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Mixing business with respect
Business Standard - 28 Oct 2008

Water-positive and carbon-positive, India’s largest cigarette maker ITC is known almost as much for its other activities now. That has earned it new respect, and fuelled growth at a time when the core business is facing limitations.

In India: A Million Mutinies Now, V S Naipaul gives an account of the life of Chidanand Das Gupta, an ITC executive whom Naipaul met during his visit to India in 1962. “He (Das Gupta) worked at the time for the Imperial Tobacco Company, later known less provocatively as ITC. Chidananda was one of the select and envied group of Indians known as ‘boxwallahs’,” wrote Naipaul. Later in the chapter, giving an idea of the complacency of the boxwallahs’ world, Naipaul quoted Das Gupta as saying: “There was a highly-paid staff manager who spent a large part of his time measuring the carpet that a particular... officer should get, and discussing the colours of curtains with the wives.”

The two images — of the boxwallah superfluity of ITC executives and of the company as a monopolistic agency — endured in the mind of the educated Indian long after ITC ventured into areas unrelated to its core businesses of tobacco leaf export and cigarette manufacture.

However, if Naipaul were to update A Million Mutinies, he may feel compelled to replace Das Gupta with, say, S Sivakumar, who gets excited about agricultural exports, or K Vaidyanath, who cannot stop talking about the environment.

That is what ITC has accomplished through decades of focus on sustainability and corporate social responsibility. In fact, it has achieved the near-impossible of diverting attention away from its core business of tobacco, which pooled in 48 per cent of its turnover in the last financial year.

“For six years in a row, ITC has been a water-positive company, and for three consecutive years to date, we have sustained our carbon-positive status, notwithstanding the large growth in our business. Today, we have three times more fresh water harvesting potential than what we consume and sequester almost twice the amount of carbon we emit. This year, we have also achieved the 100 per cent benchmark in recycling solid waste in several of our operations. This makes us the only company in the world, of our size and diversity, to have achieved these three milestones,” says Yogi C Deveshwar, the company’s chairman.

The journey to these milestones has been paved by several gallons of midnight oil burnt by ITC executives to resolve tricky issues. In hotels, for instance, the challenge lies in disposal of food from the kitchen, and of the old linen and towels that pile up in the store. The solutions are innovative — tying up with piggeries to utilise food fit for animal consumption and converting the rest into compost to be used as manure. The linen and towels are given away to orphanages. Leftover ghee and oil in the kitchens is transported to a soap factory to be used as raw material.

The challenges were the biggest for ITC’s Bhadrachalam paperboard plant, which generates enormous solid waste. The fly ash generated from the boilers in the mill is used to make bricks. And to demonstrate that the fly ash bricks are as durable as their more conventional counterparts, they have been used by the company to build its own staff colony.

Today, the company has 6,500 e-Choupals (internet-driven knowledge kiosks that give farmers information and services for all aspects of farming) covering 40,000 villages and over 4 million farmers, and a social forestry initiative that has greened over 80,000 hectares and created 35 million man days of employment. For long a force in the hospitality sector (Maurya), it has become a major player in the areas of apparel (Wills Lifestyle) and foods (Sunfeast, Ashirvaad, Kitchens of India). When it comes to public perception, these have become as prominent, if not more, than ITC’s cigarette brands, which do not make for a happy discussion at public forums and whose advertising avenues are restricted by law.

Still, the fact is that the company pays its bills and its shareholders with tobacco money. Many of the new businesses, funded by the earnings from tobacco, have yet to stop being a drain on the resources (about that more later). That raises the uncomfortable question: does this whole thing amount so far to little more than a corporate social responsibility, or CSR, initiative to make people stop linking ITC to tobacco? Or is there deep strategic thinking behind it? The answer is complex.

So, what’s new?

ITC’s diversification thrust started early with forays into paper manufacturing, deep-sea fishing (a failed project) and hospitality ventures under Ajit N Haksar, the company’s first Indian chairman. But it’s only recently — after more than 35 years of sustained efforts — that ITC has come to be seen as an entity that creates value for both stakeholders and society at large.

With the launch of e-Choupals in 2000, ITC took a bold step towards aligning its business goals with the empowerment of farmers. The Rs 2.5 lakh that ITC spends on e-Choupals’ computers, solar power, bandwidth and on training the village sanchalak (the portal managers) help farmers get real-time access to farming knowledge, weather information, and transparent price comparisons.

