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ITC : In Pursuit of Value Creation
 - 28 Jul 2000

ITC: IN PURSUIT OF VALUE CREATION

Speech by the Chairman, Shri Y.C. Deveshwar,
at the Eighty-Ninth Annual General Meeting of ITC Limited
in Kolkata, India on July 28, 2000

It is with great pleasure and a sense of satisfaction at the conclusion of yet another year of encouraging results that I welcome you to your Company’s 89th Annual General Meeting today. Despite difficult trading conditions, your Company’s Pre-tax Profits at Rs. 1229 crores registered a substantial growth of 31% over the previous year. Post-tax Profits at Rs. 792 crores, represent a growth of over 27%. Strong cashflows from operations and retirement of debt enabled your Company to substantially reduce its interest burden. The strength of the balance sheet stands considerably enhanced with a reduced and robust debt-equity ratio of 0.23. The results of the first quarter of this year announced yesterday are a further source of satisfaction and are indicative of the future growth prospects of your Company. The strengthening balance sheet and the world-class human resource of your Company constitute the wherewithal towards enlarging its contribution to the national economy with growing value to the shareholders.

_GROWTH THROUGH COMPETITIVENESS


The current rates of growth of the Indian economy are woefully inadequate. Even with a much higher rate of growth of around 10% it would take years to attain the per capita income levels currently obtaining in South East Asian economies like Thailand. Higher levels of growth together with equitable distribution of incomes are the crying need if millions of disadvantaged Indians are to be freed from abject poverty.

Over the last few years in my communications to you I have been highlighting:

a. The need for accelerated reforms with the objective of creating a climate that makes investment rooted in the soil of India productive and internationally competitive so that investor sentiment is mobilised to attract larger investments commensurate with the requirement of higher rates of growth.

b. The need to enhance capital productivity, particularly of the public sector that has been the recipient of the lion’s share of the country’s savings since Independence. The resolve being displayed by the government in bringing about reform through privatisation needs to be wholeheartedly welcomed.

c. The urgency of strengthening and upgrading the physical and social infrastructure to be a source of competitive advantage for enterprises operating in India and thereby making India the preferred destination for international capital flows.

d. The compelling need to rapidly reposition Indian companies for extreme competitive preparedness and support their successful transition from an era of regulation and protection to the fully globalised market of the 21st century. Business portfolios and processes would need to be restructured to focus deployment of scarce resources only to those areas where organisational capability best matches business opportunity. Strategy needs to be backed by substantial investments in modernisation, scaling up and upgradation of skills. The attendant gestation would severely test managements for their staying power and commitment to their businesses. Only those that are able to overcome these challenges can reap the benefits of the growing opportunities in the marketplace. In order to cope with this magnitude of challenge, it is also necessary to shed preoccupation with merely maximising tactical results and focus instead on building strategic and sustainable capabilities. A wholesome balance will have to be struck between the short, medium and long terms.

e. That the competitiveness of Indian industry is intertwined with that of the national economy. One cannot grow in isolation of the other. Therefore, there is a need for a much closer partnership between the government and industry to create a nurturing economic environment.

The imperatives set out above assume increasing urgency with every passing year. Trade liberalisation under the aegis of the WTO is calibrated to shrink trade barriers, thereby fast globalising the Indian market and progressively intensifying the global forces of competition. Concurrently, the explosion in the use of information technology is further facilitating the process of globalisation by causing the death of distance. The emerging economic world order is unfolding a collage of new opportunities and formidable threats. Whilst Internet based electronic commerce has opened up enormous opportunities for the relatively smaller Indian enterprises by facilitating instant access to the developed markets of the world, it is equally creating opportunities for global players to access the Indian market. India’s simultaneous movement towards a market economy and liberalisation on the external front has multiplied manifold the challenges to the competitiveness of Indian enterprises. One cannot overemphasise that the single key priority for Indian enterprises is to rapidly reposition themselves for extreme competitive preparedness without any further delay. The direction of flow of value, whether into or out of the country, will depend upon the relative competitiveness of Indian enterprises.

