Q2 FY15 Results Update and Frequently Asked Questions

Q1. What is ITC's Vision and Mission?

Answer:

Vision: Sustain ITC's position as one of India's most valuable and admired corporations through world-class performance, creating growing value for the Indian economy and the Company's stakeholders.

Mission: To enhance the wealth generating capability of the enterprise in a globalising environment, delivering superior and sustainable stakeholder value.

 

Q 2. How does the Company effectively manage a highly diversified business portfolio? What is the Company's Corporate Governance structure?

Answer: ITC's 'strategy of organization' is crafted in a manner that enables focus on each business while harnessing the diversity of the portfolio to create unique sources of competitive advantage. Please refer to the following link http://www.itcportal.com/about-itc/values/corporate-governance-structure.aspx for details of ITC's 3-tier Governance Structure.

 

Q 3. What is the Company's shareholder value creation track record?

Answer: ITC has been a consistent performer when it comes to shareholder value creation. During the period 1995/96 to 2013/14, Total Shareholder Returns have clocked compound annual growth rate of 25.9% significantly outperforming the Sensex. A snapshot of ITC's financial track record across different time horizons is given below:

 

Q 4. What is the rationale for the Company's investments in the FMCG space?

Answer: ITC's entry into a wider range of FMCG products in recent years is in line with its strategy of creating multiple drivers of growth. The Indian FMCG industry is expected to grow rapidly driven by increasing affluence, urbanisation and a young workforce on the one hand and relatively low levels of penetration and per capita usage on the other. The Company seeks to participate in the exciting growth prospects of the FMCG industry by leveraging its institutional strengths namely, deep consumer insight, proven brand building capability, manufacturing excellence, deep and wide distribution network, packaging and printing knowhow, agri-commodity sourcing expertise and cuisine knowledge.

 

Q 5: Please provide an overview of the Company's progress in the new FMCG businesses? What is the Company's goal in the new FMCG businesses?

Answer: The new FMCG businesses comprising Branded Packaged Foods, Personal Care Products, Education & Stationery Products, Lifestyle Retailing, Incense Sticks (Agarbattis) and Safety Matches have grown at a compound annual rate of 22% over the last 5 years, crossing the Rs. 8000 crores mark during FY14.

ITC has established a vibrant portfolio of brands such as 'Aashirvaad', 'Sunfeast', 'Bingo!', 'YiPPee!', 'Candyman', 'mint-o', 'Kitchens of India' in the Branded Packaged Foods space; 'Classmate' and 'Paperkraft' in Education & Stationery products market; 'Essenza Di Wills', 'Fiama Di Wills', 'Vivel', 'Superia' and 'Engage' in the Personal Care products segment; 'Wills Lifestyle' and 'John Players' in the Lifestyle Retailing business; 'Mangaldeep' in Agarbattis, 'Aim' in Matches and so on. These brands, which have been built organically by the Company, have attained considerable size in a relatively short period of 10 years and in aggregate currently represent over Rs. 10000 crores in terms of annualised consumer spend - a feat perhaps unrivalled in the Indian FMCG industry. It is pertinent to note that these brands support the competitiveness of domestic value chains of which they are a part and create and retain value within the country.

ITC's relentless focus on quality, innovation and differentiation backed by deep consumer insights, world-class R&D and an efficient and responsive supply chain will reinforce its market standing in the Indian FMCG industry.

ITC's endeavour is to become the No.1 FMCG player in India and the Company is aiming for a revenue of Rs.100000 crores from the new FMCG businesses alone by the year 2030. Such rapid growth in scale is expected to be driven by the existing portfolio as well as entry into new categories.

 

Q 6. Would ITC contemplate acquisitions in order to achieve its vision in the Other FMCG segment?

Answer: ITC examines prospects for inorganic growth that arise from time to time not only in this business segment but also in the other businesses. The Company continues to evaluate opportunities to grow its businesses through acquisitions and Joint Ventures and in this regard will be guided by considerations such as strategic fit, valuations, financial viability, ease of integration etc.

