itc acquistion wimco

8/4/2019 ITC Acquistion WIMCO

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ITCs Acquisition of WIMCO: The

Turnaround Challenges


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Preview

Introduction

V/M/CV/Strategy

Industry Analysis Analysis of Both Companies

Rationale For Acquisition

Organizational Performance factors Relevance of SME strategies

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Introduction

Few companies survive intact for centuries.

All organizations sooner or later face a crisis situation.

Reasons for a crisis situation are plenty:-

Revenue Downturn Caused By A Weak Economy High Operating Costs

High Fixed Costs

Poor Strategic Choices

Poor Execution Of A Good Strategy

Highly Successful Competitor

Excessive Debt Burden

Inadequate Financial Control14-Apr-12 3


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What do Org do for Turnaround..

How org recover depend on their strategy

Unique to each company

Some of the turnaround strategies are:- Change Of Top Management

Strategic Acquisitions

Divestment Of Certain Investment

Revenue Increase

Cost Reduction

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Objectives We seek to Discuss

To focus on the business diversification

strategies of ITC and its entry into the match

stick industry

To discuss the challenges faced by ITC in

turning around WIMCO.

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Indian conglomerate with a turnover of US $ 6 billion

and a market capitalization of over US $ 22 Billion

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Vision

SUSTAIN ITCS POSITION AS ONE OF INDIAS

MOST VALUABLE CORPORATIONS THROUGH

WORLD CLASS PERFORMANCE, CREATING

GROWING VALUE FOR THE INDIAN ECONOMY

AND THE COMPANYS STAKEHOLDERS.

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Mission

To Enhance The Wealth Generating Capability

Of The Enterprise in a Globalising

Environment, Delivering Superior And

Sustainable Stakeholder Value.

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Values

Trusteeship

Customer Focus

Respect For People

Excellence

Innovation

Nation Orientation

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Strategy

Consolidate and offer a greater range in the existing

categories and grow these markets

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Industry Analysis - Matchsticks

Highly fragmented market in India

Rs. 1.2 million market in India

Total Annual Production 750,000 units

Market leader Wimco (13% market share)

Stagnant Growth 1% p.a

Industry margins 1.5% Major users - Households (>50%)

Categories small scale (handmade), cottage, large-scale (mechanized)

2,50,000 people employed by handmade sector

6,000 people employed by mechanized sector

Govt. showed keen interest in promoting this sector as it would provideemployment to rural sector

Per capita consumption of matchbox in 2000 6% (projected)

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Porters 5 forces Analysis of Matchstick

Industry

Threat of

New

Entrants:

HIGH

Competitive

Rivalry: HIGH

Power of

Buyer: HIGH

Power of

Supplier:

LOW

Threat of

Substitutes:

LOW

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Small-scale (handmade) sector

Holds 67% of matchstick market

Dominated by 18 players in the industry

(Match Kings of South India)

Pioneer Group (group of 18) holds largest

market share

Labor not easily available

Women and child laborers paid low wages

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Cottage Sector

Govt. of India set up Khadi & Village IndustriesCommission (KVIC) in 1977

To increase employment opportunities

To reduce exploitation of traders To increase wage levels

Total of 10,000 cottage units

Rapid Expansion Programme failure led tolosses

Holds 15% market share

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Large-scale (mechanized) sector

Only player was Wimco

Contributes to 18% of matchbox production In

India

Although automated, operations were labor-

intensive

Higher wages (16% of total sales) as compared

to small-scale (5.5% of total sales)

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Company Analysis: Wimco

Belongs to Swedish Match AB Group Co.

