Q4 FY16 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.
Q2. How does the Company effectively manage a highly diversified business portfolio? What is the Company's Corporate Governance structure?
Answer: ITC's 'Strategy of Organisation' 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 /about-itc/values/corporate-governance-structure.aspx for details of ITC's 3-tier Governance Structure.
Q3. What is the Company's shareholder value creation track record?
Answer: ITC has been a consistent performer in terms of shareholder value creation. During the period 1995/96 to 2015/16, Total Shareholder Returns have clocked compound annual growth rate of 23.3% significantly outperforming the Sensex (10.6%).
Q4. Please provide a brief overview of Q4 FY16 results.
Answer: The Company's performance during the quarter remained subdued reflecting the continuing impact of higher taxes and regulatory pressures on legal cigarette industry volumes, weak demand conditions in the FMCG industry and synchronisation of trade pipeline in the Notebooks category. Net Revenue for the quarter stood at Rs. 10062.38 crores. Profit Before Tax at Rs. 3831.52 crores and Net Profit at Rs. 2495.20 crores registered a growth of 14.4% and 5.7% respectively during the quarter. Earnings Per Share for the quarter stood at Rs. 3.10.
Q5. (a). Why has 'Consumption of Raw Material etc. (net)' increased by Rs. 318 crores during Q4FY16 as compared to Q4 FY15?
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) was primarily due to higher revenue in agri commodities Business.
Q5. (b). Why has 'Other Expenditure' increased by about Rs. 103 crores from Rs. 1934 crores in Q4 FY15 to Rs. 2037 crores in Q4 FY16?
Answer: Other Expenditure for Q4 FY16 is higher by 5% Vs. Q4 FY15 mainly due to increase in advertising & sales promotion expenditure and higher rates & taxes.
Q6. 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 FMCG industry faced another challenging year with demand conditions remaining sluggish for the third year in succession. The slowdown in the broader economy - as reflected by the marked deceleration in Nominal GDP growth, the absence of any material pick-up in consumption expenditure and headwinds in rural demand due to the second successive year of sub-par monsoons - was manifest in the Company’s operating segments in the FMCG space. The year also witnessed price deflationary conditions with industry players passing on the benefit of decline in input prices to consumers with a view to bolstering sales volumes.
Against the backdrop of such a challenging operating environment, the Company sustained its position as one of the fastest growing FMCG businesses in the country. The Company’s FMCG-Others Businesses clocked Segment Revenue of Rs. 9731.17 crores during the year, representing a growth of 7.7% over the previous year. While revenue growth during the year was relatively subdued, it is pertinent to note that apart from the factors as aforestated, the Company had to contend with regulatory issues surrounding the Noodles industry (largely pertaining to products of the lead competitor) and synchronisation of trade pipeline in the later part of the year ahead of the ensuing season in the Notebooks category. Segment Results for the year improved to Rs. 71 crores from Rs. 34 crores in FY15, after absorbing the gestation costs of new categories viz., Juices, Gums and Dairy and significant brand investments towards communicating the superior value proposition offered by YiPPee! Noodles, besides a host of new launches in existing categories.
The Company continued to make investments during the year towards enhancing brand salience and consumer connect while simultaneously focusing on implementing strategic cost management measures across the value chain and adopting a judicious pricing approach. Several initiatives were also implemented during the year towards leveraging the rapidly growing e-commerce channel for enhanced reach of the Company’s products and harnessing digital and social media platforms for deeper consumer engagement.
During the year, 3 Company-owned units (including 1 through a joint venture company viz., North East Nutrients Private Limited) were commissioned to cater to the requirements of the Branded Packaged Foods Businesses. Significant progress was also made during the year in constructing several state-of-the-art owned integrated consumer goods manufacturing and logistics facilities across regions in line with long-term demand forecasts. Currently, over 20 projects are underway and in various stages of development - from land acquisition/site development to construction of buildings and other infrastructure.
