ITC Foods, the foods division of tobacco and hotels major ITC, is likely to report a maiden profit this year, thanks to strong growth in sales of biscuits and staples, a senior company official said.
The business, which sells brands, such as Sunfeast and Aashirwad, could report a revenue of over Rs 2,200 crore, up 25-26% over the previous year, the official added. “We could be turning profitable this year, if we see a growth of around 26% in FY10. Growth is the oxygen, even as we work on driving cost efficiencies,” the source said.
The foods business is newest and smallest business of the conglomerate, which last year reported a revenue of about Rs 23,000 crore. It faced a tough road when it began operations in 2001. Foods was a completely new diversification for ITC and it had to compete with established players, such as Hindustan Unilever and Parle and Britannia. There were also a number of small and regional brands, who dominated local markets and were considered impregnable.
To add to all that, the foods business had not proved to be a happy hunting ground for other large players. Unilever, which boasts of a strong foods business globally, had to scale back its plans in India and change its business model after its initial foray flopped. Modern Foods, India’s first privatisation in 2000, was sold by Unilever in 2007, while plans for its spices and atta brands were cut back sharply.
But ITC, to its credit, managed to make an impact. Sunfeast, the biscuit brand, has managed to chalk up a market share of 11-12%, while Aashirwad, has mopped up 45% of the branded atta market. Biscuits have been the biggest driver of the foods division, contributing over 35% of the top line, followed by staples.
Snacks, confectionery and basic spices are the other categories in which ITC is present. ITC Foods did not comment on the possibility of turning profitable this year, but, when contacted, its chief operating officer Chittaranjan Dhar confirmed that the division was working on several factors to increase profitability. He declined to specify numbers or talk about profitability.
The division, for instance, has prepared a plan to set up more production units closer to the market and increase the number of contract manufacturing units from the current 40. “At present, each of our plants service markets at a distance of 550-600 km.
We want to bring it down to about 250-300 km by adding contract-run units, with ITC investing in machinery and control processes. We will bring more plants on stream for segments, such as biscuits and staples (like atta), which are not freight-friendly in carrying out operations,” Mr Dhar told ET. Investors in the ITC stock could heave a sigh of relief, if the foods business becomes profitable.
“If foods can ensure a top line growth and report profits, the valuation multiples would definitely improve. In fact, the ITC stock was re-rated by the market, once it forayed into this category. Currently, snack-food Bingo and the biscuits segment are generating losses, while only Aashirwad is profitable,” said Aashish Upganlawar, FMCG analyst with Sharekhan.
ITC shares ended marginally lower at Rs 192.95 on Thursday. Last year, the foods business’ turnover grew 20% to over Rs 1,800 crore, a sharp deceleration from the 40% plus growth rates of a few years ago. The increasing losses had then prompted speculation that the firm’s board of directors had asked asked the foods division to work on profitability rather than numbers.
The FMCG major will continue to support growth in business segments where they are already leaders, or where they are in contention with existing leaders. Staples and biscuits are two such verticals. ITC claims to be performing exceptionally well in the mid-priced cookies and cream categories, with a focused strategy, as it trails established leaders like Britannia and Parle in the overall biscuit segment.
Also, ITC Foods will not aggressively go after businesses that are relatively small or do not offer signifciant ramp-up opportunities. This includes the read-to-eat operations under its Kitchens of India brand— its inaugural play in the FMCG business—where the Indian market is relatively small for ITC to invest in developing it. The spices business too is heavily fragmented and is without any major upside.