However, ITC’s bigger coup came as the by-product of this initiative: a rural supply chain and a network that reaches nooks that were not tapped earlier. The network provides a multi-dimensional delivery channel to the company that works both ways. It works as a gateway for commodities leaving farms. Besides, it carries products ranging from FMCG, durables and automotives to insurance services from ITC and other companies back to the rural markets. Life Insurance Corporation, for instance, has e-Choupals as one of its top five alternative sales channels.

Sivakumar, the divisional chief executive of agri-business, explains what inspired e-Choupal: “Global competition in our agri-exports triggered the idea. It was apparent that we wouldn’t be competitive if the whole chain of which we are a part is not competitive.”

When ITC diversified into packaged foods with the launch of the Kitchens of India brand in 2001, e-Choupal provided the confidence of a bolstered supply chain. “The cost-efficient sourcing and identity-preservation of raw agri-materials such as wheat and potato have been the key factors for the rapid success of ITC’s branded foods business,” says Sivakumar.

Potatoes form a large part of its snack foods business, while wheat supply is critical for packaged wheat flour. No less than a million tonnes of wheat is sourced through e-Choupals to replenish its thriving wheat flour brand, Aashirvaad. Launched in 2002, Aashirvaad has already left its closest rival, Hindustan Unilever’s Annapurna, behind and appropriated over 50 per cent of the market for itself. The subtle, unadvertised regional customisation in the atta’s composition has worked to make it the preferred brand. The ease with which ITC can interact with farmers, thanks to e-Choupal’s backward integration, has enabled the company to get the right crop mix of wheat varieties to cater to different regional palates. The last but vital task of mixing and churning the wheat flour, so it gets cooked the way home-makers want, is ensured by the company’s legacy of blending tobacco.

The wheat supply has not only helped Aashirvaad lord it over the branded atta market, it has also provided the dough for its line of biscuits, whose sales, according to market estimates, scaled Rs 700 crore in 2006, when market leader Britannia’s turnover was Rs 1,500 crore.

E-Choupals have armed ITC with a rural retail network that has organised retailers queuing up to tap it. For every 40 e-Choupals, ITC has one Choupal Sagar — a physical marketing hub — where farmers can get hands-on training, hire a tractor, or just shop for FMCGs and durables. The next couple of years will see ITC managing the back-end operations — logistics, warehousing and stores — of the likes of Food Bazaar and IndiaBulls Marts, leveraging its Choupal Sagar experience.

A silent revolution

Much before e-Choupal captured the popular imagination, ITC was working with marginal farmers as part of its paperboards business. The association, however, was borne as much out of necessity as intent. Bhadrachalam Paperboards Ltd, set up in Andhra Pradesh in 1975, which later merged with the parent company in 2001 to form ITC’s paperboards and speciality papers division, ventured into farm forestry in the early 1980s, when government regulations made it tough to source raw material from the forests located around the establishment.

The challenge lay in finding an alternative source of wood pulp that would not resort to imports and one that would be faster than the erstwhile seven years of plant maturing.

The company hit upon a plan that would not only ensure a steady supply of raw materials but also provide year-around jobs to farmers. It tied up with small and marginal farmers of the region who would raise fast-growing plantations for the factory.

The idea saw wastelands growing pulpwood plantations that yielded three times more pulp and supplied 90 per cent of the woody raw material that kept the huge Bhadrachalam machines rolling. Today, with access to 80,000 hectares, ITC has become one of the first carbon-positive corporations of its size and complexity in the world. As many as 13,492 households in 406 villages are earning more than their seasonal farming wages.

“The economic development has reduced the social pressures in these regions,” says Pradeep Dhobale, the chief executive of the paperboards & specialty papers division.

So successful has ITC’s paperboards business been, the company claims, that it consumes just 20 per cent of the over 4,70,000 tonnes per annum of manufactured paper-boards it produces, with the rest meeting the demand of other companies. The business has clocked a profit of Rs 124 crore (an increase of 43 per cent year-on-year) supplying to other corporations and ITC’s own businesses that involve packaging for its food, tobacco and personal care products.

Just-in-time drift

For ITC, starting to do good for society couldn’t have come at a better time. Much of it coincided with the government’s clamping down on tobacco products and anti-smoking legislation being passed. ITC ran the risk of being saddled with a primary business that could only gain stronger pejorative shades: cigarettes.

The anti-tobacco lobby, often training its guns on the cigarette industry, was backed by the government when it amended the Cable TV Act in 1995, culminating in the ministry of information and broadcasting banning cigarette advertisements in 2000. Even surrogate advertising was banned in 2002.

