.

ITC: Enduring Value

Chairman speaks

Chairman Speaks - 2003

ITC: CITIZEN FIRST
CREATING SUSTAINABLE VALUE THROUGH SERVING SOCIETY
 
Speech by the Chairman, Shri Y.C. Deveshwar,
at the 92nd Annual General Meeting of ITC Limited
in Kolkata, India on July 25, 2003



Ladies and Gentlemen,

It gives me great pleasure to welcome you to the 92nd Annual General Meeting of your Company. As we gather today at the end of yet another financial year, I am sure you share my sense of satisfaction at the continued progress of your Company in the face of difficult trading conditions. Gross Turnover grew by 12% to Rs. 11,025 crores while Post-tax profit at Rs. 1,371 crores registered a growth of 15.3%. After adjusting for certain once-off items, underlying Post-tax profit grew by an even more impressive 18.5%. Earnings Per Share for the year stands at Rs. 55.41. All-round growth in each of your Company’s four business segments, founded upon substantial investments towards creating global competitive capability, enabled such robust growth in financial terms. Such a performance has further strengthened the fundamentals of your Company, placing ITC among the frontrunners of corporate India.

Notwithstanding these handsome results, I am seized by a basic question: Are these the sole measures that reflect how valuable your Company is? I believe that companies are economic organs of society and therefore need to be ultimately evaluated in terms of the value they create for society. Both dimensions of value creation – for society and for shareholders and other stakeholders directly linked to the company – are germane to assess corporate performance, particularly in the context of the primacy of developmental objectives of an emerging economy like ours. While the Balance Sheet of your Company certainly reflects financial strength built over time, it does not readily reveal the depth and breadth of vision, values and vitality that determine strategic choices and inspire purposeful action. In this context, may I invite your attention to the special feature in your Company’s Annual Report 2003 titled "Citizen First" which sets out the inspiring contours of ITC’s pathbreaking initiatives in creating sustainable value through serving society. I would like to take this opportunity today to elucidate the manner in which your Company seeks to align the objectives of owners of capital and that of larger society in a mutually supportive manner.

   IMPERATIVES OF AN EMERGING ECONOMY

  
Enterprises represent engines of economic growth. Sustained growth of enterprises therefore is an important component of overall economic growth in emerging economies such as India. Emerging economies are disadvantaged by the absence of an adequate pool of internationally competitive enterprises. The ability of an enterprise to sustain value creation over time is crucially dependent upon its ability to continuously upgrade competitive capability, more so in the context of the increasingly globalising marketplace. Enterprises cannot however, become competitive in isolation in view of their linkages with the broader economy for supply of cost effective inputs, as well as for growth in demand for their output.

It is now universally acknowledged that no long term economic growth agenda for India can be feasible without including in its fold the agricultural sector, which is home to 72% of the population and 60% of the nation’s workforce. Indeed, while targeting a real growth of over 8% in India’s GDP, the Planning Commission observed that "agricultural development must be viewed as a core element of the Plan since growth in this sector is likely to lead to the widest spread of benefits, especially to the rural poor including agricultural labour". In this context, it is also well understood that reforms are crucial to the upliftment of the poor. Reforms need to embrace all aspects of socio-economic and political life of our society, including the creation of robust social, physical and institutional infrastructure, to engender productivity and competitiveness. The challenge thus lies in sustaining high rates of economic growth with equity over many years in order to convert the world’s largest pool of economically disadvantaged people into viable consumers, thereby translating development into economic freedom.

   

   ROLE OF ENTERPRISES IN PARTNERED GROWTH


Research by Michael Porter contained in the Global Competitiveness Report 2002-2003 places equal importance on both macro-economic and micro-economic factors in creating conditions for improved national productivity and competitiveness. Vitality of companies operating in an economy makes the decisive difference in the capacity of a country to create wealth and to upgrade the basis of competition from comparative factor advantages to innovative capability that enables the highest order of value capture.

