ITC Looks to Non-Tobacco Businesses for Growth

Source from:  tr.itsmyiq.com Jul 31, 2008 08/01/2008

The chairman of ITC, Y. C. Deveshwar, said yesterday that it was difficult to grow the company's tobacco business within India's restrictive regulatory environment where cigarettes were taxed at rates higher than were applied to other forms of tobacco products, according to a report on The Hindu Online. In fact, in response to an unprecedented increase in excise duties on non-filter cigarettes in the Union Budget this year, ITC has withdrawn from this segment of the market. ITC has for many years been diversifying its business interests and now nearly 53 per cent of the company's revenue comes from its non-tobacco operations. Deveshwar was speaking as ITC released its financial results for the quarter to the end of June. Net turnover for the quarter, at Rs39.0 billion, was up by 18.4 per cent on that of the quarter to the end of June 2007, according to a report posted on the company's website. The increase in turnover was said to have been driven by the non-cigarette businesses, which grew by 29 per cent 'due to the continued scale up of the new FMCG [fast moving consumer goods] businesses, higher agri-business revenues and a healthy performance by the Hotels and Paperboards and Packaging businesses'. But pre-tax profits, at Rs11.1 billion were lower by 1.3 per cent over the same period of last year. Post tax profit, at Rs7.5 billion, was down by 1.0 per cent after adjusting for income tax refunds of Rs290 million received in the quarter to the end of June 2007. Earnings per share were lower by 9 paise at Rs1.99. ITC said that an unprecedented increase in excise duties on non-filter cigarettes in the 2008 Union Budget, steep increases in commodity prices and store rentals, the launch costs of the additions to its new personal care portfolio and the continuing brand building costs in the Foods business had combined to exert intense pressure on profitability during the quarter. 'The unprecedented increase in the rates of excise duties on non-filter cigarettes, of the order of 140-390 per cent, in the 2008 Union Budget has made it unviable for legitimate manufacturers to make value propositions that will appeal to consumers in this segment,' according to the company website report. 'Consequently, the legitimate cigarette sector has stood deprived of the opportunity to engage profitably in a business segment that accounted for more than 25 per cent of industry volumes. As a result, the industry is under tremendous stress. The company had no option but to discontinue the manufacture and marketing of non-filter cigarettes in the plain and micro segments. In the immediate aftermath, consumers have moved to revenue-inefficient tobacco products, including smuggled and tax-evaded cigarettes with [a] consequential steep decline in volumes for the highly taxed legitimate cigarette sector. 'Despite this unfortunate intervention, coming on the heels of a 30 per cent increase in the incidence of taxation in the previous year, the company's consistent efforts in providing value to its consumers through innovation and investments in technology, product quality and distribution have driven a significant shift of consumers to the filter segments and enabled it to sustain its leadership position in the cigarette industry under testing circumstances. 'Nonetheless, the economically weaker sections of society, who largely consume non-filter cigarettes, are now forced to opt for tax-evaded cigarettes or inferior forms of tobacco and remain deprived of the opportunity to upgrade to a superior and more contemporary smoking product. With organized industry substantially vacating the non-filter segment and the huge financial arbitrage resting in tax evasion, contraband and illegitimate players have mushroomed leading to an estimated trebling of illegal cigarette volumes even as legitimate volumes have slipped by almost 13 per cent during the last few quarters. It is imperative that enforcement authorities check this phenomenon to preserve revenues that rightfully belong to the government, apart from restoring equity and a level playing field for the organized industry. 'In addition, the consequent reduction in demand for higher grade tobaccos will have long-term implications on earnings and employment in the farm sector and adversely affect a large number of farmers, specially in rain-fed areas where several attempts to grow alternative crops have failed to yield results. 'Such challenging circumstances on the taxation front, coupled with the harsh regulatory climate will undoubtedly test the resilience of all legitimate players in the cigarette sector. The company believes that the economic potential of tobacco can be maximized through moderation of taxes on tobacco, minimization of discriminatory taxes between different classes of tobacco products and a regulatory framework that addresses the genuine concerns of all the stakeholders of the tobacco industry. The need is for a balanced agenda on tobacco, both fiscal and regulatory. 'The company remains confident of leveraging its internationally benchmarked product quality, the resilience of its brands and the superiority of its competitive strategies to deliver strong results and shareholder value, despite the current difficult circumstances.' Enditem