 

Q 7. Please explain the Company's 'Triple Bottom Line' philosophy

Answer: The Company's Vision to subserve larger national priorities and create enduring societal value is the inspiration for its multi-dimensional sustainability initiatives that are today acknowledged as global exemplars. The Company's sustainability strategy aims to significantly enhance national wealth through superior 'Triple Bottom Line' performance that builds and enriches the country's economic, environmental and societal capital. It is premised on the belief that the transformational capacity of business can be very effectively leveraged to create significant societal value through a spirit of innovation and enterprise. The Company's 'Triple Bottom Line' contribution is manifest in the creation of innovative s models that enable the replenishment of natural capital and augmentation of sustainable livelihoods.

The Company's inclusive models and value chains have supported the creation of 6 million sustainable livelihoods, largely amongst the disadvantaged sections of society. The Company has sustained its position as the only company in the world of comparable dimensions to have achieved the global environmental distinctions of being carbon positive (for 9 consecutive years), water positive (for 12 years in a row) and solid waste recycling positive (for 7 years in succession).

The Company's renewable energy portfolio enables 38% of its total energy requirements to be met from clean resources - a remarkable achievement given the large manufacturing base of the Company. Further, all the premium luxury hotels and several factories of the Company are LEED (Leadership in Energy & Environmental Design) certified at the highest Platinum/Gold level by the US Green Building Council/Indian Green Building Council.

The Company's 11th Sustainability Report was published recently detailing the progress made across all dimensions of the 'Triple Bottom Line' for the year 2013-14. The report, independently assured by KPMG, conforms to the G4 Guidelines of the Global Reporting Initiative (GRI). This Report was one of the first in India to be prepared in accordance with the new G4 guidelines of the GRI. Please refer to the following link to view the report: http://itcportal.mobi/sustainability/sustainability-report-2014/index.aspx

 

Q 8. Please provide an update of the Company's Social Investments Programme

Answer: The Company's Social Investments Programme aims to address the challenges arising out of poverty, environmental degradation and climate change through a range of activities with the overarching objective of creating sustainable sources of livelihood for stakeholders.

The footprint of the Company's Social Investments Programme has spread to 71 districts across the country and can be viewed at a glance in the following chart:

 

Q 9. Please provide a brief overview of Q2 FY15 results?

Answer: ITC posted another quarter of impressive growth in revenue and profits. Net Revenue at Rs. 8930.32 crores recorded a growth of 14.8% driven by Agri Business, Branded Packaged Foods, Personal Care and Cigarettes. After adjusting for liability written back in Q2 FY14 (towards Rates & Taxes and interest thereon pertaining to earlier years, aggregating Rs. 192.68 crores), underlying growth in Profit Before Tax and Net Profit during the quarter stood at 17.8% and 15.6% respectively. Earnings Per Share for the quarter stood at Rs. 3.04.

It is pertinent to note that, for the third year in succession, Excise Duty on cigarettes was increased sharply under the Union Budget 2014 announced in July 2014. This includes a 72% increase in the Excise Duty rate on filter cigarettes of 'length not exceeding 65 mm' which constitute appx. 17.5% of legal industry volumes. The Company's performance for Q2 FY15 does not reflect the full impact of such increase in Excise Duty – the annualized impact of which is estimated at Rs. 3800 crores for the Company.

 

Q 10 (a). Why has 'Consumption of Raw Material etc. (net)' increased by Rs. 577 crores during Q2 FY15 as compared to Q2 FY 14?

Answer: Increase in Consumption of Raw Materials (net of changes in closing inventories of finished goods, work-in-progress & stock-in-trade and purchase of stock in trade) is primarily on account of higher share of agri-commodity trading business in sales mix.