Holds 10% market share in the world

WIMCO stands for Western India Match Company

Brands Ship, Homelites, Tekka, Horeshear,Three Mangoes, Cheeta Fight, Kapas and Arrow

Production base: 5 billion units p.a

Caters to 1.5 million retail outlets Paid 60% more in excise taxes than other sectors

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The Fall of WIMCO

Market share fell from 30% to 13% in late 1990s due to Intense competition

Low volumes

Increase in LPG connections

Increased usage of lighters (growth of 20% from 2002)

Unorganized sectors had a tax relief

Tough competition to ITC Losses incurred: Rs. 71.5 million in 2003-04

Increase in excise duty from 8% to 16% (squeeze in margins)

WIMCO had labor problems (strike for 9 months)

Tried to diversify into shampoos, mosquito coils, gumlets, throat lozenges

Could not break through huge losses to the tune of Rs. 71.5 crores in 2003-04 and

Rs. 42.7 crores in 2004-05

Wimco reacted very slowly to the changes in the market and are now looking at lowmargin products. It remains to be seen whether that changes the bottom line. an industry analyst.

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Company Analysis: ITC

ITC stands for Imperial Tobacco Company

Focus was on growth and consolidation of cigarette and tobacco business

Popular brands Wills, Bristol and Gold Flake

Forayed into other businesses to reduce dependency on cigarette & tobacco business Hotels

Paper

Packaging

Agri

FMCG

IT

Lifestyle Retailing

Leader in cigarettes, hotels, paperboards, packaging and agri-exports

Supplies to 2 million retailers

Core Competencies Unmatched distribution reach

Superior brand-building capabilities Effective SCM

Acknowledged service skills in hoteliering

Cigarette and tobacco 78% of revenues (Dec. 2004)

Net Profit Rs. 14,000 million (Dec. 2004)

Net Sales increased by Rs. 53 million

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SBUs contribution to ITC revenues

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ITC: SWOT Analysis

Distribution

Branding

SCM

New to thisindustry

Hugeinvestment

Matchstickstagnantmarket

Low margins

STRENGTHS

WEAKNES

SES

OPPORTUNITIES

THREATS

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The BCG Matrix for ITC Ltd.

Stars

Hotels

Paperboards/

Packaging.

Agri business.

?

FMCG- Others

Cows

FMCG-Cigarettes

Dogs


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Reward Management

Managerial remuneration key component of

PMS

Features of ITC's remuneration strategy are:

Remuneration must be market linked

Remuneration must take into account

"affordability" and the Company's capacity to pay

and updation The policy is implemented at all SBUs

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ITCs Matchstick Portfolio

Entry in 2002

Business Model sourcing from small-scale units and marketing

Tried to help SSI matchbox units through tie-ups

Brands AIM, Ikno, Mangaldeep, Vaxlit and Delite (priced betweenRs. 0.50 to Rs.1.50)

Aim increase market share and sales by offering unique designsand value-adding features

Market share 12% (Dec 2005)

Spent a lot on marketing

Increased no. of tie-ups to reduce costs

Only option to increase market share was through acquisition theWIMCO opportunity presented itself!

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Rationale for acquisition

To enhance image as a FMCG player

To increase market share

To enable cost effective delivery of goods andservices into rural India

To add value to rural customers through its

penetrative distribution capability To catalyse fresh investments in the company

with attendant benefits to all stakeholders

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Did ITCs strategy deliver

organizational performance?

Profitability Ratio:

ROCE

Price by earning Ratio

Liquidity Ratio

Debt to Equity Ratio

Dividends

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30

32

34

36

38

Mar '06 Mar '05

Return On Capital

Employed(%)

Return On

Capital

Employed(%)

0

10

20

30

40

Jan/05 Jan/06

Price Earning (P/E)

Price Earning

(P/E)

0

0.02

0.04

Mar '06 Mar '05

Debt Equity Ratio

Debt Equity

Ratio

0

500

1000

1500

Jan/05 Jan/06

Dividend

Dividend


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Year on Year Growth

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Segment wise Contribution

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Stock Performance

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Can SME strategies have relevance for

large organizations?

Strategy formulation depends upon:

M/V/Core Values/BP/Environmental factors

Vary in different sectors

SMEs can have common strategy (Incidental)

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itc acquistion wimco

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