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Chairman Speaks - 2004

REDEFINING  CORPORATE CONTRIBUTION
ITC: IN PURSUIT OF THE TRIPLE  BOTTOM LINE

Speech by the Chairman, Shri Y.C. Deveshwar,
at the 93rd Annual General Meeting on July 30, 2004

Ladies and Gentlemen,

It gives me much pleasure to welcome you to the 93rd Annual General Meeting of your Company. Financial performance constitutes the lifeblood of a corporate enterprise, particularly in the private sector. Therefore, let me start with first things first, by accounting to you ITC's financial performance, towards seeking your support as willing investors. As in the past, I am appending the financial performance to date since the time you, the shareholders, placed me at the helm of affairs of your Company.

(Figures in Rs. Crores)
ITC: Financial Snapshot 1996 - 2004
  1996 2004
Gross Income 5188 12040
Profit After Tax 261 1593
Return on Average Net Assets (%) 30 39
Net Assets Employed 1886 6619
Net Worth 1121 6410
Market Capitalization 5571 25793
As at 31st March.

You will be glad to know that during this period Total Shareholder Returns, measured in terms of increase in market capitalization and dividends, grew at a compound rate of over 23% per annum, placing your Company among the foremost in the country in terms of efficiency of servicing financial capital.

The subject of my speech today is not confined to financial performance. The subject is "beyond financial performance". Companies such as yours are organs of society, using significant societal resources. Therefore, the value that is created by them cannot be assessed by financial parameters alone. Instead they need to be measured by the contribution they make to improving the quality of life of our society. It is not to suggest that financial performance is not important. It is very important. It is indeed an essential requirement and a means to fulfil a much larger purpose.

The content of my speech today, as in the past, is meant to appeal to you more as citizens than as shareholders alone. Envisioning a larger societal purpose has always been a hallmark of your Company and has variously been described by me in the past as "A Commitment beyond the Market", "Citizen First" and "Going the extra mile" in a bid to enlarge your Company's contribution to the Indian society. And, out of such enlarged perspective was born the notion of an "Indian company", based less on the source of its capital and more on the "Indianness" of its soul.

This year is proving to be a special one for your Company. The relentless pursuit of enlarging your Company's contribution beyond financial performance has been recognized internationally. I am sure that the citizen in you is delighted at your Company winning the inaugural 'World Business Award' instituted in support of the United Nations' Millennium Development Goals. The award honours business-driven initiatives that make a difference to society at a national level by helping reduce poverty and creating sustainable livelihood opportunities. Your Company also won the Wharton-Infosys 'Enterprise Business Transformation Award 2004' for the Asia-Pacific region. This award recognizes visionaries and organizations that use technology creatively to revolutionize their industries. The unique honour of being simultaneously acknowledged for the achievement of both business and social purposes will further strengthen Team ITC's determination to realize your Company's vision of sustaining itself as one of India's most valuable corporations.

The e-Choupal initiative of your Company has also been the subject of further international attention. The Harvard Business School now regularly teaches a case study based on ITC e-Choupal. 'The New York Times' carried a lead front page article on 1st January 2004. And more recently, the prestigious international magazine 'The Economist' also covered this subject. I owe a special gratitude to the eminent economist Swaminathan S Anklesaria Aiyar for his article entitled "The Great Indian Dreamer" in 'The Economic Times'. Not because we necessarily deserved what it generously stated, but because it served to inspire Team ITC to an even higher level of commitment, ignited by the sincerity of expectations.

   THE CONCEPT OF THE TRIPLE BOTTOM LINE

  
A company's contribution can be more comprehensively measured along three dimensions, commonly referred to as the "triple bottom line". These dimensions are economic, ecological and social. The material progress of industrial society has taken a heavy toll of the natural capital of planet earth and yet left a vast share of global population in abject poverty. This manner of progress is clearly not sustainable. India accounts for one-sixth of the world's population. How much natural resources would need to be used up if Indian citizens were to follow the same path to economic progress as the G8? The threat of environmental degradation was poignantly highlighted way back by Mahatma Gandhi in his reaction to a question related to India's economic development. He said, "It took Britain half the resources of the planet to achieve prosperity. How many planets will a country like India require!" In the last half century, the world has lost a fourth of its topsoil and a third of its forest cover. In the past three decades, one-third of the planet's natural wealth has been consumed. At present rates of destruction, the world will lose 70% of its coral reefs within our lifetime, driving to extinction about 25% of marine life.

