ITC : A COMMITMENT BEYOND THE MARKET
 

Speech by the Chairman, Shri Y.C. Deveshwar,
at the 90th Annual General Meeting of ITC Limited
in Kolkata, India on August 03, 2001

   

                                                      (Rs. crores)

The long term growth prospects of your Company, and indeed that of every company operating in India, are inextricably intertwined with the growth prospects of the broader Indian economy. In this context, the recent downward revision in estimates of GDP growth for 2000-01 from 6% to 5.2% is a source of concern. I would therefore first like to offer some comments relating to the growth agenda facing the Indian economy.

In this context, the criticality of accelerating the reform process cannot be overstated. The fundamental purpose of reform is to create a climate in which investments in India can become productive and internationally competitive. The role of the market in engendering efficiency needs to be understood and appropriately harnessed. The history of the public sector having received the lion’s share of the country’s savings since Independence and having operated outside of market principles has now posed a serious challenge to the capital productivity of the country and calls for speedy restructuring. The priority of reforming the public sector deserves to be wholeheartedly supported. The reform agenda needs to embrace all aspects of socio-economic and political life of our society. It is necessary to create robust market institutions that foster investor confidence essential to mobilise domestic and international savings for investment in India. The imperative of upgrading the social and physical infrastructure requires mobilisation of even higher rates of public savings, supplemented by a growing tax base that lends buoyancy to revenues. This would entail a fundamental re-ordering and rationalisation of the terms of tax assignment between the Centre and the States to align the structure of responsibility in a manner that promotes fiscal discipline, supports mobilisation of resources from an expanding tax base and unlocks the potential of a larger Indian common market. The reform agenda is even broader and encompasses financial markets, labour markets, the environment, public health and education systems, the legal framework and much more. This enormous reform agenda has to be accomplished within a large and complex multi-party political system straddling a broad spectrum of ideologies. Adding to the enormity of the task is the country’s vast diversity including severe income disparities and regional imbalances. Acceleration of reforms can sustainably come about only through a growing political consensus on the fundamentals of a long term growth strategy that cuts across ideologies and short term sectarian interests.

In this context, I would like to once again invite your attention to the distinction I had drawn in my communication to you last year, between an ‘Indian’ company and a company operating in India. The difference lies in the depth of commitment to the Indian economy. A global company per se, by definition, tends to be committed to the primacy of shareholder value above all else, and towards this end would source globally from locations where quality and cost are most competitive, and manufacture and add value where it is most efficient to do so in supplying to target markets to maximise profits. On the other hand, an ‘Indian’ company, whilst recognising the need to create a fair reward for shareholders, would go the extra mile in partnership with other participants in the economy, to create conducive conditions for international competitiveness towards maximising value for the Indian society of which it is a part. It needs to be emphasised that no organisation can sustainably contribute to the creation of national value without creating shareholder value. An ‘Indian’ enterprise would, as its fundamental orientation, favour value chains within India by supporting their competitiveness wherever feasible. On the other hand, any other enterprise would not necessarily demonstrate such a commitment in pursuit of shareholder value. Thus an ‘Indian’ enterprise is borne out by its approach and commitment to the Indian economy rather than by the source of its capital.

Whilst India has demonstrated sustainable promise in the field of Information Technology, anecdotal evidence appears to suggest that hitherto well established manufacturing companies are now increasingly looking for sources of supply from outside India to service the Indian market. This does not augur well for the ambitious growth agenda of the Indian economy. If this trend is real, it is tantamount to an early sign of acceptance of defeat in the battle for competitiveness. This phenomenon underscores the need for an even closer and deeper spirit of partnership within the Indian economy in shaping and effectively executing the reform agenda.

