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Financial Results for the quarter ended 30th June, 2008
Net Turnover at Rs 3900 crores registered a growth of 18.4% driven by the non-cigarette businesses, which grew by 29% due to the continued scale up of the new FMCG businesses, higher agri business revenues and a healthy performance by the Hotels and Paperboards and Packaging businesses.
The unprecedented increase in excise duties on non-filter cigarettes in the Union Budget 2008, steep increases in commodity prices and store rentals, the launch costs of the additions to the new Personal Care portfolio and the continuing brand building costs in the Foods business combined to exert intense pressure on profitability during the quarter. Consequently, pre tax profits at Rs.1114 crores were lower by 1.3% over the same period last year. Post tax profit at Rs.749 crores represents an underlying degrowth of 1% after adjusting for income tax refunds of Rs.29 crores received in the same quarter last year. Earnings Per Share was lower by 9 paise at Rs.1.99.
FMCG – Cigarettes
The unprecedented increase in the rates of excise duties on non-filter cigarettes, of the order of 140-390%, in the 2008 Union budget has made it unviable for legitimate manufacturers to make value propositions that will appeal to consumers in this segment. Consequently, the legitimate cigarette sector has stood deprived of the opportunity to engage profitably in a business segment that accounted for more than 25% of industry volumes. As a result, the industry is under tremendous stress. The Company had no option but to discontinue the manufacture and marketing of non-filter cigarettes in the Plain and Micro segments. In the immediate aftermath, consumers have moved to revenue-inefficient tobacco products, including smuggled and tax-evaded cigarettes with consequential steep decline in volumes for the highly taxed legitimate cigarette sector.
Despite this unfortunate intervention, coming on the heels of a 30% increase in the incidence of taxation in the previous year, the Company’s consistent efforts in providing value to its consumers through innovation and investments in technology, product quality and distribution have driven a significant shift of consumers to the filter segments and enabled it to sustain its leadership position in the cigarette industry under testing circumstances.
Nonetheless, the economically weaker sections of society, who largely consume non-filter cigarettes, are now forced to opt for tax-evaded cigarettes or inferior forms of tobacco and remain deprived of the opportunity to upgrade to a superior and more contemporary smoking product. With organized industry substantially vacating the non-filter segment and the huge financial arbitrage resting in tax evasion, contraband and illegitimate players have mushroomed leading to an estimated trebling of illegal cigarette volumes even as legitimate volumes have slipped by almost 13% during the last few quarters. It is imperative that enforcement authorities check this phenomenon to preserve revenues that rightfully belong to the Government, apart from restoring equity and a level playing field for the organized industry.
In addition, the consequent reduction in demand for higher grade tobaccos, will have long-term implications on earnings and employment in the farm sector and adversely affect a large number of farmers, specially in rain-fed areas where several attempts to grow alternative crops have failed to yield results.
Such challenging circumstances on the taxation front, coupled with the harsh regulatory climate will undoubtedly test the resilience of all legitimate players in the cigarette sector. The Company believes that the economic potential of tobacco can be maximised through moderation of taxes on tobacco, minimisation of discriminatory taxes between different classes of tobacco products and a regulatory framework that addresses the genuine concerns of all the stakeholders of the tobacco industry. The need is for a balanced agenda on tobacco, both fiscal and regulatory.
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
The Branded Packaged Foods business continued to expand with sales growing by 23% over the previous year. Apart from the development costs of new products, the business has had to contend with the recent economic slowdown and severe cost increases in input commodities including wheat, vegetable oil, maize and skimmed milk powder, in addition to the soaring fuel prices. Having acquired reasonable scale in a relatively short span of time, the business is progressively focusing on consolidating the portfolio in certain categories, improving market servicing and driving supply chain efficiencies.
The ‘Bingo!’ range of potato chips and finger snack foods has witnessed enthusiastic consumer response to post a 72% growth in revenues. 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, creams and increased volumes of new category launches of ‘Coconut’, ‘Nice’ and ‘Golden Bakery’ premium cookies resulting in a 16% growth in revenues. The excise relief accorded to low and mid-priced biscuits, consistent with the Government’s stated intention to promote the food processing industry, has given a fillip to the sector. It is hoped that the Government would respond to the industry’s representation favourably and extend the relief to the entire category.
