RESHAPING THE ITC OF TOMORROW

Speech by Shri Y.C. Deveshwar, Chairman, ITC Limited at the 86th Annual General Meeting of the Company held in Kolkata, India on August 27, 1997

This year, the Golden Jubilee celebration of India's independence has provided the context for serious introspection and a re-discovery of the ideas of Nationhood and Independence. The entire nation is paying homage to the courage and commitment of those who sacrificed so much to earn dignity and the right to self-determination for future generations of their fellow citizens.

There is a renewed sense of "India's Tryst with Destiny"' a ready inclination to take stock and carry out a honest re-appraisal of the years gone past; to at once gain confidence and inspiration from past achievements; to carry forward what is relevant for tomorrow; and an impatience to unshackle ideas and beliefs that impede progress.

There is a new understanding of Nationhood, a new urgency to gain freedom from poverty, illiteracy and disease. There are new ideas of globalisation, strengthened by the common threat of a degrading environment that knows no political boundaries, of integrating with world economy, of global synergy. There is a new pace set by the compulsions of time targets defined by global institutions like the World Trade Organisation. In a bid to register higher rates of economic growth, there is a new challenger for the policy makers to accelerate flow of international capital, technology and trade, yet preserve the independence of our Institutions, and strengthen our pride in them.

Each segment of the Indian economy, be it industry, agriculture or the services sector, must find a new zeal to rapidly gain international competitiveness, the new "mantra", the effective practice of which will determine the economic well-being of the nation.

Your Company is a premier Indian enterprise. It has always been deeply cognizant of its role as an economic arm of society subserving broader national aspirations. Like the country itself, your Company too seeks to take stock of the years gone by, re-group and harness its resources for extreme competitive preparedness and move forward into the future with renewed energy, fresh resolve and new hope. This implies a complete re-evaluation of ITC's future path, the reshaping of its business portfolio, systems and processes of governance and the formulation of a strategy that best matches the strengths of ITC with the growth opportunities in the marketplace.

Before I outline the future plans for your Company, let us take a look at the year gone by.

Last year witnessed new records attained by your Company on all financial parameters. Gross turnover at Rs.5863 crores was at an all time high, even though the export business went through a consolidation phase.

Net profit at Rs. 347 crores was 33% higher than that of the previous year. This is particularly satisfying when seen in relation to the results of the top 100 Indian companies, which collectively showed a decline of 5.6% in post-tax profits.

The highlight of the performance is manifest, in a much more telling manner, in the doubling of the operating cash flows. All this was made possible by a combination of aggressive growth in the high margin segments of the business, winding down of uneconomic activity and all round improvement in resource utilisation.

This enabled the Company to complete the excise pre-deposit of Rs.350 crores on schedule and placed it in a position to assist, in some measure, group companies in their restructuring and revival processes without in any manner sacrificing its growth plans. Equally, this performance has given your Board the confidence to recommend the restoration of a highest level of dividend at 40%.

I am sure all of you will readily join me in paying a handsome tribute to the employees of the Company at all levels for an outstanding display of courage, sense of purpose and commitment to the Company on a year riddled with uncertainty and adversity. I would also like to express my deepest sense of gratitude to you, the shareholders, who stood by the management in the task of stewarding the Company through what was decidedly the most turbulent year in its history.

During the year, your Board deliberated on the future growth strategy for your Company, and in doing so, took stock of the dramatic transformation that has taken place in the economic environment over the last few years.

Liberalisation is rapidly converting what was a closed market. We are today progressively becoming part of the global market and the world's largest corporations are now entering India, changing the nature of competition. Tariff barriers are being lowered. In each area, a strong grasp of consumer needs, and continuous innovation in building trademarks, product and process design, technology and research & development will determine success. This will require substantial investments in capital and know-how.

International competitiveness would be critical to survival and growth in the new Indian global market. This has several implications for Indian corporate houses like your Company. First, the whole thinking on what is a large corporation has undergone change. The largest corporations in India are tiny in the International context, and it is common knowledge that no Indian private sector corporation features in the top 500 companies of the world, as per the report published by Fortune magazine. Indeed, in recognition of this reality, the Government modified the MRTP Act in 1991, withdrawing restrictions on size.

Second, apart from the benefits of size, the large corporations entering the Indian market are able to take a long term investment views, because they can service their shareholders from their established bases in other markets. In comparison, Indian business houses like your Company do no enjoy such an advantage.

Third, Indian business houses can hope to succeed in this unequal battle, only if they learn to leverage their intimate knowledge of local consumers, by creatively segmenting the market and differentiating their brands, while at the same time matching their international rivals in the cost of operations.

Finally, all these endeavours may not be adequate by themselves without a nurturing policy framework.

