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Profits from Operations up 19.4%
23 Jul 2009

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Financial Results for the quarter ended 30th June, 2009

Highlights

Profits from Operations :  +19.4%
Pretax Profits : +18.3%
Post Tax Profits : +17.4%

Threat to legitimate industry and Government revenues as a result of sharp growth of illegal and contraband cigarettes.

Pictorial graphic warnings on cigarette packs implemented w.e.f 31st May 2009.

Maharashtra, Delhi and Rajasthan increase VAT on cigarettes threatening the concept of the ‘Indian Common Market’.

9.5% growth in non-cigarette FMCG businesses. Segment improves on profitability.

Segment net revenues of Paperboards, Paper & Packaging grow by 16%. Paper and pulp investments stabilize.

Agri business profits up by 31%.

 ‘Classmate’ range augmented with pens, pencils and scholastic products.

The green qualities of ‘Paperkraft Premium Business Paper’, win franchise from responsible Corporate customers.

Hotels business continues to be impacted by the global economic slowdown.

ITC becomes the first Indian company to gain membership of WWF GFTN for responsible forestry.

ITC’s Social forestry project recognised to receive carbon credits under CDM – a first of its kind. Benefits will be passed on to the tribals partnering the project.

The resilience of the Company’s business portfolio was underscored by the 17.4% growth in Post tax profits despite tough economic conditions. Although the FMCG and Paper & Packaging businesses grew handsomely in net revenues by 19% and 16% respectively, overall turnover growth for the Quarter was muted at 4.7% due to the de-growth in Hotels and Agribusinesses.

As a result of the restructured product portfolio, profitability of the agri-business continued to be robust despite lower revenues. Whilst margins improved, investments in brand building in the Personal Care and Branded Foods business continued to impact the segment results of ‘FMCG-Others’.

Pre-tax profits at Rs.1317 crores were higher by 18.3%. Post tax profits at Rs. 879 crores grew by 17.4% over the same period last year. Earnings Per Share for the quarter stood at Rs. 2.33.

FMCG – Cigarettes | Branded Packaged Foods | Lifestyle Retailing
Personal Care Products | Education & Stationery Products
Hotels | Paperboards, Specialty Papers & Packaging
Agri Business | Sustainable Development

FMCG - Cigarettes

The Company’s relentless initiatives and efforts in offering truly world class products to its consumers have enabled it to maintain its position of leadership in the industry. Innovation and consumer focus have enabled the business to deliver superior value through its brand portfolio of well crafted blends and contemporary packaging styles and use of state-of-the-art manufacturing technology.

The severe taxation and regulatory milieu for cigarettes in India remains a cause for concern. Coming close on the heels of the smoking ban in public places, the cigarette industry was subjected to imposition of pictorial graphic warnings during the Quarter. As these regulations would impact  cigarettes more than other forms of tobacco consumption,  switching to cheaper forms of tobacco consumption will increasingly take place, adversely impacting the earnings of the farmers, who gain the maximum realisation from cultivating cigarette type tobaccos. In addition, smuggled contraband cigarettes, which already enjoy an illegal advantage of tax arbitrage, will have yet another source of clandestine advantage as these packs may not carry the specified graphic warnings.

The other disturbing development during the period was the increase of VAT rates on cigarettes by some states like Maharashtra, Delhi and Rajasthan from 12.5% to 20%. This  completely undermines the basic objective of establishing a common Indian market through uniformity of rates in taxes. VAT was introduced on cigarettes in 2007 at a uniform rate of 12.5% across the country. This position was in line with the philosophy of VAT, as maintaining uniform rates of tax was critical to preventing an unhealthy tax rate ‘war’ and trade diversion amongst States/Union Territories. The current increase in VAT  would provide an attractive tax arbitrage opportunity and encourage illegal inter-state flow of cigarettes. Not only would it defeat the purpose of augmenting revenue, but would also result in trade falling into the hands of undesirable syndicates. The industry has  urged the deviating states to retain the consensus VAT rate of 12.5%. Leaving the VAT on cigarettes untouched will help expand the tax base to augment revenue collections for the State Governments and prevent illegal trade diversion.