_ITC: A PREMIER INDIAN ENTERPRISE


In this context, there is often a debate as to the definition of an ‘Indian enterprise’. To my mind, an ‘Indian enterprise’ is one that creates and captures value for the Indian economy and contributes to the virtuous economic cycle of investment, creation of jobs and the related demand, and the generation and redeployment of surpluses for economic growth, with fair reward to shareholders, irrespective of the ownership of capital. Capital owned by Indian citizens that leads to a net outflow of value from the country, by the same token, cannot qualify to be an ‘Indian enterprise’. Enterprises operating in India need to be calibrated for their ‘Indianness’ on the basis of the net value that they capture for the Indian economy over time and need to be supported for such contribution. Even the most developed countries orient their economic strategies to maximise value retention within their respective economies. I would like to quote from Charles Schwab and Claude Smadja of the World Economic Forum who point out "that the new order of priorities set by the (Clinton) administration puts U.S. corporations located in the United States first in line for protection, foreign corporations located in the United States second and U.S. corporations operating outside the country a mere third. The clear emphasis on job protection for U.S. workers is being echoed in Europe with assertions of a similar order of priorities." There is no need to shy away from such expression and pursuit of enlightened self interest. It is difficult to accept the assertions of market fundamentalists who advocate free markets as the sole panacea to banish poverty. Market mechanisms are essential to engender efficiency and add value to the consumer. Yet, they must be supplemented with a much broader growth strategy to create and retain value to uplift the living standards of Indian society. In this context, governance and disclosure guidelines similar to those mandated by SEBI for listed companies need to be made applicable to unlisted subsidiaries of foreign companies operating in India to enable public evaluation of their net value contribution to the Indian economy. Those that contribute substantially to the Indian economy need to be supported as ‘Indian enterprises’ in preference to those that do not.

ITC is inspired by the opportunity to make a big difference through the enlargement of its contribution to the national economy.
With its resources and capability to compete, it has always focused on the creation and capture of value for the Indian economy. Your Company has attempted to achieve this value objective by not only driving each of its businesses to become internationally competitive, but also by consciously contributing to enhancing the competitiveness of the entire value chain of which it is a part. It is your Company’s belief that creation of shareholder value provides the only basis for sustainable contribution to the superordinate goal of creating national value. This spirit permeates the nature of its partnerships with the various constituents of its value chains, including farmers, suppliers, employees and the State. Your Company’s governance structures, strategies and organisational processes have been fashioned to create growing and competitively superior value. I will now take this opportunity to update you on the progress made in this direction and also share with you the prospects for your Company’s future growth

_ITC: PROGRESS TOWARDS SUSTAINABLE VALUE CREATION


a) Cigarettes and Cigarette Leaf Tobacco

Your Company continued to sustain its market leadership in all segments of the cigarette business. Towards attainment of international competitiveness, further progress was registered in implementing your Company’s modernisation plans. Investments of about Rs. 700 crores have been made over the last four years in technology, brands and skills upgradation. The first phase of the new world class manufacturing facility in Bengaluru was completed on schedule. As a result of these investments, the product mix stands further enriched with the share of filter cigarettes growing to 77%, of which 75% now constitutes the internationally preferred high value hinged lid type of packaging. It is a measure of your Company’s growing competitiveness that in the most developed market of the world, namely the U.S.A., two brands manufactured at your Company’s Bengaluru factory sell around 100 million cigarettes a month.

The focus on the consumer, coupled with the continuous benchmarking of quality to international levels necessitates the deployment of inputs of exacting world standards. Accordingly, your Company has completed the upgradation of the green leaf threshing plant at Chirala as part of its modernisation plans to upgrade its tobacco processing facilities. This facility now ranks among the finest in the world. Your Company stands committed to enlarging its development and extension services to the farmers. Further progress has been registered towards crop development of Oriental type tobaccos on Indian soil for which there is a growing demand in international markets. The cultivation of this variety is highly labour intensive and carries a large potential for employment generation. It is a tribute to your Company’s world class tobacco processing facilities that despite a glut in world tobacco markets, over Rs. 180 crores of foreign exchange was earned from leaf tobacco exports.

