• Continued Competitiveness

The Company's Cigarette Business, the oldest in its business portfolio, is increasingly impacted by a high incidence of taxation and a discriminatory regulatory regime on the legal cigarette industry in India which 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, gutkha and illegal cigarettes.

ITC's enterprise strengths such as deep consumer insight, cutting-edge Research & Development, strong rural linkages, superior agri-sourcing, world-class manufacturing, brand-building skills, culinary expertise, innovative consumer packaging, world-class human capital, digital technology and an effective trade marketing, distribution and logistics network and sustained investments in R&D, enable the Company to power its strategy of developing multiple drivers of growth through diverse businesses. These enterprise strengths have helped in creating new FMCG businesses, and fortified its traditional businesses. Competencies developed have also lent support to its Information Technology Business.

• Sustainable Use of Natural Resources

Increased water scarcity may directly impact ITC's Business Units located in high water stress areas. With continuous decline in ground water and disruptions in rainfall patterns, the challenges of water availability and quality will become increasingly acute. These challenges may result in additional regulatory pressure on water withdrawal besides raising the prospect of conflicts with other water users.

Challenges related to energy security due to volatile energy markets and inadequate infrastructure for capitalising on off-site renewable sources of energy in the country.

As part of its long-term strategy for achieving water security for all stakeholders at the catchment level of operating units located in high water stress areas, comprehensive studies to understand water supply and demand trends, hydro geology and rainfall patterns have been initiated. Based on the studies, work has been initiated towards improving water use efficiencies within the Unit and across stakeholders. Adoption of technologies to reduce water use and enhance recycle/reuse within processes, improve awareness on better utilisation of water among employees are a few examples of initiatives within the Unit. In addition, building infrastructure to significantly improve rainwater capture through enhanced groundwater recharge, surface storage and soil moisture conservation measures have also been practiced.

These risks provide an immediate stimuli to focus on energy conservation and maximising contribution from renewable energy sources. This should provide long-term advantages in terms of both reduced costs as well as reliability of support. ITC would also enjoy first mover advantage by developing internal systems and processes to operate in such a natural resource constrained environment.

ITC has set a goal to source 50% of its overall energy requirements from renewable sources by 2020. ITC is also setting an internal target, based on the assumption of eased norms and viability of inter-state wheeling of power, to meet 100% of its electrical energy requirements either from renewable sources or through co-generation by 2030. These measures will not only reduce carbon emissions but also help in cutting down overall energy costs.

• Dynamics of Government Policies and Regulation

Several of ITC's Businesses are intrinsically linked to agriculture. The regulatory framework therefore plays a critical role in the viability of sourcing agri-commodities. Regulations like the Essential Commodities Act (ECA), which impose stock limits and restrict movements from time to time, create uncertainty in business operations. This acts as a huge deterrent to long-term investments required to build infrastructure like climate-controlled storages and transport facilities to prevent wastage. In recent times, the Government has formulated a new model Agricultural Produce Market Committee (APMC) Act. The Forward Contracts (Regulation) Act has also been amended to allow derivatives such as options. While this will provide flexibility for farmers and offer them an opportunity to link production to market signals, the coverage of commodities in different exchanges is currently limited and therefore the full economic benefit to both farmers and companies will only accrue when more exchanges trade in a larger number of commodities.

The legal cigarette industry continues to face challenges from the growing incidence of smuggled and illicit cigarettes. Over the last five years, the incidence of Excise Duty and VAT on cigarettes, at a per unit level, has gone up cumulatively by 131% and 157% respectively, thereby exerting severe pressure on legal industry volumes. The Government has issued a notification last year increasing the size of graphic health warnings from 40% of the surface area on one side of the cigarette package to 85% of the surface area of both sides of the package. Such measures, including the tax increases and excessive regulatory regime provide a large arbitrage and opportunity to tax-evaded and contraband suppliers. As a result, the share of legal cigarettes has reduced from 21% in the 80s to 11% today, while at the same time illegal and contraband cigarettes have proliferated exponentially, making India one of the largest markets for contraband products. These policies have led to a significant shift in tobacco consumption to lightly taxed or tax-evaded tobacco products like bidi, khaini, chewing tobacco, gutkha and illegal cigarettes, which presently constitute over 89% of total tobacco consumption in the country.

