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Chairman Speaks - 2012

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ITC: CREATING ENDURING VALUE FOR INDIA

The Making of a National Champion

Speech by the Chairman, Shri Y.C. Deveshwar, at the 101st Annual General Meeting
on 27th July, 2012

Ladies and Gentlemen,

I have great pleasure in welcoming you to the 101st Annual General Meeting of your Company.

This AGM, in a manner, heralds ITC's entry into its new century. A future that promises to be even more glorious, fulfilling and rewarding as your Company pursues its vision to build an exemplary Indian enterprise. Your continued trust and goodwill has always been invaluable, and will lend immense encouragement for the journey ahead.

As in earlier years, I would like to first present to you the highlights of your Company's Triple Bottom Line performance during the year gone by.

TRIPLE BOTTOM LINE PERFORMANCE

Your Company continues its record of impressive financial results despite the challenges posed by the slowdown in the global and the national economy. Gross Income for the year grew by 14.9% to over Rs. 36,000 crores. Profit before tax increased by 22.4% to over Rs. 8,800 crores while Net Profits grew by 23.6% to over Rs. 6,100 crores.

Your wholehearted support to the Company's robust strategy to pursue multiple drivers of growth has also resulted in the non-cigarette segment net revenue growing 12-fold from about Rs. 1,360 crores in 1996 to Rs. 16,150 crores today. As a result, 57% of net segment revenue of your Company is now from businesses other than cigarettes, significantly enlarging ITC's capacity to create additional avenues for value creation.

Your Company is today acknowledged as one of India's most valuable corporations. Market capitalisation, which stood at Rs. 5,570 crores in 1996, has multiplied over 35 times to touch Rs. 2 lakh crores. Total Shareholder Returns, measured in terms of increase in market capitalisation and dividends, have grown at a compound rate of 25.7% per annum during this period.

(Figures in Rs. Crores)
ITC: Financial Highlights 1996-2012
  1996 2012
Gross Income 5,188 36,073
Net Segment Revenue
(other than Cigarettes)

1,363

16,150
Profit After Tax 261 6,162
Net Assets Employed 1,886 19,754
Net Worth 1,121 18,792
Market Capitalisation* 5,571 2,00,000*
CAGR in Total Shareholder Returns
in the period 1996-2012: 25.7%
*As on 17th July, 2012

It gives me immense pleasure to share with you yet another global recognition of your Company that should be a source of pride for all our shareholders and indeed every Indian. ITC was conferred the World Business and Development Award 2012 at the historic Rio+20 United Nations Summit which concluded recently. The Award was instituted by the UNDP, the International Chamber of Commerce and the International Business Leaders Forum in partnership with the United Nations Global Compact, the Swedish International Development Cooperation Agency and the Netherlands Ministry for Foreign Affairs. This honour was bestowed on your Company for its transformational rural initiatives in social and farm forestry. I would like to take this opportunity to convey our deepest appreciation to the thousands of tribals and poor farmers whose afforestation efforts in partnership with ITC have earned this global recognition.

Indeed, your Company's achievements in the environmental and social dimensions of the Triple Bottom Line have been remarkable. ITC has been "carbon positive" for 7 consecutive years, sequestering twice its emissions. It has been "water positive" for 10 years, having created freshwater potential that is more than twice its consumption. For over 5 years now, your Company has been "solid waste recycling positive". These achievements remain unparalleled globally, with ITC being the only enterprise in the world of its dimensions to have accomplished and sustained these environmental distinctions.

Your Company's endeavour to co-create competitive value chains with rural communities has enabled the creation of sustainable livelihood opportunities for more than 5 million people. I am sure it is a source of satisfaction for all of you to know that your Company's inclusive business models have transformed lives in such meaningful ways for the weakest sections of our society.