The adversity caused by the glut in international tobacco markets has been exacerbated by excess cultivation of cigarette tobaccos by Indian farmers for the second year in succession, well beyond the quantities mandated by the Tobacco Board. Your Company believes that the solution to this problem lies, not in declaring a crop holiday in the face of apparent pressure from some sections of farmers, but in more effective self-regulation, which will serve to align cultivation with market demand. Thousands of Indian farmers and farm workers are dependent on the cultivation of tobaccos on land that is otherwise relatively unsuitable for growing remunerative alternate agricultural crops. A blanket crop holiday could place the entire Indian leaf tobacco industry at risk of losing long term international custom and cause irreversible and severe hardship to the farming community. Your Company, as a responsible and leading partner of the Indian farmer, has offered to support the efforts of the Central and the concerned State Governments in mitigating this hardship by purchasing upto 10 million kgs of tobacco additional to its normal requirements.

It needs to be re-emphasised that the cigarette segment is the largest economic contributor within the tobacco sector. Fewer than 15% of tobacco users who consume cigarettes contribute nearly 90% of the revenues to the Exchequer. Equally, the cigarette form of tobacco accounts for nearly the entire foreign exchange earnings from this sector. Growing the share of cigarettes even in a shrinking tobacco basket carries a large untapped potential contribution to the economy. Moderation in taxation would enlarge the tax base of the Exchequer, multiply foreign exchange earnings and fulfil the aspirations of the adult tobacco consumer to upgrade consumption to this preferred and higher value format.

 

The high rates of taxation, coupled with the absence of harmonisation of taxes in the SAARC region, are spawning a flourishing trade in contraband cigarettes. The contraband trade is growing alarmingly at upwards of 20% per annum and is estimated to be causing export of value from the Indian economy of around Rs.1000 crores annually, comprising unaccounted foreign exchange outflow and the loss of revenues to the Exchequer that would otherwise accrue from equivalent domestic manufacture. I would once again make a strong plea that the ramifications of this serious issue are examined by the government with some urgency with the objective of refurbishing the legal and policy framework, regarding which your Company has made comprehensive recommendations. It is evident that a combination of moderation in taxes, harmonisation of the tax regime among SAARC countries, plugging of the loopholes related to tax free imports and the strengthening of the enforcement machinery would go a long way in minimising the injury caused by such illegal trade in cigarettes.

b) Hotels

Globalising markets and the expected higher rates of growth of the Indian economy will lead to growing demand for high quality accommodation. India is grossly under-roomed and it is estimated that hotel room capacity will have to at least double over the next five years to keep pace with the expected growth in demand. It is companies such as yours, with a strong balance sheet, that can contribute effectively to the creation and sustenance of such capital intensive and long gestation projects like hotels, which constitute an important part of infrastructure for the growth of trade, commerce and industry.

Towards this end, your Company had initiated an aggressive investment plan a couple of years ago, with a planned outlay of over Rs. 1500 crores to strengthen the ITC Welcomgroup chain by establishing presence in key markets. The 80-room super deluxe extension at the ITC Maurya Sheraton, christened ‘ITC One’, has been completed and is ready for opening shortly. The super deluxe project, ITC Grand Maratha, at Sahar, Mumbai is at an advanced stage of construction and is expected to open towards the end of this year. Construction of the second hotel near Upper Worli in Mumbai has already commenced, together with a housing project for managers. The construction of ITC Sonar Bangla at Calcutta is progressing satisfactorily. The second hotel project in Delhi is at an advanced stage of completion and will be ready to receive guests in the next few months.