 

Q 10 (b). Why has 'Other Expenditure' increased by about Rs. 244 crores from Rs.1338 crores in Q2FY14 to Rs.1582 crores in Q2 FY15?

Answer: Other Expenditure for Q2 FY14 included Rs. 158 cr. credit representing liability written back on account of Rates & Taxes pertaining to earlier years. Adjusting for this item, the underlying increase in Other Expenditure is Rs.86 cr. representing an increase of 5.7% which is in line with overall business growth.

 

Q 11. Please provide an update on the Company's progress in the FMCG-Others Segment during the quarter

Answer: The FMCG-Others Segment registered a revenue growth of 11.9% during the quarter amidst a persistently sluggish consumer demand environment. Despite a challenging business scenario, the Branded Packaged Foods Businesses recorded further improvement in market standing during the quarter growing well ahead of the industry across most categories. In the Staples, Spices and Ready-to-Eat Foods Business, 'Aashirvaad' atta recorded robust growth driven by premium variants and the 'Select' offering which continues to gain impressive consumer franchise. During the quarter, the Bakery and Confectionery Foods Business launched the 'Sunfeast Mom's Magic' range of premium cookies in two variants – 'Cashew & Almond' and 'Rich Butter'. The Business also forayed into the Chewing Gums segment with the launch of 'GumOn' in select markets. The products have met with favourable consumer response and are being rolled out to target markets.

In the Snack Foods Business, 'Bingo!' registered robust growth driven by the finger snacks portfolio comprising the 'Mad Angles', 'Tedhe Medhe', 'Tangles' and 'Galata Masti' sub-brands. The recently launched 'Original Style' variants of Bingo! Yumitos potato chips also gained good traction during the quarter. In the Instant Noodles and Pasta categories, 'Sunfeast YiPPee!' sustained its high growth trajectory and enhanced market standing.

During the quarter, the Personal Care Products Business augmented its product range in the Deodorants category with the launch of 'Engage' Cologne in six variants - 3 each for men and women. In the Personal Wash category, the Business expanded its presence in the fast-growing male grooming segment with the introduction of several new variants of Gel Bathing Bars, Shower Gels and Face Wash under the 'Fiama Di Wills' brand. These products have received encouraging consumer response and are being extended to target markets.

 

Q 12. Please provide an update on the Cigarettes business

Answer: Discriminatory and punitive taxation coupled with growing incidence of smuggling and illegal manufacture are the biggest challenges facing the legal cigarette industry in India. These challenges were compounded during the quarter with the announcement in the Union Budget 2014 of a steep increase Excise Duty rates including a 72% hike on filter cigarettes of 'length not exceeding 65 mm' which constitutes around 17.5% of legal cigarette industry volumes.

Over the last 3 years or so, the incidence of Excise Duty and VAT on cigarettes, at a per unit level, has gone up cumulatively by 75% and 165% respectively. It is pertinent to note that Kerala, Tamil Nadu and Assam, which together account for nearly 30% of the Company's sales volumes, have significantly increased VAT rate on cigarettes with effect from October 8th 2014, November 1st 2014 and November 20th 2014 respectively. The combined impact of the sharp increase in Excise Duty and VAT as stated above is exerting unprecedented pressure on legal industry sales volumes - including that of the Company - and leading to downtrading. Besides adversely impacting the performance of the legal cigarette industry, this has led to sub-optimisation of the revenue potential from the tobacco sector.

A recent Government notification, to be effective from April 1st 2015, mandates larger graphic health warnings covering 85% of the surface area of both sides of the pack as compared to the current requirement of covering 40% of the area of one side of the pack. The proposed graphic health warnings are amongst the most stringent in the world and far larger than the top 5 cigarette markets viz. China, Russia, Indonesia, US and Japan. The impact of the proposed graphic health warnings is yet to be felt by the legal cigarette industry.

High incidence of taxation and a discriminatory regulatory regime on cigarettes in India have, over the years, led to a significant shift in tobacco consumption to lightly taxed or tax evaded tobacco products like Bidi, Khaini, Chewing Tobacco and Gutkha. These cheaper and revenue inefficient products presently constitute over 88% of total tobacco consumption in the country. Thus, while overall tobacco consumption is increasing in India, the share of legal cigarettes has progressively declined from 21% in 1981-82 to below 12% in 2013-14.

The Company continues to engage with the concerned authorities, both at the Central Government and State level, highlighting the need for moderation in tax rates on cigarettes to maximize the revenue potential from the tobacco sector and contain the growth of the illegal segment.

Please refer to the FMCG - Cigarettes section in the Report of the Directors & Management Discussion and Analysis for the financial year ended 31st March 2014 and Media Releases on quarterly results for further details.

 

Q 13. Please provide an update on the Company's Agri Business

Answer: During Q2 FY15, Segment Revenue recorded a robust growth of 16.1% driven by trading opportunities in wheat, soya and coffee while Segment Results grew by 4.8%.

The Business provides strategic sourcing support to the Company's Cigarettes Business and is the leading exporter of quality Indian tobacco. The declining trend of global cigarette demand due to steep hikes in taxation and the impact of stringent regulatory measures covering cigarette marketing, packaging/labelling and usage of additives continues to weigh on the prospects of leaf tobacco exports from India. The Business continues to leverage its crop development expertise and world-class processing facilities and play a pioneering role in positioning India as a preferred source of leaf tobacco in the global market.

The Company's deep rural linkages and expertise in agri-commodity sourcing is a critical source of competitive advantage for the Branded Packaged Foods business. Given the volatile market conditions caused by climatic variations, changes in government policies and global demand-supply dynamics, the Company has over the years invested in building competitively superior agri-commodity sourcing expertise through multiple business models, geographical spread and customised infrastructure. These capabilities and infrastructure have created structural advantages that facilitate competitive sourcing of agri raw materials for the Company's Aashirvaad (atta & spices) and Bingo! Yumitos (potato chips) brands. The Business continues to focus on increasing the overall efficiency of procurement by pursuing cost optimisation initiatives including reducing distance travelled and eliminating non-value adding activities

Please refer to the Agri Business section in the Report of the Directors & Management Discussion and Analysis for the financial year ended 31st March 2014 and Media Releases on quarterly results for further details.

 

Q 14. Please provide an update on the Company's Hotels business.

Answer: The Hotels industry continued to be impacted by a weak pricing scenario in the backdrop of sluggish economic conditions and the overhang of excessive room inventory in key domestic markets. Consequently, Segment Revenue growth during Q2 FY15 remained muted at 5.9%. Segment Results includes Rs. 13.4 cr. towards additional depreciation charge during Q2 FY15 due to revision in the useful life of fixed assets in accordance with the provisions of Schedule II to the Companies Act, 2013. Despite depressed market conditions, the Company's Hotels Business maintained its leadership position in the industry in terms of operating margins.

'My Fortune Bengaluru', a flagship property under the Fortune banner in the 'upscale' segment launched in May '14, has been well received by guests. 'ITC Grand Bharat', a super luxury golf and spa resort located at the Classic Golf Resort, Manesar, was launched on November 14th 2014. Construction activity at the luxury hotel projects in Kolkata and Hyderabad is progressing satisfactorily. The Company's first overseas hotel project in Colombo, Sri Lanka, being developed by its wholly-owned subsidiary WelcomHotels Lanka Private Ltd., is also progressing well with the appointment of all major consultants and receipt of requisite approvals from the Sri Lankan Tourism Development Authority.

In line with its 'asset-right' growth strategy, the Business commenced providing operating services at WelcomHotel Jodhpur during the quarter, taking the total number of rooms under the management contract model in the 5 Star category to 1150.