ITC engages with industry associations, organisations and other appropriate forums in line with its Policy of Responsible Advocacy. This is aimed to help the formulation of a balanced and pragmatic policy framework that addresses the concerns of the Industry.

The new model APMC Act, if adopted by the States, along with the decision to allow options trading in commodity derivatives will lead to closer engagement between farmers and the corporate sector and enable better transmission of market signals. As more commodities get traded in the Exchanges, and more States adopt the model APMC Act, new opportunities will emerge for agri and food-based companies, helping unleash the full potential of the agriculture sector.

ITC continues to represent to the Government for the implementation of an equitable, evidence based and pragmatic tobacco taxation and regulatory framework that cognises the economic imperatives of the country whilst, simultaneously, supporting the tobacco control objectives of the Government.

ITC has created strong Indian brands in the cigarettes segment, in the absence of which, the domestic market would have been more vulnerable to the onslaught of smuggled and tax-evaded cigarettes. Raising the awareness of policymakers and civil society to the menace of illegal and contraband cigarettes, which impact both revenue and livelihoods of farmers, would help in enhancing enforcement as well as stemming the rapid increase of the illegal industry. This will lead to eliminating losses to the exchequer as a result of tax-evaded cigarettes, and help in ensuring that livelihoods of farmers and others in the value chain are not lost.

• Human Capital and Well-being

ITC operates in a diversified, ever-changing, highly competitive global landscape. This necessitates the development of a strong, customer responsive world-class human capital base. The challenge of meeting the growing needs of an organisation with the requisite skills co-exists with the challenge of attracting and retaining the best talents given the multitude of options available to skilled professionals.

There is also a need to nurture harmonious employee relations to enable smooth functioning and productivity enhancement to be able to support the organisation's growth and progress.

In order to sustain growth and to continue to deliver value for stakeholders, it is necessary for organisations to recognise human capital as a critical resource base. The over 100-year-old brand value of ITC provides an opportunity to attract talent from premier institutions. Retention of such a talent pool is in turn facilitated through a talent management strategy focused upon building a high quality 'future-ready' pool of managers, specialists and business leaders, supported by significant investments in learning and development and backed by a culture of care and concern.

• Employability of local population

Lack of proper education and inadequate availability of requisite skills in local population, especially from disadvantaged sections of society in the catchment areas is a challenge faced by most of ITC's manufacturing Units. This points to the compelling need to create a large pool of skilled human resources from among the local populace.

ITC's deep engagement with rural communities, which has been enhanced by the co-creation of economic opportunities, has helped in forging strong relationships. This provides an opportunity to enhance gainful livelihoods of local population.

ITC's partnership with local Industrial Training Institutes and agencies that impart vocational training on skills related to sales & distribution, hospitality, construction and technology acts as an opportunity to enhance the employability of youth from disadvantaged sections of society in the catchment areas of ITC operations.

• Poverty and Social Inequity

Nearly 700 million people living in rural India, with low adaptive capacities, have a direct and symbiotic dependence on climate sensitive sectors (agriculture, forest and fisheries) and natural resources (water, biodiversity, mangroves, coastal zones and grasslands) for their subsistence and livelihood.

The limited options of alternative off-farm employment, combined with endemic poverty, continue to imperil the livelihood of millions of small and marginal farmers with fragmented landholdings, mainly in rain-fed agriculture regions, where the production regime is inherently fragile and getting more so due to a number of factors.

ITC's innovative development models based upon the foundation of its deep rooted stakeholder centric approach, provide the opportunity of simultaneous generation of sustainable livelihood as well as creation of positive environmental footprint. Such models unleash strong drivers for achieving development with social equity. The Company's approach to develop the competitiveness of value chains of which it is a part enables the creation of long-term drivers that address the problem of social inequities.

• Low productivity of rain-fed agricultural sector of India

ITC operates across the agri value chain of 19 crops and is present in 17 states with substantial investments in resource intensive models that entail heavy capital infrastructure. Since around 55% of India's total sown area meets its requirements from rainwater alone, climate change generated environmental challenges aggravate the risks of low productivity of agricultural sector of India, in turn impacting sustainability of agri-based businesses.

Low productivity risks are compounded by absence of focused incentivisation of precision farming, micro-irrigation, watershed development and power-efficient farm mechanisation.

There are inadequacies in the policy framework required to boost the provision of rural infrastructure so that wastage can be eliminated and farmers can receive better returns.

Furthermore, absence of crop and weather insurance reduce the risk-taking capability of the smallscale farmers for investment in infrastructure improvement.

Owing to long standing presence in the agri-commodities market of the country, ITC has created a rich knowledge pool of agri-based interventions in terms of infrastructure, connectivity, price discovery, market access and farm productivity. ITC's close connect with the grass root level and effective dissemination of critical information provide opportunities for ITC to address the challenges in its agri-value chain.

• Post-consumer Waste Management

Inadequate solid waste management systems result in a large amount of wastes being generated today ending up in landfills. Heaps of unattended waste, foraged by cattle and rag-pickers alike, have become a common sight both in urban and rural areas of the country.

New regulations such as the Solid Waste Management Rules 2016 and the Plastic Waste Management Rules 2016 have been promulgated to address this challenge with responsibility allocated to industry too for post-consumer plastic waste, based on the Extended Producer Responsibility principle.

ITC has already initiated collaboration with government, municipal corporations, NGOs, communities and other stakeholders to tackle the issue of plastic packaging waste. ITC is implementing several projects across the country to ensure waste segregation at source and improve the reuse/recycle rates of all categories of waste including post-consumer plastic, by raising mass awareness and creating sustainable business models for the informal sector.

• Corporate Reputation

Inadequate information or misrepresentation, especially in the media, can impact corporate reputation.

Adverse coverage or feedback on ITC's Brands and Businesses can impact brand salience in the minds of the consumer/customer.

ITC's structured media engagement plan comprises an array of activities including press releases/ statements, media interviews by top management, media coverage of important corporate and business milestones and regular presentations to senior media editors. In addition, presentations are also made to key stakeholders. These provide an opportunity to the senior management team to effectively engage with stakeholders on issues relating to ITC's products, services, initiatives and business practices.

• Social Media

The explosion of Social Media channels which allow individuals to form virtual communities of common interest and link-up with people across the globe to share news, views, visuals and videos, is posing a new challenge to organisations. Being unregulated, social media allows instant dissemination of information globally without any mechanism to verify or authenticate the flow of information. This creates the possibility of spreading misinformation that can impact consumer behaviour as well as corporate reputation.

ITC has created its own presence in social media leveraging publicly available web applications as well as creating dedicated branded web applications to disseminate information about the organisation and its brands in the digital space.

ITC's corporate Twitter handle, @itccorpcom provides an opportunity to engage in the social media space. In addition, ITC has created customised apps for mobile phones to provide superior and transparent access to information to its stakeholders. An exclusive app, ITC Iris, that aggregates ITC's social media content for employees to engage with and share, was successfully launched during the year. ITC's Facebook page for engagement with potential employees, Hub and Scope, is another example of ITC's Social Media engagement. Several ITC brands like Bingo!, YiPPee!, Wills Lifestyle and Engage and ITC Hotels have a significant social media presence allowing them to constantly interact with their respective target audiences.

• Customer Satisfaction

Customer feedback is one of the vital inputs for any organisation to modify or update the product/ service in order to better address the requirements and sentiments of its customers. Growing options for customers, increased customer awareness on quality, health and safety, consumers' expectation on continual innovation, aggressively low price offer from competition, are some of the key challenges encountered by businesses today in achievement and maintenance of high levels of customer satisfaction.

A regular customer feedback system forms an integral part of ITC's Businesses where there is direct interface with customers. In the case of FMCG products, consumers are provided several communication channels like e-mail, telephone number, website address and feedback forms to enable them to contact the relevant Business. Processes are laid down to ensure that consumers are provided with responses on their feedback in a timely manner. Customer feedback for B2B businesses like Agri Business and Packaging and Printing, is obtained through different activities e.g. preseason engagement with customers (in case of Agri Business), client visits and engagement of the Divisional Management Committees with major customers. In the Information Technology Business, the Customer Service Satisfaction Survey is an annual check on the robustness of the engagement, culminating in a Customer Experience Index. For Hotels Business, WOW ratio - a Guest Satisfaction Index is continuously monitored and used for benchmarking and performance improvement.