Nations of the world need to work together even more closely on this global challenge. The corporate world needs to make its own contribution. Clearly premium needs to be placed on those companies that create economic progress with minimal adverse impact on ecology by deploying technologies that use the planet's finite resources efficiently. Indeed those that serve to replenish natural capital need to be valued even more. The challenges of development of the large and growing Indian population need to factor in the cost of replenishment of natural capital. Poverty is a scourge and those companies that contribute to elimination of poverty through creation of sustainable employment opportunities need to be encouraged by our society. The idea of sustainability underlying the concept of the triple bottom line is more of significance than the metrics related to measurement, which is often the subject of controversy. Companies need to create their own Balance Sheets related to these three dimensions, namely the triple bottom line, alongside the traditional Balance Sheet that is presented annually to shareholders.

   ITC: IN PURSUIT OF THE TRIPLE BOTTOM LINE


It is the spirit of sustainable development that has inspired ITC to adopt this concept in all aspects of the Company's functioning. You will have observed that since last year the Annual Report of your Company begins with a pictorially assisted feature that highlights ITC's contribution to socio-economic and environmental priorities. This voluntary initiative of your Company is based on the Sustainability Reporting guidelines of the Global Reporting Initiative. A separate booklet has also been put together for your benefit, and I trust it has been made available to you today. From such a perspective, I will once again draw your attention to some of your Company's major initiatives and accomplishments for your renewed appreciation. These initiatives hold the promise to contribute impactfully to the Indian society, over and above their potential of creating wealth for you. Indeed, the creative genius of your Company's business strategy lies in making these two objectives mutually reinforcing and synergistic.

From rural Poverty to potential Markets

Nearly 87% of India's 640,000 villages have population clusters of 2000 people or below. Despite a universe of roughly 3.6 million rural retail outlets, there is no active marketing or distribution in these small villages because of uneconomical "last mile" logistics. Nearly 35% of India's villages are yet to be connected by roads. Rural tele-density is barely 1%. Apart from being geographically dispersed, these villages as economic units, are too feeble to support the scale of investment required to upgrade last mile connectivity. A substantial proportion of the rural population subsists on less than $ 1 per day - less than half the subsidy provided to each head of cattle by the OECD.

Rural India accounts for about 60% of the country's household consumption expenditure. Yet, consumer research reveals that the propensity to consume for a rural wage earner is only half that of an urban wage earner for the same level of income. The lower propensity to spend arises from uncertainties the future holds in the absence of effective mechanisms to manage risk. Agriculture continues to be the predominant source of rural livelihood. A host of factors including small and fragmented farms, overdependence on monsoons, and lack of sophisticated inputs and knowledge traps the farmer in a vicious cycle of underdevelopment. The growth opportunity lies in building capacity to induce productivity led growth by providing cost effective last mile connectivity.

Your Company has nurtured deep linkages with rural India both as a buyer of agri commodities and as a seller of goods and services. ITC's e-Choupal model seeks to address the issues relating to last mile connectivity by leveraging IT to build capability at the grassroots through empowerment of the small farmer. This model seeks to enhance farm productivity and income by aligning output with market demand through connectivity. Its primary focus revolves around creating markets by helping raise incomes before servicing such markets commercially. Indeed these processes occur more or less simultaneously - a phenomenon that C K Prahalad so aptly refers to as "co-creation of value". Such an e-infrastructure can also serve as a powerful and effective delivery channel for a host of goods and services, including those related to farm practices, risk management, education and health. In effect, the e-Choupal is potentially an efficient delivery channel for rural development and an instrument for converting village populations into vibrant economic organizations.