The FMCG Businesses comprising Branded Packaged Foods, Personal Care Products, Education and Stationery Products, Lifestyle Retailing, Incense Sticks (Agarbattis) and Safety Matches have grown at an impressive pace over the past several years. The Company’s vibrant portfolio of brands viz., ‘Aashirvaad’, ‘Sunfeast Dark Fantasy’, ‘Sunfeast Yumfills’, ‘Sunfeast Delishus’, ‘Sunfeast Mom’s Magic’, ‘Sunfeast Bounce’, ‘Bingo! Tedhe Medhe’, ‘Bingo! Mad Angles’, ‘Yumitos’, ‘YiPPee!’, ‘Candyman’, ‘mint-o’, ‘GumOn’, ‘Kitchens of India’, ‘Aashirvaad Svasti’ 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, amongst others continue to garner consumer franchise and enhance market standing. These brands, which represent an annual consumer spend of over Rs. 12000 crores in aggregate, have been built organically by the Company over a relatively short period of time - a feat unparalleled in the Indian FMCG industry. In terms of annual consumer spend, Aashirvaad and Sunfeast are today over Rs. 3000 crores and Rs. 2500 crores respectively while Classmate and Bingo! are over Rs. 1000 crores each. These world-class Indian brands support the competitiveness of domestic value chains of which they are a part, ensuring creation and retention of value within the country.
Q7. Please provide a revenue split of the FMCG-Others Segment.
Answer: The Branded Packaged Foods Businesses represent the largest component of this segment, accounting for ~70% of Segment Revenue. The Education and Stationery Business and Personal Care Business account for ~8% each of Segment Revenues.
Q8. What are the new FMCG categories that the Company is likely to enter over the short to medium term?
Answer: With aspirations to become the No.1 FMCG player in India, the Company continuously evaluates opportunities to grow in the FMCG space. While it is anticipated that the FMCG industry will take a few more quarters for demand revival, the green shoots of economic recovery, expectations of normal monsoons, low inflation, proposed implementation of the recommendations of the 7th Pay Commission and the 'One Rank One Pension' scheme augur well for the industry. The structural drivers of long-term growth such as increasing affluence and consumer awareness, a young and expanding workforce and increasing urbanisation amongst others, remain firmly in place and the FMCG industry is poised for rapid growth in the ensuing years.
The choice of category is guided by its growth prospects, profitability profile and the ability of the Company to effectively leverage its institutional strengths with a view to achieving leadership status within a reasonable time frame. Synergies with existing categories in terms of overlap of distribution reach, brand extension possibility, procurement efficiencies etc. are considered while choosing new categories.
Chocolates, Dairy, Tea and Coffee are some of the interest areas in this context.
Q9. What is the margin profile of the Branded Packaged Foods Business?
Answer: The Branded Packaged Foods Businesses of the Company comprise 'Confections', 'Staples, Snacks and Meals' and 'Dairy & Beverages'. These Businesses have evolved over a period of time and are currently at different stages of their lifecycles. As such, the revenue dimensions, cost structures and profitability profiles of each of these businesses are distinct from the other. For example, EBIT margin is in the high single digit range for the Staples business (first full year of launch: 2002/03) while the same is in the low single digit range for the Snack Foods business (first full year of launch: 2007/08) representing upfront investments towards category development and brand building.
Overall, the mandate for each category is to achieve best-in-class margins within a reasonable period of time.
Q10. What is the margin profile of the Personal Care Products Business? When will it break-even?
Answer: The Personal Care Products Business presently comprises the 'Personal Wash', 'Deodorising Products' and 'Skin Care' categories. The Company continues to make significant investments in this Business primarily in the area of brand building, R&D and product development towards competing effectively with incumbent players comprising firmly entrenched MNCs and domestic companies.
Presently, each category is operating at industry benchmarked gross margins. With enhanced scale and consumer connect, each category is expected to earn best-in-class EBIT margins progressively over the medium-term.
Q11. What are the Company's targets in the FMCG-Others space? What does the Company envision in terms of revenue and profits in this segment, over the medium and long-term?
Answer: ITC's endeavour is to become the No.1 FMCG player in India driven by the existing portfolio as well as entry into new categories. In this regard, the Company is aiming for a revenue of Rs. 100,000 crores from the new FMCG businesses by the year 2030.
Over the medium term, the Company seeks to grow revenues of each category within the FMCG-Others segment at a rate which is well ahead of industry. With enhanced scale and consumer connect, each category is expected to earn best-in-class EBIT margins, progressively over the medium-term.
Q12. 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 is guided by considerations such as strategic fit, valuation, financial viability, ease of integration etc.
In February 2015, the Company acquired the 'Savlon' and 'Shower to Shower' trademarks and other intellectual property rights for identified markets from the Johnson & Johnson group. Savlon is an established brand with a rich heritage and is associated with personal care products in the fast-growing antiseptic/anti-bacterial categories. Shower to Shower has a strong consumer franchise in the prickly heat talcum powder category. The Company intends to leverage these assets to strengthen its position in the personal care space by expanding its existing product portfolio and gaining access to newer consumer segments and markets.
