ITC chairman Sanjiv Puri optimistic as India outshines global inflation challenges

A: Absolutely, it is, indeed, as you very rightly put India's moment for a confluence of factors. One, of course, the economy, the macros are doing well, I think there have been a lot of good policy interventions, not just policy interventions, but you can see it on the ground, whether it's a digital infrastructure, or physical infrastructure, and many more. So it has really worked out well and it's wonderful that despite the difficult global situation, the Indian economy is still growing, it's growing well, despite exports being under severe pressure. So indeed, things are well placed as far as India is concerned.

And as you know, in the new world order and given India's advantage of demography, and the scale opportunity that India can provide, whether it's manufacturing or services, I think there is a lot of global interest to look at this as a hub not only to deal with the growing domestic consuming market, but also as a hub for, global exports. So it's a great opportunity for India. Certainly, it's very positive for all the segments of ITC.

Most of our segments are related to the consumption in the economy. We are a very India-focused company and we are very confident and optimistic. Last year, we commissioned five manufacturing facilities, right now four more or in the pipeline. When I say in the pipeline, it is not on paper, work is actually happening on the ground. One in fact should be commissioned in the next 12 months itself. We are also scaling up our hotel footprint. In the last 16 months, we opened 18 hotels. So in all the segments, we see an immense amount of opportunity, we are very optimistic, and we continue to invest.

A: So first of all, yes, as far as the process is concerned, it has just started, nothing much to say it has just started. It is about a 15-month journey, and we believe it's well on track because we are well prepared for it. As far as the restructuring is concerned, I think this 40 percent issue has actually generated a lot of media interest, though our shareholders were fairly complimentary in the AGM and I had also occasion to hear the same, compliments from certain institutional investors, because this has been very, very well thought out.

Fundamentally, we must recognise that whatever we do, must position the business in a much stronger wicket than what it was before. And for that purpose for the hotel's business, first of all, to grow and thrive and to actually benefit from the tailwinds that this sector has got, it's important that it continues to enjoy the trademarks, the corporate goodwill, and all the processes and the synergy from ITC. We have huge investments in digital which is also available for hotels. So it's important that the hotels have access to this.

Similarly, for the growth of our say, for example, FMCG businesses, and the foods business, I have often spoken about the power of synergy. It is also a way for us to create new growth opportunities. The cloud kitchen comes together because of hotels and the food business. So we don't want to lose this value accretive opportunities when we reorganise ourselves. And what is happening after this is that as far as ITC is concerned, our ROCE is improving by 2,000 basis points, or thereabout, our ROI is improving by nearly 1,000 basis points. So, the productivity or financial metrics of ITC also improved. Shareholders of ITC get a direct 60 percent benefit in the hotel's business and there is a determination of the price based on market mechanics 40 percent is held indirectly through ITC. The hotel's business will attract the right kind of investors who are interested in that kind of, business. So, all in all, it's a win-win for everybody. I think 40 percent was required so that synergy is sustained and the operations of hotels are stabilised. It gives confidence to all the stakeholders of the hotel's business, whether it's employees or other stakeholders who partner with us. And therefore, I think that 40 percent was definitely required.

As far as investment in hotels is concerned, we have a strategy, which we have said is asset-right is course, it is different from asset-light so it will be a balance between management contracts, and our own properties. This new company has a very strong balance sheet, it will be debt-free with marquee properties, and a very strong balance sheet, good cash flows. It will also, as we have said, be funded for its capex requirements for two, or three years through liquid investments. So the capacity of this new entity to raise capital for the investments it wishes to do, by way of, through its own resources, or through debt is very strong. And of course, the possibility is there to raise through the equity route also because it's a very strong balance sheet of this enterprise.

A: I do not see the need immediately for or I do not foresee any significant need for capital raising. I think the cash flows plus the liquid investments that will be provided for the two to three years of capital will be sufficient because remember that we have a very strong footprint already in most of the metros. And therefore the incremental investments that we make will be in, maybe tier-II towns and so on, so forth, where the sizing is different. So, therefore, I don't see any major requirement. But if for example an opportunity, which cannot be predicted, say an opportunity for a trophy property comes up, and it requires substantive investments I am saying the enterprise has the capacity,

A: I don't know when it will come, what will come, I am just saying potentially, you have to keep your eyes and ears open.

A: I have always maintained that value will be created based on business fundamentals, based on sustained growth and profitability of enterprises. And, though it's not for me to really comment on what happens in the market I think the valuations are determined by market players. But I think it's the role of enterprises to create the value and in our case, also, if you see it, it's fundamentally because of growth and profitability, that it has had an influence on the valuations. And that's what we are focused on and that's the fundamental thing, the role of management is to make sure the businesses get more competitive, are equipped for partaking or actualising all the opportunities, and compete in a manner that's competitively superior. And in that context, we will also have to look at how we organise ourselves, whether together as a conglomerate, or something separate makes sense and based on the merits of the case, one will make a decision. Right now, there is nothing that we have called out. I mean, whenever there is something on the table, we very transparently call it out.