Despite daunting implementation challenges, this initiative now comprises over 4100 installations covering nearly 25,000 villages and serving 2.4 million farmers. The World Business Award is an acknowledgement of your Company's abiding commitment to the rural value chain. To me, it also serves as a humbling reminder of the journey yet to be traversed, of the commitment to connect 100,000 villages in this decade, and is a celebration of a small beginning - the first step in a journey which will not end till every Indian farmer is reached.

A Mega Developmental Multiplier - Promotion of forest and wood-based industry

ITC's farm forestry programme is a telling example of linking business purpose with sustainable livelihoods and environment. It is not well known that apart from initial conditions of unequal resource endowment, climatic seasonality is a critical determinant of poverty in India. Access to livelihood fluctuates seasonally both in terms of labour force participation rates and the number of days of work available during particular months. Sustainable incomes are also compromised by deterioration in the natural resource base. Soil is subject to erosion by several weathering agents resulting in loss of humus and biotic life, leading to reduction in fertility and productivity. As per estimates of the Indian Council for Agricultural Research, the present average soil loss is over 16 tonnes per hectare per year which is at least three to five times the normal. Areas affected seriously by salinity, alkalinity and wind and water erosion cover an estimated 126 million hectares, accounting for nearly 41% of the total geographical area of the country. Further, it is estimated that nearly 70 million hectares out of the total estimated 95 million hectares of land under rainfed conditions are in some stage of land degradation. Sub-optimal land use is also evident from the fact that degraded wastelands constitute at least 35 million hectares, representing 18% of total cultivable land.

Forest cover plays a critical role in maintaining the soil and water base for food production in arid and semi-arid lands. In areas where wind is the main agent of erosion, the presence of wooded areas can help to contain erosion. Trees also ameliorate the effects of drought and desertification and play a crucial role in cushioning the effect of seasonality. Interpretation of Landsat imagery data indicates that out of 75 million hectares recorded as forest area, only 64 million hectares sustain actual forest cover, and only 35 million hectares have a crown density of 40%. Thus real forests account for barely 11% of the geographical area of the country.

ITC's farm forestry project is driven by the realization that India's meagre forest cover has serious implications for the rural poor. Your Company has effectively leveraged its need for wood fibre to provide significant opportunities to economically backward wasteland owners. The main plank of this initiative is the building of grassroots capacities to initiate a virtuous cycle of sustainable development. Your Company, working with select NGOs and the Government of Andhra Pradesh, identifies poor tribals with wastelands and organizes them into self-supporting forest user groups. The user group leaders are trained in the best silvicultural practices to grow high quality timber as a viable crop, and other local species that meet domestic fodder, fuel and nutrition requirements. Your Company provides a comprehensive package of support and extension services to farmers encompassing loans, land development, planting of saplings, plantation maintenance, marketing and funds management. This intervention has been institutionalized by creating village-level natural resource management committees comprising local farmers.

At the heart of this comprehensive greening project is ITC's state-of-the-art research centre at Bhadrachalam. The biotechnology based research enables your Company to make available high yielding, disease-resistant clonal saplings, thereby presenting attractive land-use alternatives to traditional farmers and wasteland owners. So far, 66 million saplings have been planted over 19,500 hectares through farm and social forestry programmes, generating employment opportunities for nearly 200,000 people. The pace and scope of these plantations has been substantially accelerated, with 31 million saplings planted during the last year alone. Substantial employment has been created during pre-monsoon lean periods when agricultural employment is at its lowest. Thus seasonality induced migration is stemmed, making viable other social interventions relating to health, nutrition, education etc.

The benefits of this strategic initiative of your Company are much more pervasive. This effort contributes to in-situ moisture conservation, groundwater recharge and significant reduction in topsoil losses due to wind and water erosion. With poor households having access to their own woody biomass under ITC's social forestry programme, the pressure on public forests stands reduced. The leaf litter from multi-species plantations and the promotion of leguminous inter-crops enable constant enrichment of depleted soils. These forests enable sequestration of carbon, thereby contributing to strengthening the plant-led life support system.

