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Sun rises for ITC's aggressive acquisitions

E Kumar Sharma     May 25, 2020

Call it a sunrise at night if you will, ITC's note to bourses on Sunday night that it has entered into a Share Purchase Agreement (SPA) to acquire 100 per cent of the equity share capital of Sunrise Foods Private Limited (SFPL), a company primarily engaged in the business of spices under the trademark 'Sunrise', is more than just another deal by the FMCG giant with interests across the board from tobacco to hotels.

Biggest deal

Industry insiders say this is ITC's biggest deal in the past two decades. While the size of the deal is not known, estimates doing the round suggest it is at least 7 to 8 times the size of deals ITC has carried out in the past.

The estimates are based on the fact that acquisitions upto five times the turnover of the acquired company are not unusual in FMCG space.

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Sachin Bobade, vice president, Dolat Capital, who has looked at the Indian FMCG sector for many years, says "going by some of the past deals in the FMCG space such as Emami acquiring Kesh King brand of hair care product or of Marico acquiring Paras, deals have been at around 5.5 times the turnover of the acquired company. Infact, it is usually between 3 to 5.5 times the turnover and therefore this deal by ITC, which seems at between 3 to 4 times the acquired company turnover, seems reasonable."

Some of ITC's past deals include acquisition of Savlon and B Natural in 2015 and floor cleaner Nimyle in 2018.

Inorganic growth

ITC has set a target of Rs 1 lakh crore turnover by 2030 for its non-cigarettes FMCG business. The company has ramped up trade marketing and distribution infrastructure, including setting up warehouses and factories. Twenty such facilities are spread across equal number of states.

Sunrise deal is indicative of the company's preparedness for inorganic growth. Analysts feel ITC is unlikely to rest with just one deal and will aim to acquire other traditional family-owned brands too.

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High Growth Segment

ITC looks to tap into spices - a high growth segment - with the Sunrise deal. Spices are key ingredient in Indian food and consumers prefer branded and well-packaged products. In a post-COVID world, till food service industry picks up, consumption of food at home will rise, which means greater demand for spices.

Spices business in India is highly multi-locational with preferences changing every few hundred kilometres. Therefore, it makes sense to acquire trusted and popular brands rather than build these up organically.

Clear upsides

ITC's media statement talks of the upside. It says, "Sunrise is a clear market leader in eastern India in the fast-growing Spices category with a rich heritage and brand legacy of over 70 years. Over the years, the brand has built a loyal consumer franchise, anchored on a differentiated product portfolio tailored to regional tastes and preferences, both in the basic and blended spice segments. The proposed acquisition is aligned with ITC's strategy to rapidly scale up its FMCG businesses in a profitable manner, leveraging its institutional strengths viz. deep consumer insight, a deep and wide distribution network, agri-commodity sourcing expertise, cuisine knowledge, strong rural linkages and packaging know-how."

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ITC's Aashirvaad range of spices, it says, is already a market leader in Telangana and Andhra Pradesh and the company is one of India's leading producers and exporters of high-quality spices.The proposed acquisition, the ITC note says, "will augment the company's product portfolio and is aligned to ITC's aspiration to significantly scale up its Spices business and expand its footprint across the country. The deep consumer connect and distribution strength of SFPL in the focus markets, together with synergies arising out of the sourcing and supply chain capabilities of the company's agri business and its pan-India distribution network, will provide significant value creation opportunities for the company."

Lockdown Deal

The company is proud that the deal is done in the middle of a lockdown. The note mentions the deal shows "the company's agility and resilience in dealing with the new normal."

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