The vacuum created by the exit of the popular low priced micros and plain non-filter cigarettes (in the wake of the heavy imposition of excise duties last year) has been occupied by duty-evaded regular size filter cigarettes which are sold to consumers at Rs.10/- per packet of 10 cigarettes. These low priced tax-evaded illegal cigarettes are a growing threat to the legitimate industry, Government revenue, market stability and the social objective of regulating tobacco consumption. It is imperative that the authorities strengthen enforcement to eliminate this fast growing illegal industry. In addition, the Government could also consider the introduction of a new tax slab that would enable the legitimate industry to offer the consumer tax paid cigarettes at this price point.

The Company remains confident of leveraging its internationally benchmarked product quality, the resilience of its brands and the superiority of its competitive strategies to deliver strong results and shareholder value, despite the current difficult circumstances. 

Branded Packaged Foods

Notwithstanding weak economic conditions, the Branded Packaged Foods business continued to expand with sales growing over the previous year. Having acquired reasonable scale in a relatively short span of time, the business is progressively focusing on driving consumer franchise, consolidating the portfolio in certain categories, improving market servicing and driving supply chain efficiencies.

The ‘Bingo!’ range of potato chips and finger snack foods continues to witness enthusiastic consumer response. ‘International Cream & Onion’, a variant with a truly international flavour is the brand’s latest addition to its existing unique and exciting range. The award winning marketing campaign continues to reinforce the unique selling proposition of the product.

The product mix of the ‘Sunfeast’ range of biscuits continues to improve with wider consumer acceptance of the value added variants of cookies and creams. The quarter witnessed the re-launch of the ‘Marie’, a high fibre variant now available widely across all markets.

In the Staples category, ‘Aashirvaad’ further built on its leadership position with market shares improving to 57% among national branded players. The Confectionery category revenues grew by 37% with wide consumer acceptance of its variants such as Lactos and Tofichoos, launched last year.

The business is focusing on improving its margin profile with specific cost management actions.

Lifestyle Retailing

The Lifestyle Retailing business is consolidating its market presence in the branded apparel market. The business responded with speed to the economic slowdown, even as the mid tier segment bore the brunt of the weak consumer sentiment. Renegotiation of rentals and rationalization of uneconomical stores have helped improve store margins. Cost management actions and business process streamlining are being pursued to enhance retail and manufacturing productivity. Investments in store design, visual merchandising and customer service are being made to enhance the shopping experience. Emphasis on product design and flexible manufacturing enabled the business to grow its export revenue by 23% over the same period last year.

Personal Care Products

The carefully architected portfolio of brands is gaining increasing consumer acceptance with robust growth witnessed  over last year. The progress so far has met the internal milestones set by the business. Product development and research are being leveraged in a focused manner to build brand equity. Investments in tax exempt manufacturing capacities being under-taken will provide benefits of assured quality, flexibility and cost advantages.

The aggressive communication strategy with appropriate celebrity association backed by focussed consumer activation programmes and enhanced consumer engagement is expected to build appreciable brand franchise.

Education & Stationery Products

The Stationery business recorded a healthy sales growth of 22%, positioning the Company as the largest marketer of notebooks in India. The unmatched product quality of the ‘Classmate’ brand has fuelled demand from a growing section of discerning consumers.

The recently launched "Paperkraft Premium Business Paper", an environment friendly paper which has been crafted using a pioneering "Ozone Treated Elemental Chlorine Free” technology, is finding wide acceptance with well known Corporate houses in the country.  The purchase of this superior and environment friendly multipurpose paper for office and home use is increasingly becoming an avenue for expression of “green” sentiments by corporates. This unique product is an integral part of the Company’s significant initiatives to augment natural and scarce resources and has been launched in line with its triple bottom line commitment to building economic, environmental and social capital for the nation.

With the expansion of categories of scholastic products like geometry boxes, pens and recently launched pencils, the ‘Classmate’ brand has transformed into a powerhouse national brand with true values of product superiority. The business has blended the Company’s core capabilities of environment friendly superior paper, knowledge of image processing and printing and brand building and trade marketing skills to successfully market a growing range of education and stationery products.

Hotels

The squeeze on corporate travel along with the steep reduction in international travel as a fallout of the global financial crisis has triggered a significant slide in occupancies and average room rates. Lack of consumer confidence has adversely impacted leisure travel as well. The situation post the Mumbai terror strikes got aggravated with adverse travel advisories issued by most source countries and the spread of swine flu. Despite these adverse circumstances the business has demonstrated resilience during this challenging period. 

The business continues to pursue an aggressive investment led growth strategy recognising  the longer term potential of this sector and the need for greater room capacities commensurate with India’s economic growth.

