His Money Never Sleeps

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 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’s performance on all key parameters – revenue, profit, profit margin, cash reserves and debt – has improved every year since Tandon assumed charge of the finance department. Net sales, for instance, have grown at a compound annual rate of 28 per cent since 2009/10.

Cash reserves have nearly tripled to Rs 3,828.3 crore in 2012/13 from Rs 1,348.6 crore in 2009/10. The ITC stock has delivered annual returns of 30.9 per cent (excluding dividend) since August 2009, compared with 6.75 per cent by the Bombay Stock Exchange’s benchmark Sensex. Its market value has climbed to Rs 2.6 trillion from about Rs 94,000 crore. (One trillion equals 100,000 crore) Mehta says one of Tandon’s biggest contributions has been leading the non-tobacco consumer goods business toward profitability. “The company is burning lesser cash now (in the consumer goods business) and the focus has turned to making this segment profitable.”

ITC entered the non-tobacco consumer goods segment in 2001 with the launch of branded food 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.

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.

“Shareholders look at how an organisation is exploiting the opportunities available. We are investing in value drivers which will create earnings growth for the future,” he says.

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