, so health and nutrition will be a very strong focus area for us in the coming years,” Chitranjan Dar, chief executive of ITC Foods, told Reuters in a phone interview.

ITC, India’s fifth most valuable company with a market capitalisation of $38 billion, already makes cookies, crackers and potato chips, so expanding into dairy and breakfast foods is not that big of a stretch. But healthy food marks a sharp turn for a company best known for cigarettes. Although ITC got into the food business a decade ago, cigarettes account for half the company’s revenue and even its initials are a throwback to its century-old roots when it was known as Imperial Tobacco. The company is 30.8 percent owned by British American Tobacco. Building market share in food and consumer products may be difficult. With the exception of packaged flour, where ITC holds a leading position, the company has not won more than 15 percent of the market for any product category in which it competes.

It has spent Rs 4500 cr building up its food and consumer product segments over the past 10 years, according to analysts. “No other consumer company has invested such sums of money without creating a relevant share in any category,” said Nikhil Vora, managing director at Mumbai-based IDFC Securities. Vora’s firm downgraded the stock to underperform from outperform after Australia barred the use of logos on cigarette packs on August 15, sparking speculation that India’s regulators would follow. Investors initially knocked $1.3 billion from ITC’s market value after Australia’s move, although the stock has since recovered, in part because most smokers in India buy cigarettes in single sticks, not packs.

 An investor favourite for its defensive characteristics, ITC shares have risen 32 percent this year, outpacing the 13 percent rise in the index ITC makes Sunfeast biscuits, Bingo snacks and the Fiama Di Wills range of soaps and shampoos, competing with the likes of Hindustan UnileverLtd Procter & Gamble Co (PG.N), Godrej Consumer Products and Dabur India Ltd in a price-sensitive market worth $13 billion and growing at 15-20 percent a year. Its consumer goods sales rose 24 percent to 55.3 billion rupees in the year to March, accounting for 22 percent of total ITC revenue, although the business was a drag on overall profit, losing 1.96 billion rupees before interest and tax. It aims to triple revenue from consumer goods over the next 5 to 7 years. “What we have achieved is not bad for a business that is a decade old in this space,” ITC’s Dar said, adding that parts of its consumer goods business were “profit positive.”