A: Let us take that when it comes and where the opportunity is. Right now, it will be a little speculative to think about it. It will be a little speculative, one has to look at it in the context of the time when it is decided. As far as if you were to ask me this question in another way within the ITC portfolio, out of our newer businesses leave aside the traditional businesses, where is the biggest opportunity to create value? Of course, it's on the consumer side. That I would say, yes, it's the consumer side that has got the maximum potential.

A: So we are approaching the export opportunity in two ways. So one, I would say, let us say the proximal markets, and once is the larger global markets. Now, as far as the global markets are concerned, we have been in the process of setting up our distribution infrastructure, it's there now in about 60 countries in varying degrees of maturity and that's the process that is on. It has, of course, not gone with the speed that you would ever want it to, because there have been some disruptions during the COVID period because of supply chain and the cost of transportation, etc. But nonetheless, that's behind us and we are building up I think we are making a decent amount of progress.

In proximal markets, the way we are looking at it is it is a more intense market development, where we are even exploring the possibility of investments, and if there is a possibility even of an acquisition. In Nepal, where we already have a subsidiary, for example, we have already commenced manufacture of FMCG, certain categories and over a period of time, we will build it up. We are looking at other proximal markets also. So two different strategies, one for a larger global market and one for proximal markets.

A: What I alluded to you just now was more on the consumer side. Agri is big for us, it is a very large export business for us.

In agri I would really put our portfolio into three vectors - one is the commodity vector, the second is the value added vector, third is our new platform which we are building and is a business model on its own called ITC Mart.

Value added is where we are really accelerating and that is where we want to really press the accelerator. We are growing quite well there. Last year we commissioned a global spices facility. Very shortly now we will be commissioning a nicotine derivative plant of pharmaceutical grade. So we are really high value at spots. So that is the route we are going as far as agri is concerned.

Value addition also manifests in terms of the type of crops we deal with. So medicinal aromatic is another area which we are building. We have now got the farmers growing it already in 7,000 acres, this is a much smaller number than we want to scale it up to. We are now taking that up to the next level of value addition, extraction, and then proprietary formulations. So it is a journey that we will go through.

A: As far as the commodity business is concerned, yes, there are constraints, there are constraints because there are restrictions right now. So that piece of the agri business will have very limited traction till such restrictions are on.

We realise why it is there- it's because of food security, which has far greater priority than business opportunities. Business opportunities must come later, first food security is important. So we respect that. Rather it's our role to work with the value chain, the farmers, and see how we can become more resilient and more crops can be produced.

As far as number is concerned, we generally don't give guidance.

A: Well, as far as contribution to revenue is concerned in agriculture, it is going to be significant, it is already significant and it's going to be much more significant in the future. Of course, it may have a lesser share of the commodity business and a greater share of the value-added piece.

A: As far as inflation is concerned, I think the worst is behind us. In fact, as we all know India has managed it much better than the rest of the world. Pre-COVID, India would typically have a higher inflation than the other parts of the world. It's now a better situation that we are lower, but it's higher than what we would like it to be. But I think the worst is behind us, inflation is coming down, though the cost of commodities remains much higher than what it was pre-COVID. But certainly, inflation has come down.

In recent months, we did see some increase in inflation that was on account of certain commodities, the perishables where there was escalation in the prices, but I think that is behind us again and it will come down to what it was prior to that. So for inflation, all signs are the worst is behind us, it will moderate. But I will just say that we are all living in a very uncertain world because of these extreme weather events, so one has to be very watchful. However today, all the signals are that it will only moderate.

And with the moderation of inflation, there is bound to be and it's already happening price corrections in the markets. So volumes will pick up, it is not like an on and off button, it's not linear, it's not that the moment you correct prices, the next day, the volumes pick up, it's a process that happens because there is inventory in the pipeline, and so on, so forth. So it takes time. So I do expect in the second half volume will be better.

As far as we're concerned in terms of the trajectory, I think you've seen in the last few quarters that we've held on the growth rates quite well in the upper quartile. Even I would say our volumes have been better than industry figures. I can't give you a number because there are so many categories for me to get into it, but generally have been better. And I think it's holding on well. And rural also there are some green shoots of pickup.

A: If you look back from FY18 to FY23, our margins in FMCG have expanded by 770 basis points, we had said that our aspiration is 100 basis points or so every year. And so far, we have done better despite the fact that we had very severe inflation for some period of time.

Going forward, I think we are saying 80, or more like 100 basis points, is what we would like to do year on year. Of course, I'm not saying it's going to be linear, it could be some years a little more, some years a little less, so that plus minus will happen but on an aggregate, if we look at a medium-term, certainly around that- 80-100 basis points we should be able to do. What is it that gives me the confidence? I think we've put the structural levers in place, and the structural levers come from the portfolio, where we are premiumising and we are premiumising what we have, we are also premiumising by getting mega brands to address value-added adjacencies. We are premiumising by democratising premiumisation. That requires some innovation in the supply chain because the small quantities we have to take to - Bharat is premiumising. So servicing Bharath is a challenge and that's where innovation is required. So that's on the portfolio bit.

