ITC's Q2 net income rose 21% year-over-year to 15.1B rupees as sales of cigarettes, other consumer products rose; sales jumped 18% to 59.7B rupees
October 24, 2011
– ITC posted yet another impressive performance with healthy topline growth and high quality earnings during the quarter. Net Turnover at ` 5974 crores grew by 17.5% primarily driven by Branded Packaged Foods, Education & Stationery Products, Lifestyle Retailing, Agri and Cigarettes businesses. Pre-tax profits grew by 21.1% to ` 2215 crores while post-tax profits at ` 1514 crores registered a growth of 21.5%. Earnings Per Share for the quarter stood at ` 1.95.
FMCG - Branded Packaged Foods
The Branded Packaged Foods business continued to expand rapidly with sales and profitability improving across categories during the quarter. The business achieved significant growth in revenues aided by new launches and product extensions to target markets. Sales of value-added and premium products grew at a faster pace leading to portfolio premiumisation and an enriched sales mix. Improvement in profitability was further aided by smart commodity sourcing, better market servicing and strategic cost management initiatives.
During the quarter, the 'Sunfeast' Biscuits category continued to grow significantly, especially in the value-added and premium end. The 'Sunfeast' range was further strengthened with the launch of 'Dream Cream' split cream variants of 'Choco-Vanilla' and 'Strawberry-Vanilla' flavours. Coupled with the extension of its premium 'Dark Fantasy' range of cream and 'Dark Fantasy Choco Fills' biscuits to more markets and new variant launches, the 'Sunfeast' range witnessed enrichment of its portfolio.
In the Staples category, 'Aashirvaad' atta consolidated its leadership position with revenues being driven by improved realisations and higher volumes. In the premium end, Aashirvaad 'Multi-grain' and 'Select' brands continued to grow rapidly aided by increasing consumer franchise.
In the Savoury Snacks segment, the 'Bingo!' range of potato chips and finger snacks achieved robust sales growth during the quarter. This growth was driven by further strengthening consumer connect, aided by clutter-breaking advertising, 360 degree brand inputs and impactful consumer offers. During the quarter, the business launched 'Bingo! Tangles' in an innovative product format under the finger snacks range. The initial response for 'Bingo! Tangles' has been encouraging.
In the Noodles segment, 'Sunfeast Yippee!' continued to gain consumer franchise and is being further extended to target markets.
In the Confectionery segment, 'Candyman' sustained its market leadership position in its operating segment. During the quarter, the segment portfolio was further fortified with the launch of 'Lychee' variant of 'Toffichoo' and 'mint-O Strong'.
The business continues to invest in manufacturing and distribution infrastructure to support larger scale in view of the growing demand for its products and maximise the benefits of distributed manufacture for servicing proximal markets.
Personal Care Products
The Personal Care Products business' product offerings under the 'Essenza Di Wills', 'Fiama Di Wills', 'Vivel' and 'Superia' brands continued to gain consumer franchise with revenues growing significantly during the quarter. The business continues to launch products that deliver various consumer benefits in the soaps, shampoos and skin care categories.
The business extended the availability of 'Vivel Active Fair' fairness cream to target markets. In a relatively short period of time, the brand has garnered a healthy market share in launch markets. 'Fiama Di Wills' with its new 'Aqua Pulse Bath Care' line of shower gel and bathing bar and 'Vivel' with its new product variants - 'Vivel Luxury Crème', 'Vivel Healthy Glow', 'Vivel Sandal Glow' - continued to be well received by the consumer. These new products are being rolled out to target markets.
The business' foray into the domestic Talc market with the launch of 'Fiama Di Wills Face and Body Talc' in select markets has been well received.
The business continues to make investments in product innovation, quality and R&D aimed at delivering specific consumer benefits. It is also continuously enhancing the quality of engagement with consumers through efficient deployment of media, direct contact and promotional activities across conventional and new age consumer connect avenues.
Education & Stationery Products
The Education & Stationery Products business maintained its impressive revenue growth trajectory during the quarter. The business continues to consolidate its market leadership position in the notebooks segment under the brand 'Classmate' and is leveraging the 'Classmate' and 'Paperkraft' brands to enhance its portfolio of scholastic products comprising pens, pencils and geometry boxes.
The paper used in Classmate notebooks leverages the Company's world-class fibre line at Bhadrachalam which is India's first ozone treated elemental chlorine free facility. Classmate notebooks continue to feature different aspects of sustainability as core themes, such as 'Global Warming', 'Save the Environment' and 'Save the Tiger', to name a few which have distinctly enhanced Classmate's brand equity.