A Commitment to the Paperboard Value Chain

It is well known to you that some years ago ITC Bhadrachalam was a deeply troubled company, surrounded by all manner of adversity. Whilst it had survived financially in a closed economy despite outdated products and an uneconomic scale compared to global benchmarks, the opening up of the economy brought down customs duties drastically from 100% in 1991-92 to 20% in 1997-98, exposing it to the rigours of international competition. The dwindling forest resources of the country posed a serious threat to the continuity of access to cost effective fibre. The energy intensity of paperboard manufacture, the high cost and unreliability of electric power from the state grid and the challenge of absorbing modern technology in the tribal region of Bhadrachalam stacked the odds overwhelmingly against the company. It was therefore natural that conventional wisdom created a strong opinion in favour of ITC exiting this business. A sense of deep commitment to the creation of growing and sustainable value within India inspired ITC to swim against the tide and fashion a comprehensive turnaround strategy, drawing upon the diverse skills within the ITC Group. At this point, I would once again like to register my gratitude to you for your ready consent at that time to support ITC Bhadrachalam with an infusion of an additional Rs.150 crores of capital.

The aggressive pursuit of international competitiveness has enabled ITC Bhadrachalam to fundamentally transform itself. It has created value added products by absorbing state-of-the-art technology, attained global benchmarks in cost and quality, and effectively implemented an energy and fibre strategy to create a distinctive and sustainable competitive advantage. The clonal propagation programme, the heart of the fibre strategy, was multiplied manifold, with incentives to farmers to engage in farm forestry in the command areas of the mill. Further, assistance and support was extended to forest authorities to restore degraded forestland. This programme has now reached a dimension that would soon be able to substantially support a further scaling up of the mill without being a drain on the forest resources of the country and become, in fact, over time, a net contributor to forest cover. This programme is being scaled up by your Company in partnership with the government of Andhra Pradesh, select NGOs and ITC Bhadrachalam and carries the potential of creating 40,000 jobs in the backward tribal regions of Andhra Pradesh. This programme also provides an alternate remunerative opportunity to the farmers, now increasingly relevant in the context of the overflowing granaries. The captive co-generation of power has substantially improved energy efficiency. The resultant unit cost of energy, although higher than international benchmarks, constitutes the finest standard by far amongst Indian manufacturers. ITC Bhadrachalam Paperboards can today claim to be a worldclass supplier of value added paperboards. This successful turnaround has laid the foundation for an abiding and growing contribution to the Indian economy. Foreign exchange conservation last year amounted to around Rs. 200 crores made up of substitution of imports of about Rs. 110 crores and foreign exchange earnings through export of value added paperboards of over Rs. 90 crores. Demand for value added paperboards in India is growing at more than 10% per annum. It is easy therefore to comprehend the potential value of contribution to the Indian economy in terms of conservation of foreign exchange alone, apart from the multiplier impact of the additional employment opportunities. I am confident that in the not too distant future ITC Bhadrachalam will wipe out the accumulated losses of long gestation and begin to return the cost of capital for the shareholders. This sterling turnaround has led your Company to encourage ITC Bhadrachalam to embark on an ambitious growth plan entailing an investment of upto Rs.1500 crores over the next 5 to 7 years. Given adequate support for fibre and energy, this investment programme, on successful completion, carries the potential to catapult this company into a position of leadership in the value added segment in the Afro-Asian part of the globe. This success is even more gratifying as it bears testimony to the worldclass quality of the ITC Group’s human capital.

A Commitment to Tourism Infrastructure

Another example of ITC taking a long term strategic approach is evidenced in its commitment to its hotels business. Hotels constitute an important part of infrastructure essential for the growth of trade, commerce and industry. Although market conditions in the recent past have been extremely sluggish, the long term prospects are promising even if the Indian economy were to grow at rates anywhere above 6% per annum. Globalising markets and the expected higher rates of growth of the Indian economy will lead to a growing demand for high quality accommodation. Travel and tourism, already the largest industry in the world, has contributed significantly to the turnaround and growth of several economies in the world. This sector ranks amongst the highest employment generators per unit of investment and imparts a very large multiplier impact to the economy. The current foreign exchange earnings of this sector of about US $3.5 billion represent a fraction of its potential. Tourism is an industry of industries. It will prosper as all-round development takes place in the quality and scale of infrastructure. In the context of this potential, India is grossly under-roomed even in comparison with its much smaller neighbouring East Asian countries. As you are aware, your Company’s initial objective of completing its chain in the super deluxe segment in all key locations in India will have been completed over the next three years at a cumulative outlay of upto Rs.1500 crores. It is companies such as yours, with a strong balance sheet and worldclass human resource, that can contribute to the creation and sustenance of such capital intensive and long gestation infrastructure projects, so necessary to precede any prospects of rapid economic growth.