ITC has spearheaded a low carbon growth strategy contributing to the Missions enunciated in the National Action Plan on Climate Change. Today, more than 38% of ITC's total energy requirements are met from renewable sources. This is commendable given the large energy requirements of ITC's substantial manufacturing base. Continuing your Company's leadership of the green building movement in India, the ITC Green Centre in Gurgaon has recently been re-certified as the world's highest rated Platinum certified green building by the US Green Building Council. This year, several of ITC's factories have also received the Platinum Green Factory Building Rating. This follows the landmark achievement last year of Platinum LEED certification for all the premium luxury hotels of your Company, making ITC Hotels the greenest hotel chain in the world.

The scale and magnitude of your Company's Triple Bottom Line contribution makes it a unique national institution dedicated to fostering inclusive economic development with environmental sustainability. It is a manifestation of ITC's enduring commitment to put Country before Corporation and the Institution before the Individual. A commitment that has guided every thought and action of your Company in pursuing its super-ordinate goal of creating larger value for the Indian Society.

Therefore, in my address today, I would like to present to you a panoramic view of ITC's strategic contribution to the task of nation building, and the collective efforts made to create one of India's most valuable corporations.

Before I do so, I would like to spend a few moments to outline the broader contours of the challenges facing our society.

THE CHALLENGES OF GROWTH & DEVELOPMENT

The world economy continues to be in a state of turmoil. The hope of a global economic recovery looks distant with the crisis not abating in the Eurozone, the US economy still in slow motion, and the persistent contraction in Japan.

The declining growth rates in China, India and Brazil – the poster nations of the emerging world – are also a cause of significant concern. Global unemployment rates have surged this year. Governments across the world are confronted with dwindling revenue and more vociferous demands for economic stimuli.

The problems, however, are far more deep rooted. After more than a century of economic progress, we live in a significantly unequal world. The UN Human Development Report data, a barometer of the world's real progress, suggests that nearly 2 billion people in the world still live in multi-dimensional poverty. By this measure, more than 600 million people in India are severely deprived. Recent OECD studies reiterate that income inequalities have actually widened in the last 30 years in a majority of advanced nations as well as emerging economies.

And that is not all. The race for unbridled material growth has left a planet seriously depleted of environmental resources and perched on the brink of a disaster. The world's ecological footprint suggests that consumption of natural resources every year is one and a half times more than the earth's capacity to regenerate. At this rate, the world will bequeath future generations a barren planet in less than 30 years from now.

India has not been impervious to the global contagions of either the recession or the baggage of unsustainable development. One-third of the world's poor live in India. With 17% of the world's population, India accounts for only 2.4% of the global land mass, 4% of the world's freshwater resources and 1% of the global forest resources. The list of core challenges is therefore significantly intimidating. Poverty alleviation, livelihood creation, food security, water availability and access, provision of education and healthcare, energy security, infrastructure creation, environmental replenishment are all issues that need urgent attention.

The recent economic slowdown in India is therefore of concern, because it limits the capacity to tackle these enormous developmental challenges. The widening fiscal and current account deficits, persistently high and sticky inflation, coupled with a depleted appetite for investment, continue to stifle early economic recovery. The imbroglio on several important long-term policy issues is only adding fuel to this fire. The lack of consensus on issues like GST is particularly disconcerting given the well-acknowledged benefits of such a system in terms of tax buoyancy, collection efficiency and facilitation of one common market for India. It is imperative that urgent solutions are found to break this policy impasse and signal a growth impetus that can once again rebuild confidence in the economy.

CREATING COMPETITIVE INDIAN ENTERPRISES TO SERVE NATIONAL PRIORITIES

The large current account deficit also implies that a significant proportion of domestic enterprises are yet to attain international competitiveness. In a globalised economy with a liberal trade regime, it is critically important to build internationally competitive Indian enterprises that have the capacity to create value-added products and services which contribute either to import substitution or to exports. Such competitive Indian enterprises will enable a fair and balanced exchange of goods and services in an open trade regime contributing eventually to reducing the large deficits on the trade account.

India's developmental challenges are, however, of colossal proportions. Meaningful economic development requires that growth drivers not only create large scale sustainable livelihoods but also augment environmental capital. Unfortunately, this is easier said than done. Achieving sustained higher growth rates is in itself a challenge at the current moment. Making that growth process socially equitable and environmentally sustainable will require herculean efforts. More than ever before, this calls for every segment of society to rise beyond sectarian and narrow interests to sub-serve larger national goals and together create enduring value for our society.