Your Company's bold engagement across the entire value chain has converted the threats to competitiveness and to the quality of social and natural capital into opportunities for a sustainable partnership. Only a company with a 'commitment beyond the market' could have dared to commit so passionately to adding value to native wood fibre, when conventional wisdom was calling out for quitting this business in the absence of cost effective fibre. Should a company such as yours choose the easier path of importing pulp to support a 300,000 tonne mill based on virgin pulp, it would mean foregoing 75,000 hectares of sustainable plantations, 27 million person-days of employment and nearly Rs.600 crores in foreign exchange annually.

Your Company has committed itself to building competitiveness as a critical responsibility towards creating the socio-economic and ecological multiplier. Alongside investment in augmenting capacity and inducting cutting edge process technology, your Company set up an Elemental Chlorine Free pulp mill at Bhadrachalam ahead of the standards mandated by the Ministry of Environment and Forestry. This pulp mill is the only one of its kind in the country and conforms to world-class environmental standards. Your Company also invested in co-generation as a measure of efficient energy management and by way of minimizing environmental impact. In this context, the move to levy a cess on captive generation of electricity in Andhra Pradesh impedes progress towards international competitiveness, which is crucial to sustaining your Company's partnership with tribals and in generating sustainable livelihoods.

The growing competitiveness of your Company's paperboards business and its increasing market strength provide the impetus for your Company to scale up the afforestation endeavour to cover over 100,000 hectares by planting 600 million saplings over the next 10 years. Such a scale would render procurement of industrial timber exclusively from sustainable sources a reality within 10 years, benefit nearly 1.2 million people through incremental employment and position your Company as a carbon positive enterprise.

The tested viability of your Company's social farm forestry programme in effectively servicing economic, social and environmental capital holds important inputs for policy makers in the country. India can leverage two of its most abundant assets - people and land - through promotion of wood and forest-based industry to address a whole host of developmental issues. Just as horticulture and floriculture have been identified as national missions, promotion of forest and wood-based industry carries the potential for transformational change, provided usage of output is linked to replenishment. Such a strategy would facilitate land use diversification through a sustainable model of development by supporting value added wood-based industry such as paper, construction and furniture. A whole new opportunity can be opened up through promotion of forest and herb-based products for culinary, cosmetic and curative use in domestic and international markets. Apart from spawning value adding industry, this strategy would enable the creation of substantial employment both on farms and off farms, thereby helping to absorb the excess labour inherent in agricultural productivity improvement. Further, wasteland development through promotion of wood and forest based industry can also convert over 35 million hectares into productive assets, while simultaneously addressing serious issues relating to biomass depletion, soil erosion, water security, ecological balance and biodiversity.

The spirit of partnership towards contributing to societal capital has inspired your Company to venture into other markets like Agarbattis and Safety Matches. In addition to providing business growth opportunities, these forays have enabled the adoption of superior processes, upliftment of capabilities, elimination of reprehensible practices like child labour, and, over time will result in better realizations from the market. The entry into Branded Packaged Foods has enabled the creation of an engagement with the farmer such that the e-Choupal infrastructure could be used to build a developmental model sustained on a commercial foundation. The business can thus serve to create a much higher order of value across the entire value chain from seed to stomach. Similarly, it is our hope that your Company's Lifestyle Retailing business will grow in strength at the market end, which will, over time, create the basis for a deeper engagement across the entire value chain from fibre to fashion, much like the successes in the paperboards, soya and wheat value chains.

Other Social Initiatives

It may not always be possible for every business of your Company to establish such direct linkages with societal purposes. It is the endeavour to therefore also engage in socio-economic development programmes in the economic vicinity of your Company's establishments, purely as an instrument of philanthropy but geared to create sustainable livelihoods. I will briefly touch upon some of these initiatives.

