ITCs Acquisition of WIMCO: The Turnaround Challenges

Preview
Introduction V/M/CV/Strategy Industry Analysis Analysis of Both Companies Rationale For Acquisition Organizational Performance factors Relevance of SME strategies
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Introduction
Few companies survive intact for centuries. All organizations sooner or later face a crisis situation. Reasons for a crisis situation are plenty: Revenue Downturn Caused By A Weak Economy High Operating Costs High Fixed Costs Poor Strategic Choices Poor Execution Of A Good Strategy Highly Successful Competitor Excessive Debt Burden Inadequate Financial Control
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What do Org do for Turnaround..

How org recover depend on their strategy Unique to each company Some of the turnaround strategies are: Change Of Top Management Strategic Acquisitions Divestment Of Certain Investment Revenue Increase Cost Reduction
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Objectives We seek to Discuss

To focus on the business diversification strategies of ITC and its entry into the match stick industry To discuss the challenges faced by ITC in turning around WIMCO.

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Indian conglomerate with a turnover of US $ 6 billion and a market capitalization of over US $ 22 Billion

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Vision
SUSTAIN ITCS POSITION AS ONE OF INDIAS MOST VALUABLE CORPORATIONS THROUGH WORLD CLASS PERFORMANCE, CREATING GROWING VALUE FOR THE INDIAN ECONOMY AND THE COMPANYS STAKEHOLDERS.

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Mission
To Enhance The Wealth Generating Capability Of The Enterprise in a Globalising Environment, Delivering Superior And Sustainable Stakeholder Value.

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Values
Trusteeship Customer Focus Respect For People Excellence Innovation Nation Orientation

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Strategy
Consolidate and offer a greater range in the existing categories and grow these markets

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Industry Analysis - Matchsticks

Highly fragmented market in India Rs. 1.2 million market in India Total Annual Production 750,000 units Market leader Wimco (13% market share) Stagnant Growth 1% p.a Industry margins 1.5% Major users - Households (>50%) Categories small scale (handmade), cottage, large-scale (mechanized) 2,50,000 people employed by handmade sector 6,000 people employed by mechanized sector Govt. showed keen interest in promoting this sector as it would provide employment to rural sector Per capita consumption of matchbox in 2000 6% (projected)

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Porters 5 forces Analysis of Matchstick Industry

Threat of New Entrants: HIGH Power of Supplier: LOW Power of Buyer: HIGH

Competitive Rivalry: HIGH

Threat of Substitutes: LOW

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Small-scale (handmade) sector

Holds 67% of matchstick market Dominated by 18 players in the industry (Match Kings of South India) Pioneer Group (group of 18) holds largest market share Labor not easily available Women and child laborers paid low wages

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Cottage Sector
Govt. of India set up Khadi & Village Industries Commission (KVIC) in 1977
To increase employment opportunities To reduce exploitation of traders To increase wage levels

Total of 10,000 cottage units Rapid Expansion Programme failure led to losses Holds 15% market share
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Large-scale (mechanized) sector

Only player was Wimco Contributes to 18% of matchbox production In India Although automated, operations were laborintensive Higher wages (16% of total sales) as compared to small-scale (5.5% of total sales)

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Company Analysis: Wimco

Belongs to Swedish Match AB Group Co. Holds 10% market share in the world WIMCO stands for Western India Match Company Brands Ship, Homelites, Tekka, Horeshear, Three Mangoes, Cheeta Fight, Kapas and Arrow Production base: 5 billion units p.a Caters to 1.5 million retail outlets Paid 60% more in excise taxes than other sectors

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The Fall of WIMCO

Market share fell from 30% to 13% in late 1990s due to
Intense competition Low volumes Increase in LPG connections Increased usage of lighters (growth of 20% from 2002) Unorganized sectors had a tax relief

Tough competition to ITC Losses incurred: Rs. 71.5 million in 2003-04 Increase in excise duty from 8% to 16% (squeeze in margins) WIMCO had labor problems (strike for 9 months) Tried to diversify into shampoos, mosquito coils, gumlets, throat lozenges Could not break through huge losses to the tune of Rs. 71.5 crores in 2003-04 and Rs. 42.7 crores in 2004-05

Wimco reacted very slowly to the changes in the market and are now looking at low margin products. It remains to be seen whether that changes the bottom line. an industry analyst.

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Company Analysis: ITC

ITC stands for Imperial Tobacco Company Focus was on growth and consolidation of cigarette and tobacco business Popular brands Wills, Bristol and Gold Flake Forayed into other businesses to reduce dependency on cigarette & tobacco business
Hotels Paper Packaging Agri FMCG IT Lifestyle Retailing

Leader in cigarettes, hotels, paperboards, packaging and agri-exports Supplies to 2 million retailers Core Competencies
Unmatched distribution reach Superior brand-building capabilities Effective SCM Acknowledged service skills in hoteliering

Cigarette and tobacco 78% of revenues (Dec. 2004) Net Profit Rs. 14,000 million (Dec. 2004) Net Sales increased by Rs. 53 million
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SBUs contribution to ITC revenues

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ITC: SWOT Analysis

WEAKNESSES STRENGTHS Distribution Branding SCM

New to this industry

OPPORTUNITIES

THREATS

Huge investment

Matchstick stagnant market Low margins

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The BCG Matrix for ITC Ltd.

Stars Hotels Paperboards/ Packaging. Agri business. Cows FMCG-Cigarettes ? FMCG- Others

Dogs

Reward Management
Managerial remuneration key component of PMS Features of ITC's remuneration strategy are:
Remuneration must be market linked Remuneration must take into account "affordability" and the Company's capacity to pay and updation The policy is implemented at all SBUs
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ITCs Matchstick Portfolio

Entry in 2002 Business Model sourcing from small-scale units and marketing Tried to help SSI matchbox units through tie-ups Brands AIM, Ikno, Mangaldeep, Vaxlit and Delite (priced between Rs. 0.50 to Rs.1.50) Aim increase market share and sales by offering unique designs and value-adding features Market share 12% (Dec 2005) Spent a lot on marketing Increased no. of tie-ups to reduce costs Only option to increase market share was through acquisition the WIMCO opportunity presented itself!

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Rationale for acquisition

To enhance image as a FMCG player To increase market share To enable cost effective delivery of goods and services into rural India To add value to rural customers through its penetrative distribution capability To catalyse fresh investments in the company with attendant benefits to all stakeholders
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Did ITCs strategy deliver organizational performance?

Profitability Ratio:
ROCE Price by earning Ratio
38 36 34 32 30 Mar '06 Mar '05

Return On Capital Employed(%)

Return On Capital Employed(%)

Liquidity Ratio
Debt to Equity Ratio

Price Earning (P/E)

40 30 20 10 0 Jan/05 Jan/06 Price Earning (P/E)

Dividends
Dividend
1500 1000 500 0 Dividend

Debt Equity Ratio

0.04 0.02 0 Mar '06 Mar '05 Debt Equity Ratio

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Jan/05

Jan/06

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Year on Year Growth

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Segment wise Contribution

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Stock Performance

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Can SME strategies have relevance for large organizations?

Strategy formulation depends upon:
M/V/Core Values/BP/Environmental factors Vary in different sectors

SMEs can have common strategy (Incidental)

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