Paperboards, Specialty Papers & Packaging

The business maintained its market leadership with net segment revenues increasing by 16%. This was driven by the growth of the premium value added paperboard segment, successful penetration of the paper markets and robust performance of the packaging business. Interdivisional business was impacted due to the need for adjustment in pipeline inventory of cigarette packaging material in preparation for the introduction of pictorial graphic warnings.

During the period, the ‘Ozone bleached’ Pulp mill and the paper plant, with annual capacities of 1.22 lac tons and 1 lac tons respectively, reached optimum levels of productivity at desired levels of quality. The paper machine has enabled synergistic forward linkages with the stationery business, capturing incremental value. ITC has become the first Indian company to gain membership of WWF GFTN (Global Forest & Trade Network) for responsible forestry, in line with its commitment to sustainable forestry through manufacture of paperboards and paper products from renewable plantations. The GFTN is WWF’s initiative to  encourage sustainable forest management practices and minimise the forest footprint of industries trading in or using forest goods.

In the Packaging and Printing business, investment in backward integration to  manufacture key raw materials for Flexibles has enhanced competitiveness. The business is driving substantial growth by winning the trust and confidence of key customers in the consumer electronics and FMCG industries. This has resulted in revenue from  these customers growing steadily by 10%. The full range of capabilities riding on multiple packaging platforms will enable the business to strengthen its position in the domestic as well as export markets.

Agri Business

The stellar performance of the leaf tobacco portfolio was one of the key contributors to this Quarter’s robust performance. The business cemented its position as the foremost exporter of leaf tobacco, leveraging the growing demand for Indian tobaccos. Gains were made in new business development and customised product and service offerings to both existing and new leaf tobacco customers. The business continued to provide strategic sourcing support to the Company’s cigarette business by ensuring international quality supplies.

Lack of market opportunities resulted in lower throughput of soya and wheat volumes, impacting agri product revenues during the period

Contribution to Sustainable Development

In pursuit of its abiding commitment to create stakeholder value through service to society, the Company continued to make progress during the quarter in its social and environmental initiatives

The United Nations Framework Convention on Climate Change has recognised the Company’s unique and large-scale social forestry project in Khammam district of Andhra Pradesh - a first of its kind in India. The project which not only helps in sequestration of greenhouse gases such as CO2, also creates multiple benefits comprising a large green cover, groundwater recharge, conserving in-situ moisture and increase in soil fertility. This forestry project is eligible to earn Certified Emission Receipts (CERs), the benefit of which, net of expenses incurred for the project, will be passed to the tribals partnering this project. The primary objective of this effort is to create a long term secure source of sustained income for the rural poor in the area and to enable sequestration of CO2 through reforestation activities.

The Company deepened its social sector imprint by expanding to newer districts during the period. Social development projects are currently being progressed in 50 districts spread over the states of Andhra Pradesh, Bihar, Kerala, Karnataka, Maharashtra, Madhya Pradesh, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal.

The pioneering social development projects include initiatives in watershed development, social farm and forestry programmes, soil & moisture conservation programmes designed to assist farmers in identified moisture-stressed districts, preservation of precious topsoil for agriculture and group irrigation projects. Towards improving the income earning capability of the farming community, sustainable agricultural practices were provided a major boost during the quarter with the promotion of organic fertiliser units through vermi-composting and NADEP technologies. Similarly, programme for genetic improvement of cattle was undertaken through artificial insemination to produce high-yielding crossbred progenies. Integrated animal husbandry services were provided during the quarter. These included addressing the needs of problem breeders, vaccines, feed additives and awareness drives. The initiative for the economic empowerment of women also continued apace with provision of gainful employment either in micro-enterprises or through self-employment with the support of income generation loans.

The Company’s social sector footprint can be seen at a glance in the following chart:

Intervention Areas Unit of Measurement Q1 2009-10 (Cumulative Achievement)
Total Districts Covered Number 50
Social and Farm Forestry Hectare 95961
Soil Moisture Conservation Programme Hectare 46264
Sustainable Agricultural Practices
    Organic Fertiliser Units
Number 13552
Sustainable Livelihoods Initiative
    Cattle Development Centres
    Animal Husbandry Services
Number
Milch Animals
123
301015
Economic Employment of Women
    SHG Members
    Women Entrepreneurs
Persons
Persons
18221
19900
Primary Education
    Beneficiaries
Children 193571
Health and Sanitation
    Low Cost Sanitary Units
Number 2712

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