Your Board recognises that capital is scarce, and should be re-directed to those areas where your Company can compete effectively and over time, build a dominant market position. Growth on all fronts, against international competition blessed with huge resources, is not profitable on a sustainable basis. It is in this context that your Board has identified the core businesses to support for the future. This re-focus would be in the best interest of shareholders, and will help build shareholder value on a sustainable basis.

Your Company's endeavour is to grow these select businesses to a scale, which makes them globally competitive.

Your Board believes that as a first step, Company's portfolio should comprise four sectors, namely, tobacco, travel and tourism, packaging and paper. This portfolio will be subject to periodic review against the objective of international competitiveness.

In this context, your Board recognises that international alliances can provide your Company with access to the latest developments in know-how, technology and best practice.

Foreign exchange earnings will remain an area of focus, not only because it is a national priority, but also because it will enable your Company's businesses to test their competitiveness and prepare for the growing sophistication of the Indian market.

Your Company also plans to realise full value from the real estate investments, taking advantage of the skills developed while growing the hotel business.

Further, your Company's most valuable assets are its trademarks. These may not be separately valued in your Company's accounts, but remain the basis of future income streams. For many of your Company's customers, their only connection with your Company is through these trademarks.

Research has shown that these trademarks carry considerable goodwill which can be more effectively exploited by entry into new lines of business. It is with the exploration of this new opportunity in mind that we have placed the Special Resolution for your sanction today.

In respect of your Company's other businesses it is the intention to induct world-class partners and thus reposition them for growth. This will also provide your Company the option to redeem its investments in these ventures in a responsible manner. In the first instance, this programme will cover ITC AgroTech, ITC Classic Finance and the Tribeni Tissues Division. ITC Global is already under judicial Management in Singapore, at the instance of the creditors of that company.

It is not widely known that the tobacco industry makes an invaluable contribution to the national economy.

· Over 26 million people are dependant for their livelihood on the tobacco industry. This includes a million small and marginal tobacco farmers, 5 million farm labour and 1.5 million retailers, not to mention a vast ancillary sector in goods and services.
· The sector contributes over 10% of the excise collected by the Central Government, and about 4% of its tax revenue, even though it comprises a mere 0.3% of arable land.
· Further, the sector contributes nearly 4% of the value of India's agri-exports. What is even more remarkable is that the economic potential of this sector is largely unrealised.
· Cigarette tobaccos constitute just a third of the total tobacco crop in India, and cigarettes represent less than 20% of tobacco consumption in India. Yet this minority segment contributes 90% of Government revenues and exports from this sector.
· Any conversion from traditional tobacco products to cigarettes will modernise and upgrade tobacco consumption in the country, sharply improve Government revenues and export prospects for Indian tobaccos. The modernisation of this sector will multiply Government revenues and contribute to strengthening the social infrastructure, which suffers from lack of funds.
· It is worth highlighting that China generates Government revenues seven times that of India from its tobacco sector. This has been made possible by moderation in excise duties which are half that obtaining in India.

Your Company is the market leader in the cigarette segment of the tobacco industry, and its brands occupy a leadership position in all categories. In recognition of a growing demand for international brands, your Company has entered into a licensing agreement within BAT for manufacturing and marketing two of its international trademarks in India. The agreement is awaiting Government approval. This initiative will also help to curb the growth of smuggled foreign cigarettes, which results in an estimated foreign exchange loss of Rs. 300 crores and an estimated excise loss of Rs. 200 crores. It is hoped that, over time, the entire value chain for international brands will shift to India, with a multiplier impact to be shared among Indian farmers, Indian suppliers, Indian labour, together with additional revenues for the Government, and in the process creating a largest surplus for you, shareholders.

When the country is targeting a GDP growth rate in excess of 7% per annum, the infrastructure to support this growth must also keep pace. By infrastructure, I refer not only to power, roads, ports and telecommunications but also to the tourism infrastructure that supports business and leisure travel. The economic potential and the associated opportunity presented by this sector can be gauged by the following:

· Travel and tourism is already the largest industry in the world, that earns over US $ 3700 billion in revenues and continues to grow rapidly.
· This sector provides the highest potential for generating employment per unit of investment and has a very large multiplier impact on the economy.
· Moreover, this sector generates US $ 3 billion in foreign exchange earnings for India, at a time when tourist arrivals in India are a fraction of their potential.
· If India's share of world tourism grows from the current 0.3% to 1%, it will call for investments upwards of Rs. 20,000 crores in the accommodation sector alone, indicative of the size of the opportunity in this sector.

The market standing of the Welcomgroup chain, managed by ITC Hotels Ltd. provides a very promising opportunity for growth. Your Company has focused the Welcomgroup chain to the up-market business and leisure segments, and is already the revenue leader in most locations where it operates. The association with Sheraton nurtured over the last 20 years has assisted in inducting state-of-the-art know-how and best practice in hoteliering, apart from providing a cost-effective access to their marketing and distribution network worldwide. This accumulated strength laces your Company in a unique position to exploit the growth opportunities in this sector.