There is no doubt that corporate enterprises are uniquely placed to make an invaluable contribution, given their role as powerful drivers of economic growth. It is time that business and industry ask what they can do for the country before seeking a response to what the country can offer them. It is my strong belief that India's ability to address its myriad challenges will critically depend on its capacity to establish and support world-class "Indian enterprises" that are passionately driven by the vision to sub-serve larger national priorities.

It is time to support the emergence of National Champions who will be repositories of intellectual capital, have strong R & D capability, a vibrant bandwidth of human capital inspired to serve larger national goals, and above all, the competitive capability to create business models that deliver larger societal value.

To my mind, what distinguishes a truly vital "Indian enterprise" is its depth of commitment to the Indian economy. Such Corporate Champions innovate to create, capture and retain comprehensive value for the Indian society by building assets in the country, by contributing to a virtuous economic cycle of investment, by generating and redeploying surpluses for national economic growth, and by creating sustainable livelihoods. These vital "Indian enterprises" leverage best-in-class technology, resources and capital from all over the world to create enduring assets for the nation. Thus an 'Indian' Corporate Champion is borne out by its approach and commitment to the Indian economy, and the outcomes of its enterprise, rather than by the source of its capital.

A vital "Indian enterprise" by definition will be more inclined to participate in inclusive value chains that reach out to the weakest link – in many cases the Indian farmer, or the small entrepreneur – and enhance the competitiveness of the value chains of which it is a part. These enterprises will build world-class Indian brands, thereby capturing complete value for every consumer spend vis-a-vis the royalties payable for the use of foreign brands. It is important that enterprises operating in India are evaluated for their 'Indianness' on the basis of the net value that they capture for the Indian economy over time and are recognised and encouraged for such contribution. Such an approach will facilitate greater alignment of the business enterprises with national priorities.

ITC: CREATING ENDURING VALUE

As a Company deeply rooted in India's soil, and inspired by the opportunity to serve a larger national purpose, ITC had redefined its Vision a decade and a half ago to transform the Company into a vibrant engine of sustainable growth with substantial and growing contribution to the Indian Economy. Your Company's choice of strategy was driven by an overarching aspiration to sub-serve larger national goals whilst rewarding shareholders by creating growing value for the Indian Society.

A portfolio of businesses was carefully chosen in areas where internal competencies best matched the emerging opportunities of a growing Indian economy. A robust corporate strategy of creating multiple drivers of growth was put in place which saw your Company entering new FMCG businesses as well as Information Technology in addition to revitalising and growing its existing businesses of Cigarettes, Paperboards & Packaging, Hotels and Agri-Commodities. To manage this diversity and retain focus on each business, a new corporate governance structure was designed with distributed leadership for effective management and attainment of international competitiveness.

You have been witness to the remarkable progress of this business portfolio in a relatively short span of time, creating immense value for our stakeholders and the nation. Today, your Company is a leading FMCG marketer in India, the second largest Hotel chain, the clear market leader in the Indian Paperboard and Packaging industry and the country's foremost Agri business player. Your Company's wholly owned subsidiary, ITC Infotech India Limited, is one of India's fast growing Information Technology companies in the mid-tier segment.

As a result, a treasure-house of brands and assets has been created in the last decade that promises to lend wings to an even more fulfilling future. ITC is now positioned in the frontline of the businesses of tomorrow backed by strong capabilities in R & D, world-class manufacturing practices, robust farmer relationships and a rich lineage of branding, trade marketing and distribution. What is perhaps even more significant is that these achievements have been in tandem with the creation of large scale environmental and social capital. Indeed, your Company is a National Champion in the making, creating massive multi-dimensional value for the country.

The super-ordinate vision to create enduring value for the nation is manifest in inclusive and sustainable value chains that are driven by the vitality of your Company's world-class Indian brands. Let me delineate a few significant aspects in the shaping of this exemplary Indian enterprise.