The Company's recently acquired 'B Natural' brand was leveraged to foray into the fast growing Juices category. B Natural range of juices, currently available in 8 exciting variants, has garnered impressive consumer traction in a relatively short span of time and is well poised for rapid growth.
Q13. Please provide an update on the Company's progress in the FMCG-Others Segment during the quarter.
Answer: The Company's FMCG-Others businesses clocked Segment Revenue of Rs. 2704 crores during the quarter, representing a growth of 5.4% over the previous year amidst weak demand - particularly in rural markets and a price deflationary environment. Additionally, synchronisation of trade pipeline ahead of the ensuing season by the Education and Stationery Products Business impacted revenue during the quarter. Most categories witnessed expansion in Gross Margin driven by product mix enrichment and benign input costs. However, Segment Results were impacted by gestation costs of new categories viz. Juices, Gums & Dairy and continuing brand investments towards communicating the superior value proposition offered by YiPPee! Noodles.
The Company continues to leverage its state-of-the-art R&D facilities and robust product development processes to launch innovative and differentiated products in the market. Recent launches include 'Delishus Gourmet cookies - Chocolate Chip made with Ghana Cocoa', 'Marie Light Rich Taste' with a differentiated taste and flavour profile, 'Tedhe Medhe Achaari' variant, 'Apple Awe' fruit juice under the 'B Natural' brand, Pure Cow Ghee under the 'Aashirvaad Svasti' brand, new perfume sprays under the 'Engage' brand and several variants of soaps under the 'Fiama Di Wills', 'Vivel' and 'Savlon' brands.
The Branded Packaged Foods Businesses posted healthy growth in revenue despite sluggish demand conditions, whilst enhancing market standing across most categories.
In the Staples, Snacks and Meals Business, 'Aashirvaad' atta continued to grow well, consolidating its leadership position across markets. The Finger Snacks portfolio also gained consumer traction and improved market standing during the quarter.
Sales of 'YiPPee' Noodles, which were impacted during the first half of the year due to regulatory issues largely pertaining to a competitor's products, grew at a rapid pace aided by an integrated 360 degree communication campaign reassuring consumers of the quality and safety of the product.
In the Confections Business, the 'Mom's Magic' range of premium cookies sustained its rapid growth trajectory. The confectionery category witnessed margin expansion on the back of mix enrichment and favourable input costs.
During the quarter, the Personal Care Products Business focused on augmenting its product portfolio and driving product mix enrichment. However, revenue growth was impacted by a deflationary pricing environment. The Business continues to leverage the recently acquired trademarks - 'Savlon' and 'Shower to Shower' - to expand its product portfolio and gain access to newer consumer segments and markets.
The Company continued to make steady progress in building several state-of-the-art owned integrated consumer goods manufacturing and logistics facilities across regions in line with long-term demand forecasts. Currently, over 20 projects are underway and in various stages of development - from land acquisition / site development to construction of buildings and other infrastructure.
Please refer to the FMCG - Others section in the Report of the Directors & Management Discussion and Analysis for the financial year ended 31st March 2015 and Media Releases on quarterly results for further details.
Q14. Please provide an update on the Cigarettes business.
Answer: The performance of the Company's Cigarettes business remained subdued during the year due to unprecedented pressure on the legal cigarette industry in India on account of the cumulative impact of steep increase in taxation and intense regulatory pressures.
Over the last 4 years, the incidence of Excise Duty and VAT on cigarettes, at a per unit level, has gone up cumulatively by 118% and 142% respectively thereby exerting severe pressure on legal industry volumes even as illegal trade grows unabated. It is pertinent to note that steep increases in Excise Duty on cigarettes in recent years have resulted in widening the differential in Excise Duty rates (on a per kg. of tobacco basis) between cigarettes and other tobacco products from 29 times in 2005/06 to over 53 times.
An analysis of the WHO Report on Tobacco Taxation, 2015, reveals that at 6.5% of per capita GDP1, cigarette taxes in India are amongst the highest in the world. In fact, cigarette taxes in India are 14 times higher than USA, 9 times higher than Japan, 7 times higher than China, 5 times higher than Australia and 3 times higher than Malaysia and Pakistan.
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, gutkha and illegal cigarettes which presently constitute over 89% of total tobacco consumption in the country. Thus, the share of legal cigarettes in overall tobacco consumption has progressively declined from 21% in 1981-82 to 11% in 2014-15 even as overall tobacco consumption has increased in India. About 68% of India's tobacco industry is in the unorganised sector with little or no regulatory oversight. Besides adversely impacting the performance of the legal cigarette industry, this has led to sub-optimisation of the revenue potential from the tobacco sector.