Livestock Development:

India has the largest cattle population in the world. Almost every rural household in India, whether landed or landless, owns livestock. However, average milk yield at 300 kgs per lactation is abysmally low due to severe genetic erosion and fodder scarcity. Dairy farming requires low investment and has the potential to create attractive livelihood opportunities for the economically challenged sections of rural India, provided livestock can be genetically upgraded through systematic and scientific animal husbandry. In a concerted endeavour to increase milk yield, your Company is spearheading a Livestock Development programme in Bihar, Uttar Pradesh and Madhya Pradesh in collaboration with a national NGO specializing in livestock development. Crossbred cattle yield about 2100-2700 kgs of milk per lactation, as compared to the current level of 300 kgs. ITC's Livestock Development programme reaches out every year to 12,000 farmers in 600 villages, inseminating 15,000 cattle through 30 Insemination Centres.

Women's Empowerment:

ITC believes that economic empowerment of women transforms them into powerful agents of social change. Increased income in the hands of rural women means better nutrition, health care and education for their children. ITC's intervention leverages micro-credit and skills training to generate alternate employment opportunities. Commenced in 2001, this initiative of your Company has enabled the establishment of 500 micro credit groups and the creation of nearly 2000 women entrepreneurs.

Integrated Watershed Development:

It is not well known that in the absence of infrastructure to hold water that is otherwise available in plenty, 67% of the cultivated area in the country faces severe moisture stress for 5 to 10 months a year. These drylands contribute as much as 45% of the nation's food basket, where the crop production is low, unstable and highly vulnerable to seasonality. Growth in agriculture through improved yields is thus closely tied to availability of water. ITC's integrated watershed development programme seeks to achieve two critical objectives: water conservation and soil enrichment. This endeavour has already extended to nearly 550 water storages including percolation tanks, check dams and farm ponds, supporting moisture and soil conservation in over 8000 hectares of land. The rainwater harvesting potential created through such structures, together with other water conservation efforts enabled your Company achieve the status of being a water positive Company for the second successive year.

Primary Education:

The opportunities promised by market-based reforms would stand vastly circumscribed in a nation where illiteracy is rampant. ITC's education support programmes are aimed at overcoming the lack of opportunities available to the poor. Your Company believes that the extensive network of government-supported schools can be made more attractive to children to maximize enrolment and minimize dropouts. Your Company's initiatives include upgradation of school infrastructure, providing books and uniforms, establishment of supplementary learning centres to improve scholastic ability and teacher training programmes. So far, 9000 children have benefited from such support in 5 states.

Environment, Occupational Health and Safety:

Your Company continues to invest substantial resources towards sustaining and continuously improving standards of environment, occupational health and safety (EHS) in a bid to attain and exceed international benchmarks. Each of your Company's units operates to world-class standards of occupational health and safety. Most of your Company's units, whether a cigarette factory, leaf threshing plant, printing unit, research centre or hotel, maintained an enviable zero lost time accident record during the year. Efficiency of resource use through waste reduction continues to be a key thrust area, particularly recycling of solid waste. Your Company has set for itself certain key EHS objectives, against which progress is regularly monitored. Over time, your Company seeks to become a carbon positive enterprise, improve the status of being a water positive enterprise and achieve full recycling of solid waste in all its units.

The triple bottom line approach enables your Company fulfil its responsibility as a corporate citizen and supplement in meaningful measure the endeavours of other organs of society. It is my belief that all stakeholders, including consumers, will increasingly appreciate the need for a harmonious balance between the economy, ecology and society and progressively raise the bar of expectation in relation to corporate response to issues of sustainable development.

    CONCLUSION


I am certain that you are as gratified as all of us in ITC at the breadth and depth of your Company's societal contribution. The vision of enlarging such contribution manifold constitutes the singular force that serves to align the human resource of your Company, providing even greater impetus to the task of competing for your capital. There can be no greater source of inspiration for them, just as there can be no greater assurance to you, the shareholders, than the continued dedication of these inspired employees. On their behalf, I seek your enlightened support, as always.

Thank you for your attention.