  

Harnessing Technology for the Indian Farmer

Your Company’s model of contribution to rural India in the tobacco sector encompassing the entire value chain from seed to smoke, is being aggressively replicated in other crops. Over the last decade, your Company has been engaged in linking the Indian farmer to world markets through the agri exports of the International Business Division. As a result, your Company has a presence in the rural regions of 14 States in India wherefrom it sources a variety of agri commodities including soya, rice, coffee, edible nuts, pepper and marine products. Your Company is now engaged in imparting a new dimension to its rural partnership by leveraging information technology to elevate the Indian farmer to a much higher order of empowerment. The International Business Division has drawn upon the competencies residing in your Company’s Information Technology business to create a unique click and mortar capability christened
e-Choupal. Starting with six pilot choupals in June 2000, today this strategic initiative has already become one of rural India’s largest internet-based interventions, reaching out to more than 1,20,000 farmers in one thousand villages through 235 choupals in the States of Madhya Pradesh, Karnataka and Andhra Pradesh. Through virtual clustering, these e-choupals are re-organising the farm supply chain for more cost effective sourcing using the physical transmission capabilities of current intermediaries, yet disintermediating them from the information flow and market signals.

The e-choupal initiative is designed to benefit the farming community by enhancing farm productivity through web-enabled access to appropriate information and inputs. The model also seeks to increase farmer earnings through better price discovery, improved quality and savings in handling and other related costs. The strategic intent is to create a farming metamarket across India through e-hubs for servicing the information needs of clusters of villages as well as to create the infrastructure to facilitate efficiency in purchase and sale of high quality inputs and farm produce. This e-infrastructure can also be used to market a range of goods and services to the farming community including micro credit, insurance, health and education services.

The implementation of such an ambitious plan to empower the Indian farmer poses formidable challenges. A host of infrastructural inadequacies, including power supply, telecom connectivity and bandwidth, have combined to render this challenge even more complex. Your Company’s deep commitment to value creation in rural India propels it to persevere and seek innovative solutions to these problems. Your Company’s long term approach, together with its capacity to incubate long-gestation value creating projects, will position the e-choupal infrastructure as a valuable instrument for transforming farm economics in India. The coming year will witness an expansion of this initiative and by June 2002, nearly 1,200 choupals would be operational covering more than half a million farmers. I wish to highlight here that this initiative is built on market principles and is backed by a revenue model, which over time, is expected to contribute handsomely to shareholder value.

This approach of forging successful partnerships with the farming community is also capable of being extended to other elements of the agricultural value chain, notably to value added foods. Your Company is engaged in exploring opportunities in this area.

Fibre To Fashion Value Chain

The Wills Sport wardrobe brand of premium relaxed wear for men and women has been extremely well received, beyond the initial expectations of your Company. Your Company was therefore encouraged to open 18 additional stores in the short period since 15^th June this year. As communicated to you last year, it is the objective to scale up ITC’s Wills Lifestyle retailing operations to around 100 stores over the next couple of years. As the franchise of your Company’s trademarks in this sector takes deeper root in the mind of the consumer, a foundation will have been laid for your Company’s engagement with the fuller value chain from fibre to fashion towards international competitiveness. The model of e-choupal enunciated earlier can then be extended to cotton farming to upgrade quality and productivity. Inputs into upstream conversion activities through supporting worldclass vendor development can upgrade the entire value chain and create the basis for a much higher order of value realisation from exports from this sector. Your Company harbours the ambition to, over time, exploit such world-class capabilities embracing the entire value chain of the branded garments industry to service the more developed international markets.

There are other initiatives on the anvil based on such a commitment that goes far beyond the market. I will share those with you as and when sufficient progress takes place.

Thank you for your attention.