The company, of course, could still have done without advertisements, backed as it was with nearly a decade-old legacy and a distribution reach few Indian companies could boast of. But the clampdown has seeped into the government’s taxation patterns as well, and ITC, like its peers, felt the heat.

With the mounting taxes — from excise duties to value-added tax — the company could not miss the negative vibes. It was only a matter of time before the rising tax burden eroded ITC’s robust revenues from the Rs 6,635-crore cigarette business (FY08 estimates) for a capital employed of Rs 2314.64 crore (that powers all its new ventures). The ever-increasing tax levies have shrunk the cigarette market as well, with many downgrading to low-cost but more harmful tobacco options such as khaini and gutkha.

Where there is goodwill…

Paperboards and foods are perhaps the first two in a series of businesses to come supported by ITC’s sustainability efforts. For example, the livestock development programme — a part of ITC’s Sunhera Kal project, which has started to supplement those families which are in the immediate catchment areas of their factories (in Munger, Bihar, for instance) — may one day equip ITC with the resources for dairy farming. Milk is one of the farm products on Sivakumar’s list of future sourcing; rice, coarse cereals, pulses and fruit are the others.

K Vaidyanath, one of ITC’s executive directors, says, “If we had not expanded into new businesses and stayed with just cigarettes, we would have not been able to extend our top lines, growth would have come much slower.” Ramesh Sarin, who worked with Haksar as the deputy chairman of diversification and the chairman of Bhadrachalam Paperboards, feels that there has been a paradigm shift in diversification under the leadership of Deveshwar. “The old diversifications have been digested and are now safe bets. The new ones like food and FMCG will bring in the volumes giving ITC the spread a large company needs,” he says.

With the accelerated growth, the new businesses, especially the non-cigarette FMCG portfolio, account for over 50 per cent of our turnover. Vaidyanath says it has been a “strategic decision to grow through FMCG. Most of our FMCG divisions already have 8 to 10 per cent of the market, and we lead in the atta market.”

Some of ITC’s businesses have exhibited enviable speed, with the snacks brand Bingo reportedly securing 11 per cent of the market within six months of its launch in 2007. ITC claims a market share of 40-45 per cent in the packaged food market and almost 12 per cent in snacks.

While the company may find it tough to counter the government’s ire against the tobacco industry, state governments are lining up to rope in ITC for its work in watershed projects and other Sunhera Kal programmes. Vaidyanath informs: “We have been working with governments in Andhra Pradesh (in social forestry), Rajasthan (for water-shed projects) and Madhya Pradesh.”

The company knows that in the long run, consumers, especially the business-to-business ones, will settle for an environmentally-conscious company. The business customers prefer the carbon-neutrality in ITC’s packaging and paper businesses, which are produced through the elemental-chlorine-free technology that is kind on the environment. “When we talk to international customers such as Wal-Mart, they question us on sustainability, which has now become a qualifier,” says Dhobale. Similarly, adds Sarin: “The awareness of what the company does today is much higher than in our time. I think ITC is now respected even more.”

ITC has carefully reduced the presence of the cigarette business in the public eye, talking much more about its fresh ventures and achievements as a corporate citizen. A clever re-branding has taken the Wills brand’s association much beyond cigarettes, so that the equity built over the decades because of ITC’s dominance of the cigarette market is reaped by other products like apparel.

Harish Bijoor, the head of Harish Bijoor Consults, notes, “ITC now has a broader image. While it may seem to be insulating its businesses from the socially-ostracised segment of cigarettes, ITC may just have to live with this canker.”

While cigarettes generated Rs 961.41 crore in profits in the first quarter of this financial year, the non-tobacco FMCG products eroded Rs 122.61 crore. The hotels, agri-business, and paperboards and packaging have registered year-on-year growth rates ranging from 33 to 43 per cent. The new business of readymade clothing retail, too, is making dents in ITC’s profit.

But ITC’s socially-relevant programmes may come to its rescue to support the gestation of new businesses. These initiatives have already helped it consolidate among what management guru C K Prahalad refers to as India’s next billion — the market indispensable to businesses that want to grow.

While ITC’s exports continue to strengthen farmers, who are its key suppliers, the spread of Choupal Sagars has ensured that the company’s FMCG products (except for the high-end) are within reach of the rural population. “For a two-hour downtime, I can tell my people that we have deprived some one of employment because that much less pulp is being processed which links back to fewer trees planted and so on,” says Dhobale.

So there, a whole new yardstick now measures the work done in ITC’s offices and in the outfields, compelling the rest of the world to take a whole new view of the company.