The imposition of discriminatory and punitive VAT rates by some States provides an attractive tax arbitrage opportunity for illegal cigarette trade by criminal elements. The consequential decline in legal cigarette volumes in such States has led to stagnation/decline in revenue collections, even as illegal cigarettes gained significant traction. On the other hand, the pragmatic decisions of several State Governments to rationalise VAT on cigarettes have facilitated improvement in revenue buoyancy in those States and also in containing the growth of illegal trade.
According to an independent study conducted by Euromonitor International - a renowned global research organisation - India is now the 4th largest market for illegal cigarettes in the world. In fact, illegal trade comprising smuggled foreign and domestically manufactured tax-evaded cigarettes is estimated to constitute one-fifth of the overall cigarette industry in India. A recent study by the Federation of Indian Chambers of Commerce and Industry (FICCI) has estimated that revenue loss due to illegal cigarettes is more than Rs. 9000 crores per annum which represents a growth of nearly 50% over a two year period. During the year under review, the Company was in continuous engagement with various enforcement agencies whose proactive initiatives have resulted in significant increase in seizure of smuggled cigarettes.
The unprecedented fall in legal cigarette volumes and the consequent reduction in the utilisation of Indian Flue Cured Virginia tobacco in cigarette manufacture is having a devastating impact on tobacco farmers in the country. The sharp decline in domestic demand coupled with the unabated growth in illegal cigarette trade have led to a significant drop in tobacco prices, especially in Andhra Pradesh, causing deep distress to the livelihoods of thousands of tobacco farmers. A stable, fair and equitable cigarette taxation policy would be imperative to provide a strong domestic demand base to the Indian tobacco farmer, insulating him from the volatilities typically associated with international markets while helping realise the full export potential of Indian leaf tobacco. This assumes critical significance especially in view of the fact that there are no economically viable alternative crops for farmers in the tobacco growing regions of the country.
The Company continues to engage on an ongoing basis with policy makers at both the Centre and the States for moderation in tax rates on cigarettes to maximise the revenue potential from the tobacco sector, contain the growth of illegal trade and protect the interest of the Indian tobacco farmer.
Please refer to the FMCG - Cigarettes section in the Report of the Directors & Management Discussion and Analysis for the financial year ended 31st March 2015 and Media Releases on quarterly results for further details.
1 Excise Duty & State Taxes as a percentage of per capita GDP
Q15. What is the impact of increase in excise duty and VAT on cigarette volumes?
Answer: See response to Q. 14.
Q16. Is the pressure on volumes similar across the different segments i.e. King Size filters, Longs, Regular filters and filter cigarettes of 'length not exceeding 65 mm'?
Answer: While all segments are witnessing pressure on volumes, the Regular Filter segment has been the worst hit.
Q17. What is the Company's view on cigarette volume trends over the medium to long term?
Answer: As aforestated, legal cigarette industry volumes are currently facing unprecedented pressure due to the steep increase in Excise Duty and VAT and the unabated rise in illegal trade.
As highlighted earlier, the share of legal cigarettes in overall tobacco consumption is 11% in India. While this indicates room for growth in legal cigarette volumes going forward, this would largely depend on the taxation and regulatory policy on cigarettes adopted by the Government. Such growth potential was demonstrated during the period 2004/05 to 2006/07 and again, more recently, in 2009/10 and 2011/12 - years in which taxes / duties growth was moderate.
A stable, fair and equitable India-centric cigarette taxation and regulatory policy which recognises the unique tobacco consumption pattern in the country is critical to realising the full economic potential of the tobacco sector in India.
The Company continues to engage with the concerned authorities, both at the Central Government and State level, in this regard.
Q18. Are cigarettes likely to be a part of the proposed GST regime? What is the likely rate applicable on cigarettes?
Answer: As per the Constitution (122nd Amendment) (GST) Bill 2014 on Goods and Services Tax (GST), cigarettes are likely to come under the purview of the proposed GST framework while continuing to be subjected to the levy of Central Excise Duty.
It would be imperative that revenue sensitive goods like cigarettes are subjected to uniform standard rates of tax applicable to general category of goods to ensure revenue buoyancy and rein in the growth of the illegal segment. Further, the combined incidence of Excise Duty and GST should be revenue neutral i.e. maintained at current levels and all existing State level taxes should be subsumed into GST. The Company, along with industry bodies and other stakeholders, continues to make representations to the Government in this regard.
Q19. What is the status on introduction of larger graphic health warnings on packs?