In the Staples category, ‘Aashirvaad’ further built on its leadership position with revenues growing by 31%. ‘Aashirvaad’ spices portfolio was further expanded with the launch of “Pickle Mirch” variant in Andhra Pradesh.
The Confectionary category revenues grew 10% and the range was augmented with the launch of Lactos, which is being rolled out nationally. Likewise, the Ready- to-Eat (RTE) group continues to grow steadily, having made its first foray into the frozen foods segment in the US markets.
Lifestyle Retailing
Market standing of the Lifestyle retailing business stood further enhanced with sales growing by 15% during the quarter.
The stature and premium imagery of the ‘Wills Lifestyle’ brand is being further reinforced through new look stores, launch of premium product lines, and tie-ups with leading architecture and retail management companies for superior stores and product presentation. The rising rental costs have been a bane for this industry, which the business is mitigating by taking early positions in key malls and considering selective ownership of stores.
The business continued to actively pursue opportunities in the Exports arena, establishing long-term partnerships with high potential customers. Manufacturing capacities have been augmented to take full advantage of the emerging growth opportunities.
Personal Care Products
In line with its aspiration to offer world class products to the Indian consumer, the business expanded the portfolio of products in the personal care segment with the launch of ‘Vivel’ shampoos on the heels of ‘Vivel’ soaps launched in February this year. The exquisite fragrances for the ‘Vivel’ range of products have been developed by leading international fragrance houses. The soft vignette design and the unique braid design behind the brand logo are a reflection of the brand philosophy of delivering multiple, relevant and powerful benefits in each product.
The ‘Fiama Di Wills’ range of products continues to enhance its standing in the market place with its range of soaps, shampoos, conditioners and shower gels, driven by the Company’s extensive trade marketing and distribution strengths. These superior products are an outcome of the Company’s deep consumer insights and R & D based product development capability.
The ‘Superia’ range of soaps and shampoos in the mass-market segment have gained wide acceptance from consumers. The footprint is being extended to more markets.
The business is pursuing an aggressive communication strategy with appropriate celebrity endorsements. The combined quality of promise and performance is expected to speedily build an appreciable consumer franchise for these brands.
Education & Stationery Products
The Stationery business recorded a healthy sales growth of 25% over the previous year, positioning the Company as the largest marketer of notebooks in India. Its two flagship brands, namely ‘Classmate’ for the student community and ‘Paperkraft’ for the discerning working executives have established a strong presence in the Indian stationery market in a short span of time. The ‘Paperkraft’ range consists of premium stationery with a wide variety for executives. The assortment consists of notepads & multi-subject notebooks in hard/soft covers and multiple binding formats including spirals, wiros etc.
The Company has renamed this business as the ‘Education & Stationery Products’ Business (earlier known as Greeting, Gifting & Stationery) to reflect its current focus on the Rs 9000 crores market that comprises notebooks, copier and printer paper, writing instruments and scholastic products. Accordingly the business has launched Geometry Boxes for school students, branded ‘Classmate Invento’. The Mathematical Instruments Box comprises world-class precision compass, high quality plastic instruments coupled with interesting trivia and useful information.
Hotels
During the quarter, the hotels business posted a robust performance with revenues growing by 17% to touch Rs. 239 crores. This was driven by better occupancies & room rates and higher food & beverage sales. The business maintained its leadership in terms of operating efficiency as measured by the ratio of PBDIT to Net Income. The chain played host to the Indian Premier League cricketers and officials.
In keeping with the Company’s strategy of reinforcing the premium positioning of its properties, the chain has recently launched ‘Kaya Kalp - The Royal Spa’ at ITC Mughal, Agra. The 99,000 sq ft spa is Asia’s largest and has been designed to bring together elements of Mughal architecture and opulence to deliver meaningful experiences for the discerning customer. Guests at the spa will have the opportunity of experiencing traditional therapies in regal surroundings.