Creating World-Class Indian Brands

A country's brands are a reflection of its competitive strengths and a manifestation of its innovation and intellectual capacity. I strongly believe that a country's economic capacity is significantly enriched when its institutions build and own internationally competitive brands. Winning brands serve as market anchors to support the competitiveness of the entire value chains of which they are a part. Strong domestic brands create much larger value since they create, capture and retain value within the country.

Your Company takes justifiable pride in creating world-class Indian brands that have demonstrated immense vitality in the global Indian market place. Leveraging enterprise strengths of over a century in terms of deep consumer insights, unwavering focus on quality, innovation, consumer-led differentiation, manufacturing excellence and a strong trade marketing and distribution organisation, your Company has created vibrant brands that have gained remarkable market standing.

  • Within a relatively short span of time, your Company has established vital brands like Aashirvaad, Sunfeast, Dark Fantasy, Bingo!, Yippee!, Candyman, mint-o, Kitchens of India in the Branded Foods space; Essenza Di Wills, Fiama Di Wills, Vivel and Superia in the Personal Care products segment; Classmate and Paperkraft in Education & Stationery products; Wills Lifestyle and John Players in the Lifestyle Apparel business; Mangaldeep in Agarbattis; Aim in Matches and so on. In India's agricultural space, ITC's e-Choupal is a brand that is synonymous with farmer empowerment while in the services sector and in the hospitality segment, ITC Hotel brand is an embodiment of Responsible Luxury apart from its other high quality offerings such as WelcomHotels, Fortune and WelcomHeritage. ITC Hotels have pioneered the concept of branded cuisine in India with globally acclaimed restaurants including Bukhara, Dum Pukht and Dakshin.
  • It is your Company's aspiration to be the No 1 FMCG player in the country, taking into account only the new FMCG businesses. A recent Nielsen report has highlighted that ITC's new FMCG businesses are the fastest growing among the top consumer goods companies operating in India. The Segment Revenues of the new FMCG businesses are growing at a much faster clip than ITC's traditional businesses touching a turnover of over Rs. 5,500 crores in a relatively short span of time. The topline from this segment is expected to triple over the next 5 to 7 years to a level of Rs. 15,000 crores, with your Company's products delighting millions of Indian households as well as adding significant value to the exchequer.
  • Strong Indian brands, when closely engaged with the value chains residing in India, support the competitiveness of the entire value chain and benefit all participants. The diversity of your Company's portfolio is a unique source of competitive advantage for ITC's consumer brands. For example, the Aashirvaad brand benefits from ITC's agri-sourcing through the e-Choupal, enterprise strengths in blending, culinary expertise from the master chefs in its hotels, high quality safe packaging and branding expertise of your Company as well as the efficiency of its trade marketing and distribution network. As these brands garner more consumer franchise, the more are the returns to the farmers as well as to the entire income generating value chain, thereby enhancing livelihood opportunities.

As shareholders and consumers, you can also take justifiable pride that your support to these Indian brands enables the creation of larger societal capital through the virtuous cycle of sustainable and inclusive growth.

Supporting Value Chains: Creating Sustainable Livelihoods

ITC's abiding vision to serve national priorities has led to the creation of unique and innovative business models that simultaneously deliver the twin objectives of shareholder value creation and societal capital formation. This is manifest in your Company's conscious strategy to contribute to rural development in the context of its businesses through inclusive value chains that encompass the most disadvantaged in rural India. Creation of sustainable livelihoods is at the heart of this strategy. Let me highlight a few of these examples:

First, the Farm to Food Products Value Chain: Today, more than 4 million farmers in 40,000 villages are benefitted by ITC's globally acknowledged farmer empowerment programme – the ITC e-Choupal – the world's largest rural digital infrastructure. One of the most celebrated initiatives of ITC, the e-Choupal has helped raise rural incomes by energising village communities into vibrant economic organisations thereby transforming rural lives and landscapes. Your Company's sustainable agricultural initiatives supported by a Watershed Development Programme helps irrigate over 90,000 hectares of water stressed areas, raising rural incomes by enabling the harvesting of additional crops. Farmer training programmes supported by Pradarshan Khets (Model Farms) help in inculcating sustainable agricultural practices and raising productivity, further improving the long-term realisation from the farmer's meagre resources.

