For years, I use to tease ITC managers by making comparisons with Hindustan Lever. ITC, I used to point out to them, was forever caught in scandal -- whether on excise duty disputes, foreign exchange matters, or battles with shareholders.

In comparison, Lever was as straitlaced as they come, a company with solid middle-class values and closely aligned with its Unilever parent.

ITC's managers had never done well when they left to work elsewhere -- in comparison with Lever managers, who were always in demand across Corporate India and who had a sterling record in many challenging firms, in both the public and private sectors.

Also, ITC was in what one has to recognise as a "sin" business, in comparison with Lever's bread and butter products of everyday living. Something is wrong with ITC's DNA, I used to argue; and the company's managers found it hard to find their come-backs.

How times have changed. ITC now goes from strength to strength, while Lever struggles; ITC's share price has been going places, while Lever's has nose-dived.

No Indian investor would have thought he would see the day when the company would announce a staggering 46 per cent drop in profits and falling sales to boot.

In comparison, ITC has been announcing a succession of upbeat results and the building of new businesses. Lever used to command the handsomest price-earning ratios on its stock, but this has fallen by two-thirds -- and the P:E is now lower than ITC's.

So you know which company in the market's opinion has a brighter future. Indeed, ITC is now moving into Lever's core FMCG area: basic food products, rural marketing initiatives, and also clothes -- whereas no one can remember the last really new product that Lever launched.

How could the tables be turned so easily, and how could a company with the greatest management depth find itself so lost for ideas and solutions?

Perhaps no solutions exist, because it could be that Lever was too successful for its own good. One of its chairmen in the 1980s used to say that the company's objective was to try and improve its profit margins by 5 per cent each year; another said that the objective was to double turnover every four years, and profits every three.

Both meant that margins had to be jacked up constantly -- but in doing so, the company didn't realise the dangers.

Every elementary textbook in economics tells you that when a firm starts making "super-normal" profits, challengers enter the field and the new edge to competition brings profit margins down to what the market considers "normal".

This is exactly what has happened to Lever: its profit margins were quite simply unsustainable. So new firms have entered regional markets, all-India rivals have under-cut the company on prices in an effort to improve market share -- and Lever's bottom line has taken a severe knock.

But this is only a correction. Even today, the company makes net profit that is close to 11 per cent of turnover, which by any FMCG yardstick is healthy, and suffers only because a year ago the net profit margin was more than 16 per cent.

Look at the profit margins of other FMCG companies and the point becomes obvious: the market was waiting for a correction because the rules of economics operate. It could and should have been predicted, especially when research has shown over and over again that consumers in India are quite prone to moving down to cheaper brands in order to create space in the family budget for new items of spending -- like cable TV or mobile phones.

At the same time, Lever has not been investing in the research that would deliver new products with premium margins.

In contrast, ITC has thought through and launched its commendable e-chaupal scheme; it has strengthened its position in hotels; it is leveraging its cigarette brands to get into other businesses; it has moved into the software-BPO space; and it has decided to become a full-fledged FMCG company.

In short, it is building itself a future. Indeed, it has even left its scandals behind and won ratings on corporate governance -- which its chairman now wants to build on.

I don't know if either company's DNA has changed. But there is no question now as to which company seems on top of its challenges, and which one isn't.

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