ITC Ltd. (ITC), India’s biggest tobacco company and a maker of cookies and potato chips, will increase prices of some food products as the rupee’s plunge to a record low threatens its highest profit margin in nine years.
The rupee has weakened 19 percent against the dollar in the past year, making it the worst performer among Asia’s 11 most-traded currencies. The depreciation has prevented ITC, Britannia Industries Ltd. (BRIT) and other makers of processed foods from benefiting from an 11 percent drop in prices of edible oil imported from Indonesia and Malaysia. The commodity is used to prepare cookies, instant noodles and pasta.
“It’s imperative to increase prices because inflation is eroding margins,” Chitranjan Dar, who heads ITC’s food business, said in a telephone interview from Bangalore. “The real concern is edible oil. It’s something we are not comfortable with.”
ITC Chairman Yogesh Deveshwar has over the past decade expanded into new businesses including food, matches and apparel to cut dependence on tobacco as India tightens rules to discourage smoking. With Indian consumers living with the highest rate of inflation among the largest emerging markets, ITC is betting it can retain customers for its Sunfeast cookies and Bingo! potato chips even as the economy expands at its slowest pace in nine years.
“If they raise the prices at a nominal level of 8 to 10 percent, we don’t think that is going to impact,” sales, said Ajay Jaiswal, head of research at Microsec Capital Ltd. in Kolkata. “Brand loyalty is definitely one thing that is major source of confidence for the company.”
ITC, which is 31 percent owned by British American Tobacco Plc (BATS), has gained 16 percent this year, compared with a 3.3 percent advance for the benchmark BSE India Sensitive Index. The shares rose 2 percent to 233.85 rupees in Mumbai on June 1.
The Kolkata-based company’s operating profit margin widened to 32.3 percent in the year ended March 31, the highest since 2003, when ITC started selling cookies and snacks. The division, which includes personal care products has yet to post operating profit, according to data compiled by Bloomberg.
India, the world’s second-biggest vegetable oil user, imports about 55 percent of its requirement of 16 million tons. The cost of importing refined, bleached, deodorized palmolein oil has risen, according to the Solvent Extractors’ Association. The landed cost increased to 58,410 rupees ($1,055) a metric ton on average in May, compared with 53,323.9 rupees in June last year, B.V. Mehta, executive director of the association, said by phone from Mumbai. The weakening rupee has put an “additional burden” on imports, he said.
Slowing growth in Asia’s third-largest economy may affect demand for ITC’s products. India’s gross domestic product expanded at 5.3 percent last quarter, the slowest pace in nine years and below the median estimate of 6.1 percent growth in a Bloomberg survey of 31 economists.
Inflation in the country, at 7.23 percent, is the highest among the BRIC nations. Goldman Sachs Group Inc. boosted its estimate for the benchmark wholesale price gauge to a 6.5 percent gain for the fiscal year that began April 1, from 5 percent previously.
Boosting margins at ITC’s non-tobacco businesses may be key to growth as India toughens smoking control. The Indian health ministry banned tobacco advertising in 2004, making it harder for ITC to promote new and existing brands. States such as New Delhi have prohibited smoking in public places, including railway stations.
ITC, which was set up in 1910, started selling ready-to-eat foods under its Kitchen of India brand in August 2001. It added confectionery, staples and snack foods in 2003. The company got 24 percent of its revenue from the sale of consumer products including cookies, pasta, shampoo and soap, in the quarter ended March 31, according to data compiled by Bloomberg.
Revenue at ITC’s consumer products business, which includes Fiama di Wills shampoo and Sunfeast cookies, jumped 24 percent in the quarter ended March 31, outpacing the 17 percent increase in cigarette sales. Profit before taxes from cigarettes rose 20 percent, while losses from the other consumer goods business narrowed.
ITC’s earnings may increase 14 percent to 71.8 billion rupees in the year ending March 31, according to the median of 12 analysts’ estimates compiled by Bloomberg. That’s the slowest pace of growth in four years.
The market for cookies in the world’s second-most populous nation is estimated to increase to 266 billion rupees in 2015 from 156 billion rupees last year, according to Euromonitor International.
ITC, with a 13.2 percent share of the market, was India’s third-largest cookie-maker in 2010 after closely held Parle Products Pvt. and Britannia, both held 33 percent share of the market each, Euromonitor said. ITC’s market share was 7.9 percent in 2006, while Britannia’s share was 36 percent.
ITC, which sells its food products through 2.5 million outlets, plans to increase this reach by as much as 10 percent, said Dar. Modest price increases in packaged foods will not hurt growth in the segment, he said.