How ITC plans to build a future-ready portfolio

There remains a debate on who said this: “When the facts change, I change my mind. What do you do, Sir?” Was it the British econo­mist John Maynard Keynes or the Ame­ri­can economist Paul Samuelson.

Irres­p­ective of who said it, this sentiment appears to have found resonance in ITC’s boardroom in recent years.

In its evolution from a single-prod­uct company to a conglomerate, ITC has largely focused on building businesses and brands from scratch.

Acquisitions, for much of its century-old history, have been few and far betw­e­en.

But with India’s growth story playi­ng out, the narrative is beginning to shift.

A big buy, and why

On March 31, ITC snapped up Century Pulp & Paper (CPP) from Aditya Birla Real Estate for Rs 3,500 crore after a contested battle.

The acquisition is ITC’s biggest to date and comes at a time when the paper sector has been in a cyclical downturn for two years.

Supratim Dutta, executive director and chief financial officer, ITC, explained that as a long-term player, the company remains optimistic about the growth prospects of the Indian paperboards and paper industry, notwithstanding near-term challenges.

The numbers suggest strong potential.

Demand for paper and paperboards in India has been growing at 6 to 7 per cent, making it one of the fastest expan­ding markets globally.

Yet, per capita con­sumption remains low at 16 kg com­p­­a­red to the global average of 57 kg, indi­cating significant headroom for growth.

Rising demand for sustainable packaging solutions across industries such as fast-moving consumer goods (FMCG), food service, pharmaceuticals, e-commerce, education, and stationery bodes well for future consumption.

The only dampener is the pressure from low-priced Chinese and Indonesian supplies in global markets, including India.

The ITC group straddles a range of businesses — cigarettes, FMCG, hotels, agri business, paperboards, paper and packaging, information technology.

The diversification into hotels and paperboards began early.

Its entry into the paperboards busin­e­ss dates back to 1979 with ITC Bhadrac­halam Paperboards Ltd. In March 2002, Bhadrachalam Paperbo­ards merged with ITC and became a division of the company.

Later that year, Tribeni Tissues division was also merged to form the paperboards and specialty papers division.

In 2004, it further consolidated its position as the largest paperboard company by acquiring the paperboard manufacturing facility of BILT Industrial Packaging Co (BIPCO) near Coimbatore, Tamil Nadu.

Now, the CPP acquisition is expected to drive the next horizon of growth in this business.

The brass tacks

After some four decades of growth, ITC’s Bhadrachalam facility in Telangana — its largest in the paperboard segment — has little room left for further expansion.

That set the company on the lookout for new sites. In CPP, an opportunity came knocking.

“Our existing facilities are located in the southern region and are saturated.

"This acquisition will now enable us to service customers more efficiently,” Dutta explained. He added that it would also de-risk operations through multi-site manufac­tu­ring and portfolio diversification, strengthening resilience across industry cycles.

Started in 1984 at Lalkuan, Uttarak­hand, CPP offers ITC a strong foothold in northern India, compleme­nting its southern-heavy manufacturing base. (Three out of ITC’s four manufacturing sites are in the South.)

The deal is expected to close within six months.

The projections stack up well. In the first full year of operations, ITC expects the acquisition to be EPS-accretive — which means the acquisit­ion is expected to increase the acquiring company’s earnings per share.

Earnings before interest, taxes, depreciation, and amortisation, or Ebitda, per tonne is targeted to increase by 30 to 40 per cent after two full years.

In the medium term, the return on capital employed (ROCE) is likely to be in the high teens.

The CPP deal was still fresh when, late on April 17, ITC dropped another surprise with fresh acquisitions.

Flurry of activity

ITC signed a share purchase agreement to acquire a 100 per cent stake in Sresta Natural Bioproducts Pvt Ltd, which manufactures and markets the 24 Mantra Organic brand, for Rs 472.50 crore.

In a report, Abneesh Roy, executive director and head of Research Commit­tee, Nuvama Institutional Equities, men­­t­i­oned that the acquisition came at a reasonable valuation and fortified ITC’s presence in the organic foods segment in both Indian and overseas markets.

The report also stated, “ITC is easily the most aggressive consumer staples company in terms of M&A (mergers and acquisitions) in recent years.”

The comment comes in the wake of back-to-back acquisitions.

The SNBPL buy marks ITC’s third acquisition in two-and-a-half months — following Prasuma (specialising in frozen, chilled, and ready-to-cook foods) in February and CPP in March.

ITC is also moving to acquire the balance 73.5 per cent stake in Mother Sparsh Baby Care Pvt Ltd, a company in which it first invested in 2021.

It curren­tly holds 26.5 per cent in Mother Sparsh.

The year has gotten off to a hectic start for ITC, but the momentum has been building with a series of investments, big and small, over the past five years.

Changing tack

Value-accretive M&A is the buzzword at ITC these days.

And the cash-rich firm ha­s enough dry powder to fund its  ambitions.

However, Dutta pointed out that the company combines financial discipline and prudence with aggression to drive growth.

ITC’s acquisition strategy rests on three levers.

One is strengthening mark­et standing through acquisitions such as Sunrise and CPP.

Another is capability-led acquisitions like Blazeclan (building a Cloud services line) and the acquisit­ion of a substantial portion of PTC’s product lifecycle management (PLM) consulting and professional services business by ITC Infotech.

The third is addressing newer areas through investments in start-ups.

“Across all these three levers, the principle is to look at opportunity areas that offer large headroom for growth and where we must be able to add value to the acquisitions by leveraging ITC’s enterprise strengths,” Dutta explained.

In the start-up space, ITC’s approach is to partner with entrepreneurs during the ‘build’ phase by providing them access to institutional strengths and financial backing, and eventually acquire the business to scale it further.

The FMCG business — the largest component of ITC’s non-cigarettes portfolio — appears to be a particular focus for acquisitions.

ITC’s biggest buy before CPP was Sunrise Foods in the spices segment for about Rs 2,150 crore in 2020.

That was foll­o­wed by the acquisition of Sproutlife Foo­ds, the maker of Yoga Bar, in 2023 in nutrition-led healthy foods category.

Earlier deals included Nimyle (2018), Savlon (2015), and B Natural (2014).

These moves have added heft to the FMCG business.

“Our strategy is to drive growth through a combination of building brands from scratch as well as acquisitions,” Dutta said.

Identifying acquisitions as a vector of growth is central to chairman and managing director Sanjiv Puri’s ‘ITC Next’ strategy, which is focused on driving the next phase of growth with a sharper accent on profitability.

Building a future-ready portfolio of products and services is a key pillar of ‘ITC Next’ — and a string of acquisitions is helping accelerate that journey.