Answer: A Government notification, originally proposed to be effective from 1st April 2015, increased the size of graphic health warnings (GHW) 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, and substituted the previous pictures with even more gruesome and repulsive ones. The implementation of the new GHW was subsequently kept in abeyance by the Central Government pending the recommendations of the Parliamentary Committee on Subordinate Legislation (PCOSL) which was tasked with the responsibility of examining the issue of introduction of larger GHW in India. The decision to defer the notification till completion of PCOSL's review was reiterated by the Government in the Parliament2. Nevertheless, whilst the PCOSL was engaged in the matter, on 24th September 2015, the Central Government notified that the new GHW would come in to effect from 1st April 2016. On 15th March 2016, the PCOSL in its Final Report recommended that the size of the GHW should be kept at 50% on both sides of the cigarette package as opposed to 85% proposed by the Government.
The implementation of any change in health warnings on cigarette packages is an elaborate process for manufacturers, entailing months of preparation involving substantial cost and effort. Since the matter of new GHW was under the Parliamentary Committee's consideration, and the Government had itself held out that it would await the Committee's report, the industry was led to believe that the Government would re-notify new health warnings after considering the Committee's recommendations. Further, the question of the legality of the new warnings was and continues to be pending before the Court. In this situation, the Company, as any prudent person would, did not commit to wasting substantial resources in creating the large number of cylinders and other tools necessary for a changeover of the warnings. As a result, the Company was not in readiness to print the new GHW and was compelled to cease manufacture of cigarettes with effect from 1st April 2016 pending clarity on the matter. Subsequently, in order to attain clarity on the matter, the Company challenged the rules mandating larger GHW before the Honourable High Court of Karnataka. The Court was pleased to direct, vide Interim Order dated 12th April 2016, that the Government should not take any coercive steps against the Company for a period of 8 weeks during which the Company would continue to follow the Cigarettes and Tobacco Products (Packaging and Labelling) Rules, 2008 ("2008 Rules"), which prescribed 40% warning on the front panel of the cigarette packs. Accordingly, the Company resumed production of cigarettes at its factories from 15th April 2016.
On 4th May 2016, the Honourable Supreme Court directed the Honourable High Court of Karnataka to hear and dispose of within 6 weeks, the legal challenge to GHW pending in several High Courts. The Honourable Supreme Court, however, also ordered that any stay order granted by any High Court would not be given effect to till the cases are finally disposed of. As a consequence of the above development, in compliance with the interim requirements pending hearing in the Honourable Karnataka High Court, the Company progressively commenced manufacture of cigarettes with 85% warning.
2 Reply of Honourable Minister for Health and Family Welfare on 24th July 2015 to Lok Sabha Unstarred Question No. 851.
Q20. What would be the likely impact of the larger graphic health warnings on packs on the cigarette industry?
Answer: The proposed GHW is excessively large, extremely gruesome and unreasonable. There is no evidence to suggest that cigarette smoking would cause the diseases depicted in the pictures or that large GHW will lead to reduction in consumption. In fact this inadequacy of evidence prompted the courts in USA to hold the US FDA's proposal for introduction of similar GHW in that country as unconstitutional. Further, over 100 countries representing 60% of the signatories to the Framework Convention on Tobacco Control have not adopted GHW3. It is pertinent to note that other major tobacco producing countries have taken a considered view on the matter and have not adopted over-sized and excessive graphic health warnings, thus striking a balance between the interests of the consumer and of their farmers. It may also be noted that the global average size for GHW is only about 30% coverage of the principal display area. Moreover, the top three cigarette consuming countries - USA, China and Japan - which together account for 51% of global cigarette consumption have only text based warnings and have not adopted pictorial / graphic health warnings.
The new GHW will commoditise the market where price will be the sole or prime driver of consumer choice thus eroding the value of the Company's distinctive trademarks and pack designs that have been developed and nurtured through substantial investments over the years. Moreover, the new GHW will encourage the flow of illegal trade of brands owned by international companies into the country since such brands are manufactured in many jurisdictions which do not mandate the printing of graphic health warnings on cigarette packs as applicable in India. The legal cigarette industry in India will be hard pressed to counter the menace of illegal cigarettes which will be perceived by the consumer to be safer in the absence of the statutorily mandated health warnings. Coupled with the fact that illegal cigarettes are available at a fraction of the price of legal cigarettes, the new GHW will provide further fillip to the growth of illegal cigarettes in the country.
It is pertinent to note that the Department of Commerce, in its submissions to PCOSL, has stated that "large warnings will lead to an increase in overall tobacco consumption and illegal cigarettes; when large quantities of non-cigarette tobacco products from unorganised sector are sold loose and / or without any health warnings, it gives an impression of these products being relatively safer than cigarettes."
