Y.C. Deveshwar on Diversification

Founding Fuel frames ITC's 2023 demerger of its hotels division as a strategic move by chairman Sanjiv Puri to 'kill three birds with one stone': unlock value, restructure capital allocation, and respond to aggressive new entrants in hospitality — notably Reliance Industries, which was actively forging partnerships with Oberoi Hotels and making acquisitions like Mandarin Oriental in New York.

Reliance's recent moves are framed by Founding Fuel as altering the three-horse hospitality race among Taj, ITC and Oberoi. Reliance spent about $100 million acquiring a controlling stake in Mandarin Oriental in New York, then announced a tie-up with Oberoi Hotels to co-manage three properties across India and the U.K., including Stoke Park in Buckinghamshire.

Analysts, Founding Fuel observes, were never happy with the hotels division's performance. While it accounted for 20% of total capital employed, return on capital employed stayed in single digits and contribution to the topline was insignificant compared with the healthier performance of tobacco, paperboards, agri and FMCG. Critically, erstwhile parent BAT — still holding 29.1% —.

The demerger plan was first mooted in ITC's FY2019-2020 annual report, but Deveshwar succumbed to cancer on May 11, 2019 — before he could execute it. The pandemic then wrecked the hospitality industry. Sanjiv Puri put the demerger back on track as the post-pandemic hotel recovery took hold, with Q1 2023 results showing exceptional performance led by domestic travel.

Deveshwar then went on what Open calls a diversification spree with a 'let's put India first' clarion call, transforming the Kolkata-based cigarette maker into a conglomerate spanning FMCG, paper and packaging, hotels, agriculture and information technology. When he took over in 1996, nearly 75% of ITC's revenues came from tobacco; by the time of writing tobacco was down to slightly over 40% of revenues.

Deveshwar was among the first global tobacco chiefs to sense the impending decline of the cigarette business, Open notes. As ITC's helmsman he looked beyond shareholder value to overall gain for environment, society and nation. The paper business expansion was originally framed as securing raw material for pulp; Deveshwar saw the potential for rural employment and environmental benefit, and instructed the team to scale plantation targets 10x —.

Wharton frames ITC's transformation under Deveshwar as a journey from a single-product tobacco company founded in 1910 as the Imperial Tobacco Company of India to a multi-business corporate enterprise with turnover around US$6 billion by 2010. Non-tobacco businesses — foods, personal care, hotels, paper, agriculture and IT — accounted for about 40% of revenues by 2010.

Deveshwar joined ITC in 1968, became chairman in 1996, and from 1991 to 1994 served as chairman and managing director of Air India — a brief detour through India's national carrier between two ITC tenures. Returning to ITC in 1996, he faced the choice of staying in the comfort zone of a tobacco business ITC had run for nine decades or creating multiple new growth drivers to match the emerging Indian economy.

In 1985, ITC's platinum jubilee year, turnover was about Rs 800 crore with profit near Rs 8 crore. By 2010, Deveshwar tells Wharton, turnover had crossed US$6 billion with profit above US$900 million. The math implies a near-eight-fold dollar-turnover expansion in 25 years and a profit pool that grew by over 500x —.

Deveshwar's diversification thesis, in his own words to Wharton, was unconventional at the time. He recalls being told conventional wisdom did not favor diversification as a prudent growth strategy. He countered with two beliefs: in an emerging economy with untapped opportunities, diversity managed well via innovative business strategies could yield significant growth; and that diversity could lend unique sources of competitive advantage unava...

The clearest example Deveshwar cites of synergies across ITC's diverse portfolio is Aashirvaad atta. ITC's e-Choupal network enables cost-effective wheat sourcing with traceability through identity-preserved procurement. Tobacco-blending expertise informs customized blending for local tastes. Hotel master chefs contribute consumer-palate insights to the foods business. The packaging arm supplies the bag.

On FMCG, Deveshwar tells Wharton the sector was expected to triple to over US$80 billion by 2018. ITC's foray blends internal competencies — sourcing, branding, trade marketing, distribution, manufacturing — with emerging opportunities.

Paper and packaging, Deveshwar notes, are an under-penetrated Indian market — per-capita consumption around 5 kg per year, against nearly 300 kg in the U.S., 200 kg in the U.K. and 45 kg in China. With education and economic growth expected to drive manifold demand, ITC invested significantly in capacity in this business. The growth of branded consumer goods would, in turn, drive packaging demand —.