While all successful corporate effort creates value, the degree of value retention within our economy is determined by the extent to which value chains are located in India. Location of manufacturing bases outside the country to service the Indian market would imply a much lower order of value capture for the domestic economy specific to that activity as compared to that arising from larger sections of the value chain being based in the country.

The degree of value retention within India is often a result of strategic choices made by companies. Companies with the mindset of maximising financial returns to shareholders above all else would source globally from locations where quality and cost are currently most competitive, and manufacture where it is most efficient to do so in servicing target markets to maximise profits. Such an approach carries serious implications for emerging economies like India which is in the throes of a transition from an era of protection to the increasingly globalising era of today. It is in this context that I have often emphasised the need for companies with an ‘Indian’ soul as opposed to companies merely operating out of India. The difference lies in the depth of commitment to the Indian economy. An ‘Indian’ enterprise would, as its fundamental orientation, favour value chains within India by supporting their competitiveness wherever feasible. Therefore it is crucial to support the growth and vitality of ‘Indian’ enterprises that stand out by their approach and commitment to the Indian economy rather than merely by the source of their capital.

It needs to be emphasised that no company can sustainably contribute to the goal of creating national value without creating shareholder value. The Indian landscape has always had examples of corporate contribution towards social causes. However, very often such contribution takes the form of philanthropy. Philanthropy tends to be limited both in scope and scale, and in sustainability. The need of the hour therefore, is to weave philanthropy into the fundamental strategy of creating shareholder value. In this context, I am tempted to quote a deeply insightful statement by Michael Porter and Mark Kramer which to my mind, fits the need of Indian society like a glove: "There is no inherent contradiction between improving competitive context and making a sincere commitment to bettering society. Indeed, the more closely a company’s philanthropy is linked to its competitive context, the greater the company’s contribution to society will be. If systematically pursued in a way that maximises the value created, context-focused philanthropy can offer companies a new set of competitive tools that well justifies the investment of resources. At the same time, it can unlock a vastly more powerful way to make the world a better place."

    ITC: A COMMITMENT BEYOND THE MARKET

  
Your Company, as a premier ‘Indian’ enterprise, consciously exercises the strategic choice of contributing to, and securing the competitiveness of the entire value chain of which it is a part. This philosophy has shaped the vision for your Company – the vision that I had referred to in earlier years as "A Commitment beyond the Market".

The compelling nature of this vision - of contributing to the superordinate goal of creating national value – defines the values and character of your Company, providing unity of purpose across the organisation. Such a vision and the related choice of strategy, while serving to inspire your Company’s human resource, requires extraordinary commitment, extraordinary depth of distributed leadership across the organisation, extraordinary investment towards capability building and above all, extraordinary courage. It is only companies such as yours, with strength of resources, that can dare to dream beyond conventional corporate boundaries towards making a meaningful difference to our society; and going the extra mile to deliver growing value.

Rooted in the philosophy of congruence of business and social purpose, your Company is engaged in continuously refining business models that support competitiveness across the larger value chain; that are founded on market principles, creating a climate for efficiency; that support social purposes which are closely linked to the business context; that are based on partnerships across different entities, leveraging diverse competencies to foster robust competitive capability thereby strengthening your Company’s value creating ability.

It is my firm belief that the pursuit of such an approach by the corporate sector can further strengthen the foundation for a fruitful public-private partnership in the achievement of the goal of inclusive economic growth. While your Company’s portfolio comprises diverse businesses, agriculture is at the very core of most of them. ITC’s association over many decades with the agricultural sector now encompasses multiple value chains across several crops and geographies, covering 14 states in the country. I can readily share my sense of pride in providing illustrations from ITC’s businesses that are being cultivated on such a philosophy.

ITC: Creating Value for the Tribal Poor

Economic liberalisation threw up very serious inadequacies across the entire value chain of the Indian paperboards industry. The industry was faced with severe shortages of fibrous raw material and cost effective energy. Acute scarcity of wood-based raw material, which accounts for nearly 45 to 50% of the cost of production, led to dependence on imports for pulp requirements. On the other hand, years of unsophisticated demands of an overly regulated economy had led to mushrooming of mills with obsolete technology, based entirely on recycled fibre. Your Company’s paperboards business, although somewhat better placed being an integrated mill, was no exception. It could not match the world-class quality required for packaging of ITC’s consumer products, thereby necessitating large scale imports of paperboards. Your Company was therefore faced with one of three strategic choices: (1) exit from the paperboards business and import paperboard requirements or (2) confine activity to paperboard manufacture, with pulp requirements being imported or (3) embrace the challenging task of engaging aggressively with the wider value chain to make it internationally competitive. It is evident that these choices represented an ascending order of risk. There was all-round pressure favouring the option of least risk, supported by the conventional wisdom of sticking to the knitting, a compelling necessity in mature and developed economies.

Flowing from its vision and character, and against all odds, your Company chose to not only invest towards acquiring international competitiveness in quality and cost of manufacture of its own mill, but also to extend its engagement across the fuller value chain. Pulling together the resources at your Company’s disposal, ITC’s insights as a substantial consumer of value-added paperboards were leveraged to support technology upgradation and modernisation of the mill. A biotechnology based research programme that was on a relatively modest scale at that time, was leveraged to convert degraded, private wastelands in the economic vicinity of the mill into productive sources of fibre through a social farm forestry programme. Such a strategic option entailed long gestation and daunting uncertainties. There were periods of negative cash flows, followed by periods of sub-optimal return on investment. Unfazed, your Company stayed the course. The strength of your Company’s values and courage enabled the conversion of deep adversity into a sustainable economic opportunity for a sizeable section of India’s rural poor.

Today, your Company’s paperboards business is the decisive leader in the Indian market, with value-added products now constituting nearly 50% of sales. The product footprints extend to several markets in Asia, Africa and the EU, earning about Rs. 100 crores in foreign exchange annually, besides conserving about Rs.120 crores through import substitution. Your Company’s initiatives in energy management earned national awards for excellence in 2002 from the Government of India and the Confederation of Indian Industry. The modernised pulp mill, besides enhancing competitiveness and substituting imports, also enables the production of elemental chlorine free pulp. It is the only one of its kind in India, thereby setting world-class standards of environment friendly technology.

Your Company’s social and farm forestry programmes so far account for more than 35 million saplings planted over 16,000 hectares. Societal value has accrued through increasing forest cover, enhancing contribution to restoration of ecological balance and above all, providing sustainable employment to nearly 160,000 people in some of the most remote tribal regions of the country with related multiplier impact on the economy.

Your Company has traversed a long way in the journey towards global competitiveness, and continues this journey in pursuit of receding targets. R&D efforts continue to be directed at increasing the utilisation of hardwood and other indigenous fibrous material as a progressive substitute to imported softwood. The tangible value so created for society and shareholders can be multiplied manifold by scaling up this unique endeavour. Your Company aspires to progressively attain leadership in the Afro-Asian region in the not too distant future, with growing presence in international markets and over 40% share of the domestic market. Such market strength would fuel ITC’s social farm forestry programme which aims over the next ten years to bring into productive use over 100,000 hectares of private wasteland by planting nearly 600 million saplings. The programme will, on one hand, make procurement of industrial timber exclusively from sustainable sources a reality, and on the other hand, imply direct and indirect rural employment for 1.2 million, besides carrying the prospects of making ITC a carbon positive enterprise.

ITC: Adding value to Indian Agriculture

Your Company’s engagement with the agricultural value chain spans many a crop, encompassing buying, value addition through processing and exports. A host of factors – not the least of which are fragmented farms, overdependence on monsoons, and lack of sophisticated inputs and farming practices – if not dealt with in a timely manner threaten to undermine the competitiveness of Indian agriculture and in turn those who use Agri-inputs to serve their markets, such as your Company. Just as the issues related to Indian agriculture are well known, the solutions have also been well articulated. Implementation of solutions requires concerted action involving several entities. Creative use of information technology through the e-Choupal initiative has enabled your Company to bring together diverse agencies, each with specialised competencies, in a bid to empower the Indian farmer, thereby setting the basis for a much higher order of value generation and sharing.