As always, the Company complies fully with all regulations and laws in letter and spirit and continues to engage with policy-makers for reasonable, pragmatic and evidence based regulation and taxation policies that balance the health, employment and economic imperatives of the country.
3 Canadian Cancer Society - Cigarette Package Health Warnings, International Status Report, Fourth Edition, September 2014
Q21. What are the Company's plans in the 'other tobacco and nicotine products' space?
Answer: In the Nicotine Gum category, the presence of the Company's brand, 'Kwiknic', was expanded with the introduction of the product in the chemists channel during the year. The Business also launched a new variant - 'Kwiknic Neo' - in select markets which has received encouraging response from consumers.
Electronic Vaping Devices (EVD) are gaining increasing traction with consumers seeking alternative and safer sources of nicotine. In line with this trend, the Company continues to engage in this category through its brand 'EON' which was launched in Hyderabad and Kolkata in the previous year. During the year, the Company extended the brand to target markets and also augmented its product portfolio with the launch of a rechargeable variant - 'EON Charge' - in Bengaluru and Delhi.
Q22. Please provide an update on the Company's Hotels business.
Answer: The operating environment in the hospitality sector remained challenging during the year. While occupancy rates improved during the year, average room rates remained under pressure due to subdued growth in foreign tourist arrivals coupled with a steady supply of new room inventory particularly in key markets like New Delhi, Mumbai and Bengaluru. The Company's hotels in Chennai also had to contend with business disruption due to heavy rainfall and floods in the city during November/December 2015.
Despite a challenging operating environment, Segment Revenue recorded a growth of 4.8% driven by improvement in room occupancy and robust growth in the Food & Beverage segment.
Segment Results, however, reflect the impact of gestation costs of the recently commissioned ITC Grand Bharat, Gurgaon and higher depreciation charge due to revision in useful life of fixed assets in accordance with Schedule II of the Companies Act 2013.
In yet another international recognition in its debut year, the ITC Grand Bharat, Gurgaon has been ranked No. 4 among the 'Top 100 Hotels & Resorts of the World' and No.1 among the 'Top 25 Resorts in Asia' on the coveted Conde Nast Traveler U.S. Readers' Choice Awards. The luxury retreat is the only hotel from India to feature in the 'Top 50 of the world's best'. The hotel also received the Outlook Traveller Award for the 'Indian Hotel Debut of the year'. ITC Maurya was adjudged the 'Best Business Hotel' in India at the Lonely Planet Awards. ITC Hotels Business was recognised as the 'Most Respected Company' in the hospitality segment in a survey conducted by Business World. ITC Hotels was also adjudged the 'Best Hotel Group' at Travel + Leisure, India & South Asia Awards 2015.
Steady progress is being made on construction of new hotels at Kolkata, Hyderabad, Ahmedabad and Coimbatore. All requisite clearances for the Company's first overseas project at Colombo have been received from the Sri Lankan authorities by WelcomHotels Lanka (Private) Limited, a wholly-owned subsidiary of the Company. While excavation work is in its final stage at the Colombo project site, allied works including piling are progressing as per schedule.
The Company's Hotels Business continues to be rated amongst the fastest growing hospitality chains in India, with over 100 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. During the year, the Business renewed its licensing and franchising agreements with Starwood Hotels & Resorts for 'The Luxury Collection' and 'Sheraton' brands. Apart from the 12 existing properties under the ITC group, the association as aforestated will be extended to another 3 hotels that are under construction.
In line with the Company's commitment to the 'Triple Bottom Line', the Hotels Business strives continuously to reduce water and energy consumption and enhance the usage of renewable energy sources. Nearly 60% of the total energy requirements of the Business are presently met through renewable energy sources. During the year, the Business extended several 'Responsible Luxury' themed culinary initiatives and promotions under the 'Kitchens of India' banner. These interventions stand testimony to the 'Responsible Luxury' positioning of the Company's Hotels Business and reinforce ITC Hotels' position as the 'greenest luxury hotel chain' in the world.
Please refer to the Hotels section in the Report of the Directors & Management Discussion and Analysis for the financial year ended 31st March 2015 and Media Releases on quarterly results for further details.
Q23. Please provide an update on the Company's Agri Business.
Answer: The spike in the growth rate of the Agri-Segment during the quarter is mainly driven by higher wheat volume.
