ITC’s foray into the personal care segment may be put on the backburner till 2008-09 as the company faces a huge tax hit in its core business of cigarettes.
MUMBAI: ITC Ltd’s foray into the personal care segment - soaps, toiletries and hair oil - may be put on the backburner till financial year 2008-09 as the company faces a huge tax hit in its core business of cigarettes.
The budget hiked excise on cigarettes by 5% and value-added tax (VAT) may also be levied at the rate of 12.5% shortly. Decks for the levy of VAT were cleared on Tuesday when the Lok Sabha approved the bill to reduce central sales tax (CST) by 1%. This effectively means VAT can be levied on cigarettes as early as April 1, 2007.
The company had last year test-marketed a mass-market soap brand called Supriya and was looking at a possible launch date around the third quarter of 2007-08.
This would have helped ITC reduce the weightage of cigarettes in its business portfolio to less than 50%, currently 59%, in a couple of years.
ITC’s non-cigarette FMCG business — mainly biscuits, confectionery, staples, ready-to-eat and, now, snack foods — contributes around Rs 2,000 crore to the company’s kitty and has shown 20% growth in earnings before interest and tax in 2006-07.
But the damage from higher excise and VAT is now believed to be extensive, adding up to a 30% increase in taxes on cigarettes. This may effectively force the company to focus on steadying the revenues of its cash cow business first before foraying into cash-guzzling areas like soaps and toiletries, where ITC faces behemoth Hindustan Lever.
Merrill Lynch, in a recent research report, said ITC will be forced to raise cigarette prices sharply and volumes may decline by 11% in 2007-08.
Ravi Naware, chief divisional executive, ITC Foods, denied any knowledge of plans in the personal products space, but said the foods business would continue to roll out new variants of products.
ITC’s main food brands are Aashirvaad (staples), Sunfeast (biscuits), Candyman (confectionery), Bingo (snack foods) and Kitchens of India (ready-to-eat).
Anand Halve, who runs a brand consulting firm, says that new brands in soaps and toiletries will bleed money for a long time. “Soaps have been a graveyard for launches.
The company will have to go beyond the existing competencies and find new differentiators to position its product in an already overcrowded segment. They need huge investments for marketing and branding the new product.”
With higher cigarette taxes eating into revenues, cash surpluses from ITC’s core business will be squeezed in 2007-08, making the personal products foray dicey.
The Merrill report says that the decline in cigarette volumes will keep turnover flat next year, slowing down ITC’s earnings growth (earning per share) in 2007-08 to 6% as against an average growth of 20% in the last two years.
An ITC official, speaking on condition of anonymity, said that the company will have no choice but to pass on the excise duty burden to consumers. A distributor in Mumbai added that wholesalers were already selling ITC cigarettes at a premium to the listed price due to lack of fresh supplies.
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