The Company's Hotels Business comprises 98 properties across the country under 4 distinct brands - 'ITC Hotels' in the Luxury segment, 'WelcomHotel' in the Upper-upscale segment, 'Fortune Hotels' in the Upscale & Mid-market space and 'WelcomHeritage' in the Leisure & Heritage segment. In addition to these brands, the Business has licensing and franchising agreements for two brands - 'The Luxury Collection' and 'Sheraton' with Starwood Hotels & Resorts.

With all luxury properties achieving the LEED (Leadership in Energy and Environmental Design) Platinum rating, 'ITC Hotels' is the greenest luxury hotel chain in the world. Further, in line with the Company's commitment to the 'Triple Bottom Line' the Hotels Business is targeting to grow renewable energy usage from the current level of 55% (FY14) of total electrical energy requirements to around 80% by 2016.

Please refer to the Hotels section in the Report of the Directors & Management Discussion and Analysis for the financial year ended 31st March 2014 and Media Releases on quarterly results for further details.

 

Q 15. Please provide an update on the Company's Paperboards, Paper and Packaging Segment.

Answer: During Q2 FY15, Segment Revenue recorded a growth of 8.9% while Segment Results were up 9.7% driven by higher capacity utilisation & operating efficiencies, improvement in product mix and scale-up of Cartons and Flexibles packaging business. However, input prices – particularly of wood – remained at elevated levels during the quarter adversely impacting margins.

In the Paperboards & Specialty Papers Business, the Company continues to focus on the Value Added Paperboard segment in which it is a clear market leader. The new paperboard machine, commissioned in March 2013 at the Bhadrachalam plant, has been fully ramped up and has helped in further consolidating its pre-eminent market position in the Value Added Paperboard segment. This state-of-the-art paperboard machine is highly energy efficient with an installed capacity of over 1 lakh tonnes per annum. With this, the total capacity of the Bhadrachalam plant stands at over 5.5 lakh tonnes per annum, thereby sustaining its position as the single largest integrated pulp and paperboard/ paper unit in India. The Business made good progress during the quarter towards scaling up its in-house pulp manufacturing capacity at the Bhadrachalam unit. The project is expected to be commissioned in Q3 FY15.

With strong forward linkages with the Company's Education & Stationery Products SBU, the Business has emerged as a leading player in the 'Writing and Printing' paper segment and plans are on the anvil to enhance its market presence. In the 'Specialty Paper' segment, the Business remains the market leader in Decor grades and the largest manufacturer of cigarette tissue in India.

In the Packaging and Printing Business, despite a challenging operating environment, the Business recorded a robust growth in revenues leveraging its state-of-the-art facilities across multiple packaging platforms to provide superior and comprehensive solutions to customers. Consequently, the Business strengthened its market standing as a leading supplier of value added packaging in Cartons and Flexibles. Further, the Business continued to provide strategic support to the Company's FMCG businesses by providing innovative packaging solutions, faster turnarounds of new designs, ensuring security of supplies and delivering benchmarked international quality packaging at competitive cost.

Please refer to the Paperboards, Paper & Packaging section in the Report of the Directors & Management Discussion and Analysis for the financial year ended 31st March 2014 and Media Releases on quarterly results for further details.

 

Q 16. Please provide details of the Company's Capital expenditure by Business segment.

Answer: The Company's Capex during the last two financial years is tabulated below:

 

Q 17. Why has the Segment Capital Employed increased by Rs. 3002 crores from Rs. 17529 crores as at 30th Sep 2013 to Rs. 20531 crores as at 30th Sep 2014?

Answer: The increase in Segment Capital Employed was primarily on account of higher Net Fixed Assets (net of depreciation) towards capacity augmentation in FMCG businesses, ongoing investments in Hotels, and cost reduction related investments in Paperboards, Paper and Packaging business. The balance increase was on account of higher Working Capital primarily due to increase in wheat, leaf tobacco and pulp inventory in line with the scale up in businesses.