As per latest estimates, Leaf tobacco exports from India dropped to a four-year low of 207 million kgs. during the year. Decline in cigarette consumption & build-up of uncommitted stocks both globally and in India, coupled with steeper currency depreciation in competing origins weighed on leaf tobacco exports. Despite the challenging business environment, the Company sustained its pre-eminent position as the leading exporter of unmanufactured tobacco from India through focused strategies aimed at strengthening trade with existing customers and robust new business development.
During the year, the quality of wheat crop in India was adversely impacted primarily due to unseasonal rains. The Business leveraged its wide geographical sourcing network and customised infrastructure to secure supplies of critical grades with benchmark quality while scaling up operations significantly towards meeting the growing requirements for Aashirvaad atta. The Business also delivered substantial savings to the system through efficient logistics management and other cost-optimisation initiatives. However, during the year, lack of export trading opportunities in wheat, soya and coffee due to higher crop output and steeper currency depreciation in competing origins impacted revenue growth.
The Business continues to provide strategic sourcing support to the Company's Cigarette business and leverage its deep rural linkages to source identity-preserved specific grades of superior quality wheat and high quality chip stock potatoes for the Branded Packaged Foods Businesses. The Business is collaborating with research organisations such as Indian Agricultural Research Institute, Directorate of Wheat Research, Punjab Agricultural University and Agarkhar Research Institute towards scaling up wheat sourcing from areas that are in close proximity of atta manufacturing plants. As part of its wheat crop development program, the Business has introduced location-specific new and improved seed varieties along with appropriate package of practices across many States and continues to focus on augmenting capabilities in proprietary crop intelligence, scaling up the sourcing & delivery network and developing blends based on consumer requirements. The Business also leveraged its extensive sourcing network and associated infrastructure in key growing areas coupled with well-entrenched farmer linkages to source high quality chip stock potato for the Company's Bingo! Yumitos brand and fruit pulp for the Company's 'B Natural' brand.
Please refer to the Agri Business section in the Report of the Directors & Management Discussion and Analysis for the financial year ended 31st March 2016 and Media Releases on quarterly results for further details.
Q24. Please provide an update on the Company's Paperboards, Paper and Packaging Segment.
Answer: Paperboards, Paper and Packaging segment was impacted by the muted demand environment prevailing in the FMCG and Cigarette industry. Additionally, zero duty on imports under the Free Trade Agreement (FTA) with ASEAN countries, coupled with cheaper imports from China continued to adversely impact the domestic Paper and Paperboard industry. Consequently, Segment Revenue grew by 3.0% and Segment Profits grew by 6.5% respectively against the backdrop of a challenging business context as aforestated.
Despite heightened competitive intensity, the Company sustained its leadership position in the VAP segment during the year. This was achieved through effective key account management, focus on product & process innovation, enhanced service delivery levels leveraging strategically located 'quick service centres' and improved manufacturing efficiencies. In line with its 'Green India' approach, the Business sustained its leadership position in the sale of eco-labelled products, volumes of which doubled to more than 59000 MT during the year.
The Business continues to make structural interventions in the areas of strategic cost management and import substitution. Key areas in this context include investments in in-house pulp manufacturing capability, use of wind energy, developing alternative sources of supply for key inputs on an ongoing basis. In line with this approach, the Business made good progress during the year towards setting up a Bleached Chemical Thermo Mechanical Pulp (BCTMP) mill at the Bhadrachalam unit which will further reduce dependence on imports and reduce cost. The Business is also in the process of commissioning an energy efficient power plant at the Bhadrachalam unit that will reduce coal consumption and consequently, enhance the Company's position as a carbon positive enterprise.
The Company is confident of sustaining its leadership status in the Indian Paperboard and Paper industry leveraging multiple sources of competitive advantage comprising access to high-quality fibre from the economic vicinity of the Bhadrachalam unit, in-house pulp mill and state-of-the-art manufacturing facilities, forward linkage with the Education and Stationery Products Business and world-class product quality.
The Packaging and Printing Business recorded good growth in revenue in the domestic external market and exports, driven by increased offtake by existing customers and new business development. The Company's world-class facility at Haridwar is operating at benchmark standards and has strengthened the Business' ability to service demand in the northern markets more effectively. During the year, the Business stabilised the recently commissioned in-house cylinder manufacturing plant at the Haridwar unit and blown film manufacturing capability at the Tiruvottiyur unit. These investments have augmented the capabilities of the Business and are facilitating speedier fulfilment of customer orders thereby enhancing its competitive position.
The Packaging and Printing Business has established itself as a one-stop shop offering superior packaging solutions. With world-class technology across a diverse range of packaging platforms, best-in-class quality management systems and a distributed manufacturing footprint, the Business is well positioned to rapidly grow its external business while continuing to service the requirements of the Company's FMCG Businesses.
