MOSL: ITC (Neutral)-Building blocks in place for ~10x growth in ‘Other FMCG’

​ITC: Building blocks in place for ~10x growth in ‘Other FMCG’

(ITC IN, Mkt Cap USD49.6b, CMP INR260, TP INR280, 8% Upside, Neutral)

• Our recent visits to ITC’s e-Choupal and Choupal Saagar facilities in Madhya Pradesh’s Sehore district underline the company’s ambitious plans to grow its ‘Other FMCG’ business. Management too, in its recent interviews in the media, has demonstrated its focus on this business. Key highlights of ITC’s strategy:
  
• The next generation of e-Choupal will involve large-scale use of technology and increased level of procurement from farmers by 2022 (from 4m to 10m farmers).
  
• In our view, apart from the existing large categories like atta, biscuits and noodles, the new categories such as dairy, juices, coffee and shrimp fishing should contribute significantly to incremental sales growth, benefiting from extensive expansion in sourcing.
  
• In recent years, management appears inclined toward acquiring small brands (e.g. Savlon, Shower to Shower, and B-Natural). In our view, to achieve the sales target of INR1t from the ‘Other FMCG’ business, ITC will become far more aggressive on acquisitions.
  
• We believe ITC’s strong relationship with the farming community via its investments in social development initiatives is an understated but significant pillar of longer-term sourcing growth.
  
• Medium-term stock performance, however, will continue to be a function of regulations surrounding its cash-cow business of cigarettes. Massive investments in ‘Other FMCG’ also indicate that profitability in this segment is unlikely to increase sharply anytime soon.