In order to re-position effectively the product and service offerings of the ITC Welcomgroup chain across different segments of consumers, a revised branding strategy is being implemented. This will enable your Company’s hotels business to focus even more closely on the needs of consumers and position itself to dominate the major segments of the hospitality industry.

Your Company believes that with skills and expertise developed over the years, it is possible to build a global hotel business by owning and managing hotel properties overseas. This objective is part of your Company’s strategic direction, and will be embarked upon after establishing a dominant position for the ITC Welcomgroup chain in India.

On completion of the expansion plans, nearly 1500 rooms will have been added to the ITC Welcomgroup chain over the next few years. These investments, apart from providing an attractive growth opportunity for your Company, would stimulate large direct and indirect employment besides supporting substantial foreign exchange earnings. Given the high economic multiplier impact of investments in hotels, it is estimated that your Company’s investment programme will create upwards of 20,000 additional direct and indirect jobs.

c) Paperboards and Packaging

You would recall that, in 1998, you had readily accorded your consent to your Company’s proposal to invest Rs. 150 crores in ITC Bhadrachalam Paperboards Limited to support the gestation of its Rs. 675 crore expansion and modernisation project. You will be happy to note that this strategic decision has been vindicated by the dramatic turnaround in the performance of this business as reflected in ITC Bhadrachalam’s first quarter financial results.

Relentless pursuit of competitiveness has enabled a substantial substitution of imports of high value-added paperboards into the country. It has also helped expand the market for value-added paperboards used for premium packaging and advanced functional and graphic end-use applications in diverse industry segments. It is a testimony to the growing competitiveness of ITC Bhadrachalam that it has quadrupled its exports to Rs. 24 crores in the first quarter this year. It is expected that this Company will continue to garner the required capabilities to dominate the South Asian markets and reach out to markets beyond.

An essential ingredient to secure the competitiveness of the Indian paper and paperboards industry is the access to cost effective fibrous raw materials. It is evident that a supportive policy framework relating to fibre development is vital. Your Company, in collaboration with ITC Bhadrachalam, and in partnership with the government of Andhra Pradesh, is pursuing a clonal propagation programme that envisages the planting of 2.5 million high-yield, disease-resistant clonal saplings on 1500 hectares of degraded forestland per year in the command areas of the mill located in Bhadrachalam. These clones are a product of ITC Bhadrachalam’s visionary R&D programme. Upon successful implementation, this path-breaking initiative, apart from contributing to the competitiveness of ITC Bhadrachalam, carries the potential of creating 40,000 jobs in the backward regions of rural Andhra Pradesh. It will also contribute to the greening of Andhra Pradesh and the associated restoration of ecological balance.

Your Company’s speciality papers business of the Tribeni Tissues division continues to pose challenges. Your Company has not yet been able to find a suitable partner, nor has it yet been able to turn around the financial performance of this division, although some impressive strides have been taken in this direction.

The Packaging and Printing division of your Company is the country’s single largest converter of paperboards into high quality printed packaging. This business enjoys significant synergies with the paperboards business. The world-class quality standards established at ITC Bhadrachalam have been, in large measure, the result of collaborative support lent by the Packaging and Printing division as the buyer. This collaborative endeavour, in turn, is enabling the Packaging and Printing division to establish its presence in overseas markets.

_ITC: CREATING AVENUES FOR FUTURE GROWTH



ITC’s strategic thrust is founded on its ability to continuously invest in existing and new capabilities. As a result, one of ITC’s most important assets today is its pool of diverse core competencies residing in its various businesses. Your Company’s governance structure has been so designed as to place it in a position to pursue new avenues of growth without diluting the focus on its existing lines of business. The decentralised structure, with distributed leadership, enables the executive management of each of its businesses to relentlessly pursue the task of attaining international competitiveness by focusing on honing its unique skills, unencumbered by other priorities of ITC. On the other hand, the management at the apex is engaged in the strategic supervision and management of the Company as a whole, free from involvement in the day-to-day functioning of the business divisions and strategic business units.
It places the top management in the unique position of being able to assume the character of a holding company with the mindset of a venture capitalist, mentoring existing businesses and creating newer avenues for growth by blending skills and capabilities drawn from different parts of the ITC Group. Over time, these blended capabilities will, in turn, spawn newer competencies thereby imparting a multiplier effect to your Company’s growth strategies. I will now share with you the broad details of recent initiatives born out of this corporate strategy.