Working in tandem with the Company's Paperboards & Specialty Papers Division (PSPD), the business has positioned 'Paperkraft' as the finest green paper for business applications viz. copy-scan-print-fax. Paperkraft's green credentials are supported, among other factors, by the Company's membership of the prestigious Global Forest & Trade Network, an international initiative of the WWF (World Wide Fund for Nature).
The Lifestyle Retailing business posted a strong growth in revenues during the quarter through an enhanced product range, retail expansion and robust performance in the large format and multi-brand outlet channel. The retail footprint of 'Wills Lifestyle' stood expanded at 77 exclusive stores in 40 cities and more than 200 'shop-in-shops' in leading departmental stores. Continued association with the country's most prestigious lifestyle event 'Wills Lifestyle India Fashion Week', helped reinforce the premium imagery of the 'Wills Lifestyle' brand.
'John Players' continues to strengthen its position as a leading brand in the popular 'Youth' segment. The continued celebrity association with the popular film star, Ranbir Kapoor, reinforced the core value proposition of the brand and further enhanced brand desirability.
The Company continues to maintain its leadership position in the industry by delivering superior value to consumers through world-class products. The Company's value addition led strategy along with innovation and consumer focus has enabled the business to deliver superior value through its brand portfolio of well crafted blends, contemporary packaging styles and state-of-the-art manufacturing technology. Several initiatives across the brand portfolio in terms of pack modernisation, improvement in smoke profile and introduction of new brands and variants have enabled the business to further strengthen its market standing. On the manufacturing front, investments continue to be made towards enhancement of quality, productivity and variety.
Despite cigarettes constituting only 15% of overall tobacco consumption, the discriminatory and asymmetric taxation and regulatory milieu for cigarettes in India is a major cause of concern. Inelasticity of tobacco consumption coupled with lower incidence of taxation on other forms of tobacco products has adversely impacted cigarette consumption while that of other forms of tobacco continues to grow unabated. The resultant disproportionate taxation coupled with a growing incidence of smuggling and illegal manufacture, continue to be the biggest challenge for the Indian cigarette industry.
The problem of discriminatory taxation on cigarettes was further exacerbated during the quarter with certain State Governments increasing the rate of Value-Added Tax (VAT). These rate increases by the States are completely against the basic tenets of VAT as enshrined in the White Paper on VAT issued by the Empowered Committee of State Finance Ministers, wherein it is unequivocally stated - “…the multiplicity of rates in the existing structure will be done away with under the VAT system… Under 4% VAT rate category, there will be the largest number of goods (about 270), common for all States, The remaining commodities, common for all States, will fall under the general VAT rate of 12.5 %.”
The Company has, repeatedly drawn the attention of policy-makers to the fact that sub-optimal taxation practices of States - like differential VAT rates - may well derail the implementation of Goods and Services Tax (GST). In addition, cigarettes being highly taxed products are vulnerable to large scale smuggling. The differential rate of VAT on cigarettes across the States only encourages unscrupulous tax arbitrage.
The high rates of Central Excise and VAT has helped fuel the menace of illegal trade in cigarettes. It is estimated that the burgeoning illegal trade in cigarettes costs the Exchequer more than ` 3,000 crores per annum in lost revenues apart from offering products of dubious and inferior quality to consumers. As per recent independent international market studies, illegal trade constitutes more than 16% of the total industry size making India 6th largest globally in illicit cigarette trade and one of the highest growing in the world - 58% over the period 2004 - 2009. In line with international trends, contraband trade in cigarettes results in funds flowing into the coffers of criminal syndicates with consequential detrimental impact on civil society by way of heightened law and order problems.
The Company continues to engage with the authorities on this issue, highlighting the fact that punitive rates of tax and lack of tax harmonisation across States fuels the menace of illicit cigarette trade with consequential adverse impact on the legitimate industry. While there have been some reports of seizure of such illegal stocks by Enforcement Agencies, illicit cigarette units continue to mushroom and grow. Illegal cigarette trade has serious concerns for the country and needs to be reined in quickly through appropriate policy and enforcement attention. The effective and sustainable solution lies in eliminating the tax arbitrage that encourages these activities by ensuring harmonious and moderate tax rates on cigarettes.
Despite the challenging market conditions, the Company remains confident of leveraging its internationally benchmarked product quality, the resilience of its brands and the superiority of its competitive strategies to consolidate its leadership position in the industry.