Second, the Tree to Textbook Value Chain: Recipient of the recent UN Award, this wood-fibre value chain has provided over 56 million person days of employment to poor tribals and marginal farmers. A conscious strategy to promote clonal propagation of fast growing and hardy species through intensive R & D, has today led to significant wasteland development and greening of over 125,000 hectares through ITC's Social and Farm Forestry Programmes. These renewable plantations enable ITC to offer the greenest products in the country such as Classmate notebooks and Paperkraft business and copier paper. This year, the introduction of an innovative agro-forestry model has led to synergising tree growing with crop production, demonstrating that food and fibre security need not be mutually exclusive but be mutually reinforcing.

  • In addition, your Company's Wealth out of Waste (WoW) programme that promotes resource conservation through recycling is a source of sustainable raw material for ITC's Paperboards business. I am given to understand that over 3 million citizens, 500,000 school children, 350 corporates and over 1,000 commercial establishments support this programme, which in turn helps augment green cover, conserves energy and scarce natural resources, makes surroundings clean and healthy and creates livelihood opportunities.

Third, the Animal Husbandry Value Chain: Your Company has been engaged in Livestock Development programmes with the objective of increasing milk productivity thereby raising farmers' incomes. With Animal Husbandry services extended to over 3,00,000 milch animals, the increasing level of milk production is enabling dairying to emerge as a commercially attractive non-farm livelihood. This year, ITC has intensified this programme around the adjoining districts of its Munger Factory in Bihar. The ground breaking of the Munger Dairy & Social Development project will take place shortly, which over time will substantially enhance the livelihood potential in the area. As this CSR intervention achieves scale, it will enable the development of a competitive value chain which in turn can feed a packaged dairy products business and support the creation of vital Indian brands that will further lend sustainability to the entire value chain.

Fourth, the Agarbatti Value Chain: The linkage of ITC's Women Empowerment Programme to ITC's Agarbattis Business with the brand Mangaldeep is yet another unique example of livelihood creation through competitive value chains. Through these programmes, nearly 40,000 women have been provided gainful livelihood opportunities.

These value chains have not only created millions of sustainable livelihoods but have also simultaneously created large scale environmental and financial capital. In the process, it has also demonstrated the magnitude of contribution that institutions like ITC can create for the Indian society through innovative business models.

Low Carbon & Green Strategy of Growth

Your Company's low carbon and green strategy of growth contributes to the country's efforts in climate change mitigation and creation of natural capital. You are aware that over 38% of total energy consumed in ITC is now from renewable sources. Your Company has made significant investments in wind power projects as well as in biomass-based energy production systems to meet its requirements. More than a dozen ITC facilities now run more or less completely with renewable energy. This includes premium luxury hotels and factories in several locations as well as the ITC Infotech Park and the ITC R & D Centre in Bengaluru. Such a large footprint of renewable energy not only reduces our demand for fossil fuels but also contributes to cost efficiency in the long-term.

Your Company's bouquet of world-class brands together with its sustainable and inclusive value chains create enduring value that is manifest in ITC's growing economic contribution as well as in its capacity to invest in the future.

Contribution to the Exchequer

  • For every Rupee of 'value addition' by ITC, nearly 74% accrues to the Exchequer. Over the last 10 years, the cumulative accrual to the Government Exchequer in the form of taxes comprising excise duty, income tax, dividend distribution tax, value added tax, entry tax, octroi and other State levies is nearly Rs. 1,00,000 crores. ITC is one of the top 3 taxpayers amongst the listed private sector companies in India.

Foreign Exchange earnings

  • The total foreign exchange earnings of the ITC Group for the last ten years amounts to nearly US$ 5 billion, of which agri-exports constitutes 56%. This reflects your Company's contribution to the rural economy through effectively linking small farmers with international markets.