Any endeavour that engages with the farming community needs to cognise for the unique characteristics and structure of the Indian agricultural sector. Indian agriculture is synonymous with the small farmer, who cultivates on an average less than 1.5 hectares. It is an accepted prospect that the knowledge residing in the Indian agricultural research system, if effectively transferred to the 156 million hectares of farmland in India, spread across rich and diverse agro-climatic regions, has the potential to not only meet the growing needs of the domestic market, but also be a competitive source for many attractive global markets of the post WTO era. However, the weaknesses arising from fragmented farms, overdependence on monsoons and inadequate rural infrastructure, render the task of unlocking the potential of this sector very complex.

Your Company’s e-Choupal model aims to confer the power of expert knowledge on even the smallest individual farmer by leveraging information technology. By delivering real-time information and customised knowledge to improve farmers’ decision making ability, e-Choupal helps to align farm output to market demands and aims to secure better quality, productivity and improved price discovery. Enhanced farmer risk management capability arising from such empowerment would over time, create a significant economic multiplier.

The model enables a quantum improvement in the cost and quality of extension services overcoming the most important challenge facing Indian agriculture. By aggregating the demand like a virtual producers’ cooperative, e-Choupal also facilitates access to high quality farm inputs at competitive cost.

By creatively reorganising the roles of traditional intermediaries who deliver critical value in tasks like logistics management at very low costs in a weak infrastructure economy like India, e-Choupal ploughs back a larger share of consumer price to the farmer. Besides providing an alternative marketing channel, this model engenders efficiency in the functioning of mandis through competition and serves to conserve public resources that would otherwise be needed to upgrade the mandi infrastructure to handle higher volumes of agri output.

The benefits from e-Choupals testify to the validity of the assumptions of efficiency gains through virtual integration of the supply chain. ITC’s investment in such a valuable e-infrastructure, whilst creating abiding value for the farmer, is in turn placing your Company in a unique position of trust with the farming community as a reliable supplier of goods and services on the one hand, and as a buyer of high quality cost effective farm output on the other, thereby supporting its own competitiveness.

It is your Company’s strategic intent to leverage this unique sourcing strength in conjunction with its traditional capabilities related to branding, trade marketing and distribution to create growth opportunities in value-added branded foods. Growth in the value-added consumer end of the market in turn would grow demand for higher quality agri commodities, thereby opening up remunerative opportunities for the farmers. The e-Choupal rural network, together with your Company’s expanding trade marketing capabilities and state-of-the-art information technology transaction backbone, provide the basis for a low cost, broadband supply chain fulfilment capability for consumer products and services. Such fulfilment capability can be likened to a super highway which can also be used as an effective infrastructural link to align Indian farmers with markets. Your Company is engaged in executing several proof-of-concept pilots in various products and services, like agri inputs and insurance, that could be marketed in rural India using the e-Choupal network. The pioneering e-Choupal business model contributes to creating the market through improved farm incomes, whilst placing your Company in a unique position to reap benefits through its closeness to the potential consumer. Like any infrastructure project, the low cost fulfilment super highway will yield benefits over the longer term, establishing the basis for generating unmatched value by servicing the potential markets of tomorrow.

Competitiveness of Indian agriculture can thus be engendered wherever it is feasible to create a structure whereby the corporate sector’s need for creating shareholder value can be enmeshed with that of the farming community in a mutually supportive and interdependent partnership.