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 2016 and Media Releases on quarterly results for further details.
Q25. Please provide details of the Company's Capital expenditure by Business.
Answer: The Company's Capex during the last two financial years is tabulated below:
Q26. Please provide an overview of the capex plan of the Company.
Answer: The Company's capex plans are directed primarily towards capacity gearing, productivity enhancement, ensuring the highest standards in quality and environment, health & safety, and R&D.
One of the key elements of the capex plan going forward is to invest in setting up state-of-the-art owned integrated consumer goods manufacturing and logistics facilities across regions in line with long-term demand forecasts. Currently, over 20 projects are underway and in various stages of development - from land acquisition/site development to construction of buildings and other infrastructure.
In the Hotels Business, the Company is progressing the construction of new hotels in Kolkata, Hyderabad, Ahmedabad and Coimbatore. Besides, WelcomHotels Lanka Private Ltd. - a wholly-owned subsidiary of the Company - is developing a mixed-use project in Colombo, Sri Lanka.
The major items of capital expenditure in the Paperboards, Paper and Packaging segment going forward comprise paperboards & specialty paper capacity augmentation/machine rebuild at the Bhadrachalam and Tribeni units, investments in setting up a state-of-the-art Bleached Chemical Thermo-Mechanical pulp line at the Bhadrachalam unit, capacity augmentation in Cartons and Flexibles packaging at the Tiruvottiyur unit.
Overall, the Company estimates capex of approx. Rs. 20000 crores over the next 5 years (excluding investments for inorganic growth and acquisition of intellectual property/trademarks etc.). However, this would depend on several factors such as a pick-up in economic activity and improvement in demand conditions, timely acquisition of land at appropriate locations, obtaining approvals from the concerned authorities in a timely manner etc.
Q27. 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.
Q28. Why has the Segment Capital Employed increased by Rs. 963 crores from Rs. 21492 crores as at 31st March 2015 to Rs. 22455 crores as at 31st March 2016?
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. Segment Working capital has increased as compared to last year primarily due to increase in inventory.
Q29. What are the dividend payout trends in recent years? What is the Dividend policy of the Company?
Answer: Dividend paid out by the Company for the last 5 years is given below:
The Company does not have a stated Dividend policy. Dividend payouts are decided by the Board on an annual basis.
Q30. Please explain the Company's 'Triple Bottom Line' philosophy.
Answer: The Company's vision to sub-serve 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 value creation for the nation 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 effectively leveraged to create significant societal value through a spirit of innovation and enterprise.
The Company's models of sustainable development and value chains designed to promote livelihoods have supported the creation of around 6 million sustainable livelihoods, largely among the marginalised sections of society. The Company has sustained its position of being the only Company in the world of comparable dimensions to have achieved the global environmental distinction of being carbon positive (for 11 consecutive years), water positive (for 14 years in a row) and solid waste recycling positive (for 9 years in succession).
The Company's renewable energy portfolio ensures that over 47% of its total energy requirements are met from renewable energy sources - a remarkable achievement given the large manufacturing base of the Company. Further, premium luxury hotels, several office complexes and factories of the Company are LEED® (Leadership in Energy & Environmental Design) certified at the highest level by the US Green Building Council/Indian Green Building Council and the Bureau of Energy Efficiency (BEE) under its star rating scheme.
The Company's 12th Sustainability Report, published during the year detailed the progress made across all dimensions of the 'Triple Bottom Line' for the year 2014-15. The Company's Sustainability Report in conformance with the new Global Reporting Initiative (GRI) G4 Guidelines was amongst the first in India under "In Accordance - Comprehensive" category with "Materiality Matters" confirmation from GRI and also the first in India that has been third party assured at the highest criteria of "reasonable assurance" as per International Standard on Assurance Engagements (ISAE) 3000. The 13th Sustainability Report, covering the sustainability performance of the Company for the year 2015-16, is being prepared in accordance with the GRI guidelines - G4 and will be available shortly.
In addition, the Business Responsibility Report (BRR) of the Company, as mandated by the Securities & Exchange Board of India (SEBI), which forms part of the Report and Accounts 2015, maps the sustainability performance of the Company against the reporting framework indicated by SEBI.
Q31. Please provide an update of the Company's Corporate Social Responsibility Programme.
Answer: The Company's Corporate Social Responsibility (CSR) 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 many of whom represent the poorest in rural India.
The footprint of the Company's CSR programme has spread to 166 districts across the country and can be viewed at a glance in the following chart:
