Neeraj Marathe

Case 10: ITC ITC has emerged as one of India’s biggest conglomerates, with totally diverse

business interests. Very few companies in the world (let alone India) have been able

to operate such totally distinctive businesses and yet manage to grow. ITC, on the

other hand has grown phenomenally. The 10-year CAGR of various benchmark

parameters bears testimony to its phenomenal growth:

Net Sales: 14.5%

PAT: 24.2%

Net worth: 23.2%

Market Cap: 29.4%

Total Shareholder Returns: 30.3%

Very few companies in the world can boast of such a consistent growth record. This

growth record becomes all the more creditable if we take into account the various

businesses that ITC operates. ITC has the following businesses:

FMCG: This segment consists of cigarettes, foods, lifestyle retailing,

stationary, safety matches and agarbattis. Cigarettes are the mainstay of the

company. The company generates about 70% of its total revenues from

cigarettes. In the foods business, the company has five distinctive brands-

Aashirvaad (flour), Sunfeast (biscuits), Kitchens of India (ready-to eat

meals), Mint-O and Candyman (candy). All the brands have already received

extremely good consumer response. The company is also adopting an

aggressive marketing strategy to promote its brands.

Hotels: ITC has one of India’s finest and fastest growing hotel chains, with

over 65 hotels over 50 destinations in India. ITC hotels are a class apart and

have received recognition from all over the world. ITC hotels have been the

preferred destination for dignitaries like Bill Gates and Bill Clinton and are

considered to be the top service-providing hotels in the country.

Paper & Packaging: ITC’s Paperboard division has a capacity of over 3.6 lakh

tones per year and is the market leader in India across all carton-consuming

segments. ITC offers unparalleled product range and quality for a variety of

sectors in the country. The Specialty papers division manufactures a range of

specialty papers like cigarette tissues, plug wraps, tipping base, printed

tipping paper, etc. The Packaging division provides niche packaging solutions

to customers all over the world. This division has significant synergies with

the cigarettes business of the company.

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Agri-Businesses: One of the prime examples of how a business can be run in

active conjunction with the farmers, ITC’s agri-business has established itself

as a world-class profit making business, which also empowers rural India.

This business division deals in products such as soyameal, leaf tobacco,

foodgrains, edible nuts, marine products and processed fruits. ITC has

achieved true backward integration by sourcing its raw materials directly from

farmers, which is beneficial to both the company as well the farmers. ITC’s e-

choupal initiative, which centers around providing farmers with kiosks for

networking has been appreciated all over the world and is actively adopted as

a case study. It is an excellent example as to how a modern business

powerhouse can effectively build up cooperation with common farmers for

mutual benefit and development.

Information Technology: ITC Infotech India Ltd., the wholly owned subsidiary

of ITC, offers a powerful customer value proposition based on its in-depth

domain knowledge gained from the experience of servicing a range of internal

and external customers across diverse domains. It is one of India’s fastest

growing IT companies, with a CAGR of 54%. This division provides

international clients cutting edge technology solutions and business expertise

in diverse domains such as FMCG, manufacturing, hospitality, financial

services, etc. ITC Infotech partners with best-in-class companies like Sun

Microsystems, Microsoft, IBM and Siebel.

So how big are these divisions? Let us compare some of them with established

peers, which are separate listed companies.

SNAPSHOT Rs. Crores

Particulars Cigarettes Paper Hotels

ITC GPIL ITC BILT ITC IHCL

Revenue (Gross) 11678 1432 1886 1870 850 1084

PBIT 2761 103 351 358 287 315

P/E Ratio 34 20 34 12 34 43 GPIL = Godfrey Phillips India Ltd. BILT = Ballarpur Industries Ltd. IHCL = Indian Hotels Company Ltd. * All figures for the year ended 31/03/2006. In case of BILT, 12 months trailing figures have been taken.

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(The agri-business does not have any strict peer group and hence has not been

compared, while the Info-tech division is too small at present to be compared with

any established peer.)

From this snapshot, we can judge the scale of the company’s business. Over the

years, ITC has identified high growth businesses and managed to surpass

established industry players.

So how has ITC managed to grow at such rapid pace, even while operating such

diverse businesses? The answer lies in its product structure as well as management

model. Let us analyze them.

THE PRODUCT STRUCTURE:

Even though the various product divisions appear totally diverse, they are intricately

connected to each other and center around the dominant cigarette business. E.g. the

paper division makes rolling paper as well as packing paper for cigarettes. The agri

business (tobacco leaf) division is directly connected to cigarettes. Even the infotech

division’s core work area was to develop software and applications for in-house

purposes.

All the divisions of ITC enjoy the benefit of the huge cash flows generated from the

cigarettes division. This has helped ITC maintain minimal debt in its books and yet

set-up new areas of business. (ITC’s total debt as on 31/03/2006 was merely Rs.

147 crores, while its total shareholders’ funds were Rs. 9221 crores.) This explains

how ITC has managed to grow in such different business areas. Too much

diversification, which has been the weakness of many businesses, has been the

strength of ITC.

THE MANAGEMENT MODEL:

ITC has developed a well-defined and compartmentalized management structure in

order to effectively manage its diverse businesses.

The management structure consists of three interlinked levels:

Strategic supervision by the Board of Directors: The Board of Directors as a

group focuses on the macro aspects of the company, not related to the direct

day-to-day activities of the company. The Board, through its various

committees like the audit committee, compensation committee, investor

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relations committee function strictly in the supervisory capacity. They are

basically checks on the lower levels of management.

Strategic management by the Corporate Management Committee (CMC): The

primary role of the CMC is strategic management of the Company's

businesses within Board approved direction / framework. The CMC meets at

least once a month and will be connected to the strategic decision making of

the company.

Executive management by the Divisional Chief Executive assisted by the

Divisional Management Committee: This level looks after the actual working

of the division it is assigned. The Divisional Chief Executive will be a Director

of the company and will overlook the working of that specific division as if it is

a separate company altogether.

The following can be inferred from ITC’s management structure:

The company follows a totally decentralized management structure, with one

member of the Board made responsible for one division.

It is this departmentalization and total autonomy that has enabled ITC to

succeed in all the businesses it is carrying on.

Essentially, ITC can be viewed as 5 different companies within one legal

structure.

Questions:

1. Write a brief about each of ITC’s division in your own words. Are all the

divisions of the company capital-intensive? Explain

2. In spite of being in multiple businesses, some of which require huge capital,

how has ITC remained almost debt-free?

3. Write a brief about ITC’s management structure.

4. Is ITC a fit candidate for demerger? Explain in detail. Answer in point-wise

form.