ITC: Contribution to Water Resource Management

ITC’s integrated watershed development initiative is a key intervention to address moisture stress in some of the more acutely affected, drought-prone districts of the country. This model is in its infancy and is aimed at laying a foundation for a significantly larger contribution to conserving societal resources. It is not well known that in the absence of infrastructure to hold water that is otherwise available in plenty, 67% of the cultivated area in the country faces severe moisture stress for 5 to 10 months a year. These drylands contribute as much as 45% of the nation’s food basket - where crop production is low, unstable and highly vulnerable to seasonality. Growth in agriculture through improved yields is thus closely tied to availability of water.

In the economic vicinity of its business locations, your Company, assisted by select NGOs, is engaged in bringing nearly 5,000 hectares of degraded land every year under a soil enrichment and moisture conservation programme. Under the programme, villagers are trained to form watershed management groups and build water harvesting structures like contour bunds, check dams, percolation tanks and farm ponds. This programme envisages creation of 1,000 percolation tanks and over 5,000 small water harvesting structures over ten years. These water bodies will provide critical irrigation to nearly 50,000 hectares of farmlands in their command areas. These initiatives will thus secure significant increases in farm incomes through shift from single to multiple cropping, besides cumulatively generating at least 5 million person days of farm labour employment during lean periods.

Your Company’s e-Choupal network provides a unique opportunity to scale up the integrated watershed management programme towards addressing the larger issues of moisture stress and shortage of potable water in rural India. Back-of-the-envelope estimates indicate that servicing the 100,000 villages envisioned within the e-Choupal initiative would entail investment to the tune of roughly Rs. 6,000 crores over the next 7 to 10 years in creating water harvesting structures. It is evident that no single enterprise can by itself support such a large public project. The model being refined by your Company, together with the organisational backbone represented by the e-Choupal network can provide the basis for a valuable public-private partnership mobilising wider societal resources to overcome a challenge, which otherwise might seem impossible.

The significant benefits inherent in endeavours such as these tend to be back ended. A long term approach is therefore critical in order to be able to generate sustainable value. There are many other illustrations of your Company’s long term approach to value creation. ITC’s investment in world-class hotels contributes towards essential infrastructure for the growth of trade, commerce, industry and tourism, while aiming to strengthen your Company’s leadership position in the hospitality segment. Such investment simultaneously catalyses the high employment multiplier inherent in this capital intensive business. Your Company’s latest hotel, the ITC Sonar Bangla – commissioned in January 2003 and fast earning the reputation as Asia’s finest "business resort" – is yet another demonstration of your Company’s long term commitment towards infrastructure that must precede any prospects of rapid economic development in Kolkata and the eastern region. Creative strategy, successful execution and staying power are thus essential ingredients in creating sustainable value for shareholders and the larger society.

Even as the strategic initiatives illustrated earlier are aimed at strengthening your Company’s long term wealth generating capability, equal emphasis is being placed on creating shareholder value in the short and medium terms, essential for creating a robust foundation to sustain your Company’s longer term initiatives. As has been the practice I give below a table highlighting progress in financial terms since the time I assumed leadership of your Company.

 

(Figures in Rs. Crores)

ITC: Financial Snapshot 1996 - 2003

1996

2003*

CAGR (%)

Gross Income

5188

11194

12

Profit After Tax

261

1371

27

Return on Average Net Assets (%)

30

41

 
Net Assets Employed

1886

5483

17

Net Worth

1121

5366

 
As at 31st March; *assumes shareholder approval as proposed

CAGR: Compound Annual Growth Rate


    CONCLUSION

You can be justifiably proud that the capital you provide is being productively used to create not only shareholder value but also societal value. Every rupee of value created for you generates multiples of such value for society, providing livelihood to millions living at the margin, thus making your Company one of India’s most valuable enterprises. The vision of contributing to inclusive national growth provides new meaning to your Company’s world-class human resource, inspiring even greater passion and dedication. Every milestone crossed increases their sense of pride manifold, enriching the process of shareholder value creation. On their behalf, I seek your unstinting support as always, in the continued pursuit of your Company’s vision.

Thank you for your attention.

© ITC Limited