Foreign exchange earnings constitute as much as 60% of the Welcomgroup chain's turnover and is therefore an important contributor to the national effort on foreign exchange earnings.

Your Company's subsidiary, ITC Hotels, has charted out growth plans in the Heritage segment for up-market tourists, as well as in the mid-priced business and leisure travel segments.

To fully exploit the growth opportunities presented by this sector, future investments are planned both directly by your Company, as well as through ITC Hotels.

Your Company's Packaging & Printing Division is India's leading supplier to the cigarette and liquor industries, with a small nucleus focused on high value added food products.

This sector is expected to grow rapidly, in line with the growing sophistication of the Indian market, presenting an attractive opportunity. your Company plans to develop its packaging operations into a leadership position in the Asia-Pacific region.

Your Company promoted ITC Bhadrachalam Paperboards Limited nearly 20 years ago. This Company has grown to acquire a strong presence in the paper board segment of the paper industry. The long-term growth prospects of the paper industry are significant given the low per capita consumption in India of a mere 4 kgs per annum compared to the world average of 55 kgs per annum. The growing sophistication of the consumer goods industry is expected to create an attractive market for international quality paperboard used for printed packaging.

Your Company has supported the modernisation programme of ITC Bhadrachalam's mill which involves an outlay of Rs. 620 crores. A state-of-the-art paperboard machine is being installed together with captive power generating capacity. On successful completion of the project, it is expected that the mill will rank among the foremost mills in the world in its category and will be internationally competitive both in quality and cost.

In order to improve access to cost effective fibrous raw material, ITC Bhadrachalam is engaged in an extensive social and farm forestry programme in the command areas of the mill.

The world paper industry is currently going through a severe recession. Coupled with this, the dramatic reduction in import duties to 20% has intensified price competition in the Indian market. Although this will inevitable prolong the gestation of the new investment in the medium term, the long-term prospects of ITC Bhadrachalam look attractive. The merits of an international alliance for this sector are being examined.

During the course of the year, your Company has been at the centre of a highly publicised investigation by the Enforcement Directorate as set out in the Directors' Report.

Since then, five show cause notices have been served on the Company and on some of its past and present directors and managers. These relate to the export transactions of the Company's International Business Division with the Chitalia group of companies spanning a period of approximately 4/5 years. Our legal advisors are in the process of obtaining and studying the voluminous related documents. In due course, the Company will formulate its response based on legal advice. Meanwhile, the investigation by the Directorate is continuing and your Company continues to extend its fullest co-operation in the matter.

Before I conclude, it is worth setting out in brief some of the salient aspects of your Company's contribution to the economy, and its relevance as a valued corporate citizen.

· Your Company earned US $ 1100 million in foreign exchange during the past 5 years. This represents about 1% of India's export earnings, placing your Company among the country's leading exporters.
· Cumulatively, over the last 5 financial years, your Company has created value addition of Rs. 14,793 crores. This value addition has been calculated by deducting from gross income, the net cost of goods and services purchased.
· A staggering 84% of such value added by your Company amounting to Rs. 212,425 crores has been contributed to Government authorities at the central, state and local levels, making your Company the largest contributor by far to the Exchequer from the private sector, representing nearly 3% of the tax revenues of the Central Government.

In comparison to Government's share of your Company's value addition, the share of other stakeholders during this 5-year period is modest:

· Rs. 454 crores, or just over 3% of your Company's value addition has been paid out as interest to lenders.
· Rs. 470 crores i.e. another 3% has accrued to shareholders as dividends.
· Rs. 693 crores, just under 5% of your Company's value addition, has been paid to employees.
· Just Rs. 752 crores, again around 5%, has been retained by your Company to support future growth in ITC and its subsidiary / associate Companies.

The main concern of your Board is how to become internationally competitive, when as much as 84% of the value added by your Company accrues to Government in the form of various levies. This is obviously due to the very high incidence of excise in the cigarette industry. It is your Company's hope that the Government's declared policy of seeking higher tax revenues through an expanding tax rates will be extended to the cigarette industry as well.

Moderation in 4excise duties will place your Company, a premier Indian enterprise, in a better position to mobilise the benefits inherent in a larger scale of operation and enable it to compete more effectively in the global marketplace.

Several million homes are part of the ITC family. This includes farmers/ farm labor, small retailers, over 2 lakh shareholders and depositors, nearly 15 million consumers and large numbers employed either directly or indirectly through the vast network of ancillary services.

This then is ITC. Not just a corporation, but an institution in the national mainstream.

No wonder, then, that your Company is so intimately linked to the hearts and minds of so many in our country. I am sure that you, our shareholders, have the same sense of pride that your Board has in the unique position that your Company occupies. This is a position that we intend to secure and strengthen.

In this 50th year of our Independence, I, together with your Board, pledge our fullest endeavours in shaping a bright future for your Company. Towards this end, I am sure we can rely on your unstinted support as always.

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