Construction activity in respect of the super deluxe luxury hotel projects at Bengaluru and Chennai is progressing on schedule; consequent to increased FSI availability the Bengaluru Project will have the benefit of 62 additional keys.
Paperboards, Specialty Papers & Packaging
The business maintained its market leadership with segment revenues increasing by 27%. This was driven by the 30% growth of the premium value added paperboard segment and robust performance of the packaging business.
The year witnessed a continuing trend of steep inflation in the cost of fuel and major raw materials. Globally, pulp and waste paper prices spiraled, mainly due to the widening demand supply gap. Notwithstanding this high cost scenario, the business succeeded in partially neutralising cost pressures by optimising opportunity buying and increasing sales realisations.
The new ‘Ozone bleached’ Pulp mill with a capacity of 1.22 lac tonnes has commenced commercial production, and is the first of its kind in the country to meet world-class environmental standards – a testimony to the Company’s commitment to the ‘triple bottom line’. This differentiated capability, which, apart from mitigating the impact of escalation in price of hardwood pulp, will enable the business to expand the market for superior value added paper and paperboards on the strength of cost and quality competitiveness. The business has also commenced initial trials of its 1 lac ton paper plant. The paper machine will drive growth based on strong forward linkages with the stationery business.
The Packaging and Printing business continued to provide strategic support to the Company’s cigarette and other FMCG businesses by ensuring security of supplies and sustaining international quality at competitive prices. This in-house capability has enabled the Company to crash time in the launch of new products by the Branded Foods and Personal Care businesses, while simultaneously contributing to significant enhancement of brand image. The flexibles and carton lines, commissioned at Haridwar and Chennai respectively during the year, are being scaled up to cater to the distinctive and innovative packaging requirements of the Company’s Branded Packaged Foods and Personal Care businesses. The business has now become a key vendor partner to the consumer electronics industry from its Chennai facility. The Chennai unit was certified at Level 8 of the International Quality Rating System (IQRS) as audited by Det Norske Veritas (DNV), becoming the first in India to receive this rating.
Agri Business
The business registered a robust performance with revenues increasing by 32%. The growth was supported by a continuing strong performance in soybean trading and record leaf tobacco exports, which registered a topline increase of 49%.
The e-Choupal model continued to provide strategic competitive advantage to the Foods Business by enabling purchase of identity preserved, high quality wheat and quality chipstock potatoes at competitive prices. The rural servicing initiative under the ‘Choupal Saagar’ banner now encompasses 23 centres across 3 states. Its turnover more than doubled during the quarter with improvement across the key performance drivers of footfalls, conversion, average realisation and product mix.
The leaf tobacco crop from Andhra witnessed an unprecedented spurt in prices with rates increasing by more than 70% on the back of demand supply mismatch. Despite this challenging scenario, the business was able to maintain its export growth momentum profitably. The business continued to provide strategic sourcing support to the Company’s cigarette business by ensuring international quality supplies.
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 Company deepened its imprint on the social sector by expanding to newer districts during the period. Social development projects are currently being progressed in 49 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 | June 2008 (Cumulative Achievement) |
Total Districts Covered | Number | 49 |
Social and Farm Forestry | Hectare | 80000 |
Soil and Moisture Conservation Programme | Hectare | 36117 |
Sustainable Agricultural Practices | | |
Organic Fertiliser units | Number | 12771 |
Sustainable Livelihoods Initiative | | |
Cattle Development Centres | Number | 95 |
Animal Husbandry Services | Milch Animals | 193867 |
Economic Employment of Women | | |
SHG Members | Persons | 6801 |
Women Entrepreneurs | Persons | 16577 |
Primary Education | | |
Beneficiaries | Children | 128000 |
Health and Sanitation | | |
Low Cost Sanitary Units | Number | 2563 |
The Board of Directors, at its meeting in Kolkata on 30th July 2008, approved the financial results for the quarter ended 30th June 2008,which are enclosed.
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