On the back end, we are leveraging digital to optimise everything from how we buy to how we spend to how we deliver. So all of that is in place. I think our ICML story is starting to give us results, I think there is huge headroom to go with economies of scale and scope capacity utilisation.

We've also delayed operations very well in two units, that is in Kapurthala and Trichy with integrated logistics, that model has been proven, and now we are going to roll it out, we are getting closer to the market because of the footprint of our manufacturing facilities. The investments we are making in our facilities, besides giving us the right quality are also improving productivity. So all of these measures and of course, as we scale up there is going to be a scale advantage. So I think we have we have levers in place for continued margin improvement in the short term and medium term, all the levers are well there and they will unfold over a period of time and as we go along hopefully, we will keep on adding more levers to it.

A: We don’t look at it as just barely an investment or an acquisition of D2C. What we invest behind is the idea and consumer space. So Yoga Bar was a premium healthcare space, with natural ingredients that are the trend for the future. It is a trend that is accelerating. So we have invested because of the trend. Ultimately I don’t think any big is going to be created purely on a D2C model. It has to go omni-channel. There will be very few and far little niches that will remain purely as D2C.

E-commerce is growing but it is still a small pie of the consumer and our idea would be to present well on every platform from where the consumers buy so that is where D2C has a role to play. But the investment is driven by more the theme and the idea and the opportunity that gives and that is the value we bring to the table to be able to make it omni-channel in the future.

A: We have been resourcing all our investments in the past, all the brands that we have built, we have built 25 mega brands, that Rs 29,000 crore consumer spent so we have the resources, resources is not an issue. It is not a constraint. I think if at all the constraint is how creative and how well we can execute and how well we can prioritise, I think these are the areas.

A: It is going to be more FMCG and it is going to be more paperboards, of course, agri is also going to get some bit of it because we are moving into value-added and generally across businesses you also have a capex for technology upgradation, replacement so all of that will be coming in. So it is going to be FMCG, paper the major chunk followed by agri and our traditional businesses.

A: I think the headroom to grow is tremendous, Rs 5,000 is just I would say one milestone. Now we have to start working on the next milestone.

A: Milestones will be in 1,000s, in 2,500, in 5,000, it is continued, I am not going to give any guidance, but I am just saying that there is plenty of headroom to go. If you look at our per capita incomes, they are going to go up and double by 2030. We have seen the S-curve play out in many other economies, and I see no reason why it will not play out in in India, and therefore the opportunity is huge.

We have also been selecting our portfolio in a fashion where the opportunity to grow through penetration is huge. Our addressable market in our existing portfolio itself is as analyst estimate about five lakh crores the highest in the FMCG space, so headroom to grow is tremendous. And, and that is why, as I said earlier, it's about it's all about insight, prioritisation, and then great, great execution. So at a portfolio level, also, there are three parts of our portfolio. The third part is really creating the growth drivers for the future. So we are really building the portfolio for today, tomorrow, and the day after.

A: So besides scaling up our big brands, one vector is value-added adjacencies out of existing brands and that's an ongoing process. It's about inciting and then finding the prioritising to execute. So if you look at Aashirvad in the last 12 to 18 months itself, it has become a big centre of plate brands, besan, vermicelli and so on and so forth, it has gone in to anymore. It was already there in salt and spices and ghee earlier, it has gone into frozen. Sunfeast has gone into milkshakes so, the adjacencies will be spotted and where we have the right to win we will get there.

We are then scaling up categories like frozen snacks, and ITC Master Chefs, we are scaling up our beverages, the juices, we are scaling up natural floor cleaners like Nimyle, and at the same time, we are incubating categories like Dermafique, which is our skincare brand. We are incubating chocolates so these will at some point in time after we have scaled up what we are scaling up now or get to some reasonable size and when we find we have the right opportunity we will start scaling up, these are the categories so it's going to be an ongoing process.

A: So we are going to focus a lot on FMCG and in FMCG, the focus is actually we find the opportunity across whether it's food, whether it's personal care, whether it's stationary, or whether it's Agarbattis right across. So we will be identifying the right assortment for the right geography and promoting those in those geographies that is the way we will go about it.

If you look at you know, Choco Fills, which is the, by far the market leader, as far as a filled cookie is concerned, the penetration of that is just 3-4 percent. So, if you look at natural floor cleaner, the penetration again is very small. So the opportunity is huge. So we have to prioritise the markets and the product and the markets and go and promote it and execute it.

A: I am quite optimistic that demand will strengthen going forward. They will be in between like anywhere else, there will be cycles, there will be ups and downs, but I think the medium-term long-term story is very, very strong. Whatever is India-centric is very strong, whatever is indexed to external demand, yes, there are challenges. So in certain B2B areas, which are indexed to external demand, particularly for example, where China is a big player, yes, there will be challenges. But the Indian consumption story I think is very strong and it will only strengthen.