During the quarter, the hospitality industry was impacted by the economic turmoil in Europe & US - the two key source markets - and the slowdown of the Indian economy. With a lower level of demand on one hand and significant additions to supply in key markets on the other, the hospitality industry in India is witnessing a challenging period. Despite this, the hotels business posted a marginal growth in topline at ` 234 crores while profits grew at 9% during the quarter.
The Company's commitment to 'Responsible Luxury' stands reinforced with all its premium luxury hotels being certified at the highest LEED platinum rating. This milestone has uniquely positioned the Company's Hotels business as the first hotel chain in the world to achieve such a distinction.
The business continues to sustain its investment-led growth strategy in line with the positive long-term outlook for the Indian hotel industry. Construction activity of the new super luxury properties at Chennai, Kolkata and at Classic Golf Resort near Gurgaon are progressing satisfactorily. In addition, several new projects including joint ventures and management contracts are on the anvil to rapidly scale up the business.
Paperboards, Specialty Papers & Packaging
The business witnessed healthy growth in Segment Revenues during the quarter with Segment Results growing at a faster pace at 18% driven by a combination of product mix enrichment, higher realizations and enhanced value capture through fully integrated operations.
The Company, continued to leverage its integrated business model viz., access to high-quality fibre, in-house pulp mill and state-of-the-art manufacturing facilities and a robust forward linkage with the Education & Stationery Products business to further consolidate its leadership position in the Indian Paper and Paperboards industry. The new paperboard line at Bhadrachalam with a capacity of one lakh ton per annum is progressing as per schedule.
The Packaging and Printing business continues to provide strategic sourcing support to the Cigarette, Foods and Personal Care businesses. Sales to external customers also registered robust growth. The business also leveraged its state-of-the-art investments in flexibles and carton lines to deliver value-added packaging to key customers in the consumer electronics and FMCG industries. Significant Investments in new technologies and processes are underway to cater to the growing demand in this segment.
The Agri usiness posted a strong performance during the quarter with Segment Revenues and Segment Profits growing by 13% and 15% respectively. This impressive performance was primarily driven by higher trading volumes and improved realisations in soya, wheat and coffee.
The business continues to provide strategic sourcing support to the Company's Cigarette and Branded Packaged Foods business by ensuring high quality supplies. The new green leaf threshing facility in Karnataka is progressing as per schedule.
Contribution to Sustainable Development
The Company, foreseeing the unprecedented threat to sustainable development arising out of poverty, environmental degradation and climate change, has vigorously pursued a conscious strategy to align its businesses to serve a larger societal purpose. Unique business models have been crafted to synergistically deliver economic, environmental and social value. ITC today, is the only company in the world of comparable size to be 'carbon positive', 'water positive' and 'solid waste recycling positive' even as it has created sustainable livelihood opportunities for over 5 million people.
The Company's Social Investments Programme aims to address these challenges through a range of activities with the overarching objective of creating sustainable sources of livelihood for the stakeholders. The footprint of the Company's Social Investments Programme has spread to 60 districts in the States of Andhra Pradesh, Bihar, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Rajasthan, Tamil Nadu, Haryana, Uttar Pradesh and West Bengal.
The advances made towards contributing to India's sustainable development goals have been possible, in large measure, due to the Company's partnerships with some globally renowned NGOs. These partnerships, which bring together the best-in-class management practices of the Company and the development experience and mobilisation skills of NGOs, will continue to provide innovative grassroot solutions to some of India's most challenging problems of development in the years to come.
The Company pro-actively pursues a low-carbon growth strategy that addresses climate change mitigation and adaptation through several innovative and pioneering initiatives. This integrated strategy encompasses large scale afforestation initiatives for carbon sequestration, increasing use of renewable energy in its operations, continuous efforts towards energy conservation and efficiency, establishment of inspirational green buildings, extensive watershed development programmes and promotion of sustainable agricultural practices amongst farming communities. This is manifest in the Company's Social and Farm Forestry programme that covers over 1,19,000 hectares, its Integrated Watershed Development programmes that irrigate nearly 74,000 hectares of water-stressed land.
With the objective of improving the quality of life of people living in proximity of the Company's manufacturing units, the Economic Empowerment Programme for Women benefited 15,763 women.
The Company's 'WOW - Wealth Out of Waste' programme has been instrumental in creating awareness amongst the public on the benefits of the 'Reduce-Reuse-Recycle' approach. The waste recycling initiatives implemented by the programme have contributed significantly to the protection of the environment, as well as in improving civic amenities, public health and hygiene. The Company benefits from the generation of sustainable raw material sources, while conserving precious environmental resources and providing considerable livelihood opportunities.