(a) Information Technology

The explosion in the application of information technology the world over has opened up exciting opportunities for your Company’s businesses, particularly for its Information Technology business. The growth strategy of this business is premised on two basic approaches: first, to exploit the opportunity of leveraging its domain expertise and its status as a preferred partner of global software majors to provide high-end, value-added services to its global clients; secondly, to internally collaborate with each of your Company’s businesses to enable them to use information technology as a powerful strategic tool. In line with the growing realisation that ‘click and mortar’ capabilities will be the basis for sustainable competitive advantage in the new economy, each of your Company’s businesses is engaged in web-enabling its business processes.

Besides enhancing the competitiveness of your Company’s businesses, such blending of information technology and business competencies is enabling your Company to contribute significantly to improving the productivity of Indian agriculture, with attendant benefits to the rural economy.
To illustrate: the International Business division, which is gearing itself to exploit the unfolding opportunities for export of agri commodities from India, has drawn upon the core competency of the Information Technology division to create a virtual soya market christened "soya choupal". This e-choupal, introduced in Madhya Pradesh in its first phase, provides the soya farmer access to the latest local and global information on weather, scientific farm practices and market prices, all in the local language. The e-choupal will also facilitate purchase of high quality farm inputs and sale of farm produce at the farmer’s doorstep. This initiative has been extremely well received by the soya farmers. It is the intention to extend this value adding concept of e-hubs to your Company’s other product lines, namely, leaf tobacco, marine products and coffee. In the current year, it is the objective to set up 300 such e-hubs, connecting the rural community in about 1000 villages in the states of Madhya Pradesh, Andhra Pradesh and Karnataka.

A proposal to restructure your Company’s information technology business is being put up today before you and I am sure it will receive your ready support.

(b) Retailing

You will recall that in 1998, in the course of outlining your Company’s growth plans, I had shared with you that ITC was exploring the retailing business that can draw upon and combine the strengths of your Company’s trademarks, branding and marketing skills, and the services knowledge accumulated whilst growing the hotels business. I am pleased to inform you that the first flagship retail store was launched recently in Delhi on 15th July under the brand name "Wills Sport" to retail high quality relaxed wear.It is the objective to establish "Wills Sport" as an international quality, premium full range wardrobe brand for men and women constituting relaxed wear for all occasions.
Your Company’s plans envisage a chain of 100 stores all over India in the next three years. It is also the objective, after establishing a position of leadership in India, to take this brand overseas and create growing value for the Indian economy, the Indian cotton farmer and indeed, the entire value chain from fibre to fashion.

It is your Company’s endeavour to continuously explore opportunities for growth by synergising and blending its multiple core competencies to create new epicentres of growth.
One such pilot project is already on the anvil. This seeks to combine the core competencies of branded fast moving consumer goods, paperboards, printing skills and retailing to market world class greeting cards. Apart from the growing domestic market, there is a huge export potential. The US market alone accounts for nearly US$ 10 billion. Production of greeting cards is labour intensive and therefore carries a large potential for job creation. Similarly, an organisation has already been set up to develop the substantial real estate acquired whilst disengaging from the financial services business in a bid to redeem value for your Company.

_CONCLUSION



The decisive difference in creating value for your Company and for your country resides in the vitality and dynamism of the human resource. The employees at all levels of your Company are inspired by the vision of growing ITC into one of India’s premier institutions and are willing to go the extra mile to generate value for the economy, in the process creating growing value for you, the shareholders.

I look to you, as always, for your continued support in these endeavours.

Thank you.