Accelerating Investments in India

a) Building Assets for the Future

In recent times, economists and analysts have expressed concern on the slowdown in the pace of capital formation in the Indian economy putting at risk future job creation and income generation. It has become all the more important to repose faith in the long-term prospects of the economy and invest in creating assets for the future. Your Company has charted an investment programme of nearly Rs. 25,000 crores over the next 5-7 years in support of the need to raise the pace of investment in the Indian economy. At the current moment over 40 projects, large and small, are in various stages of implementation across the country.

It will help greatly the cause of stimulating the Indian economy and easing the supply side influences on inflationary expectations, if every enterprise operating in India were to, wherever feasible, advance its investment programme by one year.

b) Building Intellectual Capital for the Future

Your Company's determination to build intellectual capital as a source of sustainable competitive advantage for the future is manifest in the establishment of a state-of-the-art R & D Centre at Bengaluru. The distinctive construct of your Company in terms of its growing presence in agriculture, food and personal care businesses, is enabling a synergy of R & D capabilities to deliver future products aimed at nutrition, health and well-being. Recognising that special attention needs to be accorded to tackle the metabolic disorders common to the Indian population, several long-term research platforms have been designed to create unique nutritional interventions that can address cardiovascular health, diabetes and cognition. These world-class R & D initiatives are aimed at improving the quality of life of the people with science-led nutritional strategies. In addition, considerable progress is also being made in agri-science research to significantly increase yields, quality and other traits of crops relevant to your Company's businesses. I am confident that, going forward, ITC's R & D capabilities will add new dimensions of competitiveness to your Company.

ITC's growing contribution across all the dimensions of the Triple Bottom Line, namely, in creating economic, environmental and social capital should reaffirm your confidence that your Company is well poised for creating even greater value in the years to come.

MOBILISING BUSINESS CONTRIBUTION FOR PEOPLE AND PLANET

Business and industry can indeed make an invaluable contribution beyond profit to serve the people and the planet. Yet, these exemplars are few and far between. As things stand today, it is an unassailable fact that markets seldom reward corporate virtue. This ambivalent market response does not necessarily ignite creativity and innovation in corporate action to accelerate social benefit.

However, a paradigm change can take place if strong market drivers emerge to support corporates that innovate to deliver larger sustainable and inclusive value. For example, if differentiated and preferential fiscal or financial incentives were to flow to companies with sustainable business practices, a company's commitment to societal value creation would also be rewarded with a financial dimension. This in turn will spur a massive movement in corporate innovation to integrate business goals with the building of societal capital. Companies will vie to make Sustainability a competitive value proposition. In addition, civil society, by exercising their power of consumer franchise in favour of such responsible enterprises, can also unleash significant market forces to reward these corporate champions. A new system of rating will have to be developed to guide enlightened consumers. Therefore, new institutions will be required to evaluate and award such ratings. As you may recall, I had devoted an entire speech at the AGM last year on the theme: "Making Markets work for Green GDP and Sustainable Livelihoods" which lays down an extensive institutional framework to enable such a paradigm change. To refresh your memory on the specific issues discussed, you may like to visit ITC's web-portal (www.itcportal.com) to access a copy of that address.

CONCLUSION

Creating an engine of growth for the Indian society that fosters such large scale sustainable and inclusive development is at once a humbling and satisfying experience. When the world acknowledged such contributions at the Rio+20 UN Summit recently, when we see your Company's initiatives transforming many lives and landscapes, when we see our new brands achieve positions of leadership, when we see yet another factory and yet another hotel springing to life, there is a moment of quiet fulfillment that this journey so far has indeed been worthwhile. Yet, there are many more milestones to cross, and I am sure I can draw upon the collective wisdom and efforts of the dedicated professionals who constitute a world-class Team ITC to take this Company to even greater heights in the future.

As I conclude, may I on behalf of the Board and the employees of your Company once again thank you, our valued shareholders, for your continued support and encouragement.

Thank you, Ladies & Gentlemen.