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ITC's Rajiv Tandon has led several initiatives to cut costs, improve margins and boost
earnings.
Manu Kaushik
Rajiv Tandon, Chief Financial Officer of ITC, has the memory of an elephant. Tandon,
59, personally interviews every candidate who applies to the Kolkata-based company's
finance department. Over the years, he has recruited hundreds of management
executives - mostly chartered accountants. He remembers more than 600 of them and
what they said in their interviews. "Most of them work in different parts of the country,"
he says. "Even though I haven't met many of them in years, whenever I come across
them, I easily recall their names."
A sharp memory comes in handy for Tandon as he juggles ITC's varied businesses that
range from cigarettes and farm exports to hotels and information technology.
Tandon, who joined the diversified company about 30 years ago and took over as finance
chief in August 2009, is the overall winner in this year's Business Today-YES Bank Best
CFO Survey. He also topped the category of sustained wealth creation among large
companies.
Tandon took over as CFO at a time when the global economy was recovering from a
slowdown. Most of ITC's businesses are recession-proof, be it cigarettes, consumer
goods, agriculture or paper. "Except the hospitality business, none of the businesses was
affected by the downturn," says Harsh Mehta, analyst with brokerage HDFC Securities.
ITC
entered
the
non-tobacco
Equity consumer goods segment in 2001
with the launch of branded food
Up 35%
products. Many of them, such as
Aashirvaad flour and Sunfeast cream biscuits, are now market leaders. However, even as
revenue from the segment grew at a rapid clip, it posted losses for several years. In
2011/12, the segment reported a loss of Rs 215.08 crore on revenue of Rs 5,526 crore.
The tide is turning now. For the quarter ended March 2013, the segment posted its first
operating profit of Rs 11.8 crore.
Return
On
Should the company have opted for acquisitions to grow the consumer goods business
and make it profitable faster? No, says Tandon. He says ITC will have to pay as much as
Rs 10,000 crore to buy a consumer goods' maker with an operating profit of Rs 500
crore. This is because, typically, the enterprise value of an established company in the
sector is 20 to 25 times its operating profit. The cost of servicing that Rs 10,000 crore, in
terms of the cost of capital, will be Rs 1,300 crore a year. Building own brands is more
cost-effective, he says.
Even after ITC has spread its wings, the cigarette business continues as the thrust area,
as it generates the biggest chunk of revenue. In June last year, the company launched
smaller cigarettes priced at Rs 2 a stick. The decision coincided with a ban on gutkha, or
chewing tobacco, in several states. "It was not intentional. The excise duty structure in
India is such that there was an opportunity to launch smallersize cigarettes," says
Tandon.
Another interesting decision the finance department took was to stagger the increase in
cigarette prices. In 2011/12, ITC raised cigarette prices by about 14 per cent over several
months to offset an increase in excise duty. Previously, prices were increased in a single
step, which affected sales volume.
But due to staggered increases, sales volume actually rose last year. Tandon says the
biggest challenge has been the rapid growth of illegal tobacco products due to high taxes
levied on the cigarette industry. Tobacco products that are either lightly taxed or evade
taxes make up 86 per cent of the market, he adds.
Under Tandon, ITC's finance department has led several other initiatives to reduce the
cost of operations and improve margins in the recent past. In the consumer goods
business, the company previously had warehouses at locations where some
redistribution was required. This added to the overall cost of the product. "We have
reorganised the logistics network in a manner that redistribution has come down
significantly," says Tandon.
"Products are now going directly from factories to wholesalers. In cases where the buyers
are big, shipments are going directly to customers from factories."
The finance division also led the use of information technology (IT) in the hotels
business. Tandon says rooms are a "perishable commodity" in the hotels business and
the company can now track the availability of rooms at all its properties across the
country. "This helps in revenue maximization. Also, hospitality is about customer
experience and satisfaction. With IT intervention, we have better information about our
customers and we can service them better."
Tandon, who is part of a 10-member committee at ITC which is responsible for strategic
management, says the role of the CFO has changed since he started his career. The CFO
is no longer a controller of finances but a business partner. "Besides the traditional
finance job, I have to look for synergies between various businesses," he says. "Based on
our interactions with outsiders, we share best practices with different business divisions
within ITC. The finance function helps them achieve more transparency and a high
degree of disclosures."
What are Tandon's mantras for managing money? Bringing efficiency to capital is
important, he says. "Money should not be lying idle. Our cash balance is zero every day.
We have a robust system of forecasting sales and we know our expenses. The surplus gets
reinvested in market instruments on a daily basis." As a result, ITC's return on capital
employed - a measure of efficiency in converting capital into profit - has improved to
45.4
per
cent
in
2011/12
from
36.8
per
cent
in
2008/09.