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For a student of Indian business, ITC Ltd is one of the most fascinating companies to study. It is difficult to think of another firm that has transitioned from its core business to completely unrelated ones as smoothly and seamlessly.
Globally, there are few examples of such transitions. Apple moved from computers to consumer electronics, while Netflix shifted from DVD rentals to streaming services. Financial services giant American Express started off in 1850, transporting valuable goods, stock certificates and currency before moving on to its current business of credit cards. But in all these cases, there were compelling underlying similarities. What’s more, barring Apple, none of the others pursued their various businesses simultaneously.
Not so with ITC. It has been nurturing the non-cigarettes businesses for more than 25 years and diversified into these with an eye on the future and not because of any immediate duress.
Smart acquisitions, smartly timed
Historically rooted in tobacco, it has been aggressively building its non-cigarette fast moving consumer goods (FMCG) business, particularly food, with notable purchases such as Sunrise Foods in 2020, and stakes in Meatigo and Prasuma in 2025.
Last week it was reported to be back on the acquisition trail, eyeing MTR Foods Pvt Ltd and Eastern Condiments Pvt Ltd for an eye-popping $1.4 billion. Both brands, owned by Norwegian company Orkla ASA, have dominant positions in Andhra Pradesh, Karnataka, Tamil Nadu and Kerala, and will give ITC a stronghold in the southern markets.
Clearly, the intent is to bolster its presence in foods.
The reasons are obvious. Its cigarette business, while historically a profit powerhouse, faces long-term challenges including regulatory pressures and rising taxes. The government is reported to be considering raising the GST on cigarettes and tobacco products to 40% (from 28% at present) and levying an additional excise duty after the compensation cess on these products ends in 2026. Consumer sentiment, too, has been shifting against tobacco, with long-term trends showing a continued decline in tobacco use across the world. Acknowledging this, ITC has been reducing its reliance on the cigarettes business, which has seen its revenue contribution drop from 62% in FY14 to 37% in FY23.
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The acquisitions in the food sector are a key pillar of its diversification strategy, which is aimed at building a robust FMCG portfolio that can sustain growth as cigarette demand wanes.
The timing is right, too. India’s packaged-food market is booming, driven by urbanisation, rising disposable incomes, and a shift toward convenience foods. ITC stepped into the food business in 2001 with brands such as Aashirvaad and Sunfeast, and scored big with both. But organic growth takes time, whereas acquisitions allow the cash-rich company to fill gaps in its portfolio quickly by tapping high-growth niches such as spices with Sunrise Foods, and frozen meats and seafood with Meatigo and Prasuma.
Its food portfolio, while strong in staples such as atta, biscuits and snacks, has gaps in premium and protein-rich categories, the flavour of the moment. The acquisitions of Sunrise Foods, Meatigo and Prasuma align with its focus on premiumisation, evident in its Master Chef Creations brand of frozen foods, launched in 2021.
Tightrope act
But in the face of intense competition from giants such as Hindustan Unilever, Nestle and Britannia, ITC’s FMCG journey hasn’t been easy, and its profits aren’t slowing dramatically yet. In the long run, it’s a tightrope act for the company as it tries to step up its food game while holding on to the reassuring bulwark of its cigarettes business.
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Its non-cigarette FMCG segment has grown steadily, with revenues up from ₹11,339 crore in 2017-18 to ₹20,966.83 crore in 2023-24, but profit margins remain thinner than those of its peers. Historically, cigarettes have been ITC’s profit engine, contributing over 80% of its earnings before interest and tax (EBIT) even as their share in revenue has dipped. That’s because ITC has been able to mitigate cost pressures by passing them on to consumers. While smokers’ addiction ensures demand elasticity remains low in the cigarettes business, the FMCG business is extremely sensitive to pricing.
Buying small, niche firms allows the company to bypass the slow process of building brand loyalty in crowded segments, and gain market share rapidly. Its formidable distribution network, perfected over years through its cigarette business, now includes more than six million retail outlets. Acquisitions provide ready-made products to push through this network – ITC’s competitive edge over rivals. They are also a move to accelerate revenue growth and improve profitability by integrating businesses with higher-margin potential or operational synergies.
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If large Indian companies were to be evaluated on how successful they have been at creating new products for new markets using fresh business models, and judged by the percentage of revenue they get from outside the core business, ITC would certainly rank among the toppers. Whether it was fear of the looming extinction of its tobacco business or merely the need to optimise the returns on the cash that it was generating, the company’s repositioning as a FMCG giant has been a strategic tour de force.
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