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Ready to ‘milk’ opportunity in dairy…
ITC is set to foray into the dairy segment with value-added products like
ghee and milk powder being be the preliminary offerings. The launch of
ghee would be pan-India but powdered milk would be initially used inhouse
by the company for its other FMCG products. The company plans
to set up six plants across the country for its dairy business namely in
Bihar (first plant to be commissioned in Munger), Uttar Pradesh, Punjab
(in Kapurthala), Maharashtra, Andhra Pradesh and Telangana. ITC’s
constant extension into new FMCG segments over the years has been led
by the company’s intention to reduce its dependence on cigarettes
(facing extensive tax and government regulations hampering volume
growth in cigarettes). ITC’s revenues from the FMCG segment have
grown at 21.9% CAGR in FY09-14 with losses declining from | 483.5 crore
in FY09 to meagre profits of | 21.8 crore in FY14. We believe that though
profitability from the FMCG segment would be gradual, the company’s
strong distribution and sourcing network would aid in building a strong
presence across the segments in which it enters.
Dairy opportunity in India
India is the largest milk producing country in the world producing ~132
million tonnes (MT) of milk (FY13) with only ~20% being organised and
~80% coming under the unorganised sector. Of the 20% organised,
~14% milk is processed and sold in liquid form while only ~6% is
processed into value-added products. Within the unorganised segment,
~40% is consumed and sold in rural India itself with ~17% sold in urban
areas while ~23% is processed into traditional value-added forms.
However, a visible shift is taking place towards the organised segment,
although gradually, where companies like Amul, Nestlé, Britannia and
Danone are increasingly growing their presence to tap the huge
opportunity. Hence, we believe there lies a huge opportunity for ITC by
capitalising on its strong backward integration network with farmers
(through e-choupal initiative) and an extensively established distribution
network of cigarettes to tap this opportunity.
Innovation, new launches across businesses
ITC has also developed a new packaging solution for consumer goods
involving the package itself to turn into a retail shelf, thereby reducing the
retailer’s investment on shelves. The package is known as ‘shelf-ready
packing’. This packaging trend is already widely prevalent in developed
markets and is soon expected to be rolled out in India by ITC through its
packaging business (ITC’s paperboard and packaging business revenue
was | 5166 crore in FY14). Further, within the hotels business (revenues
of | 1132.9 crore in FY14) ITC is expected to launch its first five-star
leisure retreat ‘ITC Grand Bharat’ on October 1, 2014 at Manesar,
Gurgaon. Hence, ITC has been taking steps to expand revenues across all
its businesses to gradually reduce its dependency on cigarettes (~57% of
revenues ~84% contribution to EBIT in FY14).
Strengthening presence across businesses, earnings need to catch up!
We believe that though ITC is actively increasing its presence and
innovating across segments other than cigarettes, contribution to
profitability from these segments still needs to strengthen. With ~84% of
earnings still from cigarette segment, which is facing increased
challenges from the government to reduce consumption in the country,
we remain cautious on the earnings visibility from cigarettes. Hence, we
maintain our target price of | 387 on the stock and assign a HOLD rating.
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