Notes From ITC Annual Report 2011-12

Disclaimer and some blabber: The entire content below is copy-paste from the AR. You may rightfully think, what kind of shameless plagiarism is this. But as you can see, although the content here is not original but the effort is spent in collating a 202 page AR document into 1-2 page of content which gives me an eagle eye view of the company as an investor. To me this effort is very similar to note taking exercise i did in school and colleges. Invariably i did better in subject's in which i was diligent in taking notes. So, this is just an application of the same mental model. As you can guess i hold this company it in my portfolio and this annual exercise is to measure how the company (in which am a part owner) is doing. Over the next few month's i intend to do this exercise for around 50 different companies (of which few i hold and few for evaluation)

Management Discussion and Analysis
1. As per the RBI’s Monetary Policy Statement 2012/13 released in April 2012, the Indian economy is projected to grow by 7.3% in 2012/13 assuming normal monsoons. Significant downside risks to this baseline forecast include the outlook for global commodity prices - especially of crude oil, slippages on the fiscal front which could stoke inflation and lead to a crowding out of private investment and the unsustainable current account deficit levels.


Current year financials at a glance 
2.
- Gross Revenue for the year grew by 14.2% to 34871.86 crores. 
- Net Revenue at 24798.43 crores grew by 17.2% primarily driven by a 23.6% growth in the non-cigarette FMCG businesses, 20.0% growth in Agri business and 16.6% growth in the Cigarettes segment. 
- Profit before tax increased by 22.4% to 8897.53 crores while 
- Net Profits at 6162.37 crores registered a growth of 23.6%.
- Earnings Per Share for the year stands at 7.93 (previous year 6.49). 
- Cash flows from Operations aggregated 8334 crores compared to 7528 crores in the previous year.

Financial History (Last 16 years)
3.
 - Over the last sixteen years, your Company’s Gross Revenues and Net Profits
recorded an impressive compounded growth of 12.7% and 21.8% per annum respectively.


 - During this period, Return on Capital Employed improved substantially from 28.4% to 45.4% while Total Shareholder Returns, measured in terms of increase in market capitalisation and dividends, grew at a compounded annual growth rate of 25.7% during this period.


Where does profit go ?
5. For Dividends (4.5/- per share) - Total cash outflow in this regard will be 4089.04 crores (66% payout ratio)


6. Your Board further recommends a transfer to General Reserve of  650.00 crores (previous year 498.76 crores). Consequently, your Board recommends leaving a surplus in Statement of Profit and Loss of 1972.59 crores (previous year 548.67 crores).


7.During the financial year 2011/12, your Company and its subsidiaries earned 3072 crores in foreign exchange. (roughly 9%)


Business Environment
8. 
- FMCG – Cigarettes - The steep increase in the tax rates on cigarettes, both at the Central and at the State level, has led to the undesirable consequence of shifting consumption to lightly taxed or tax evaded tobacco products like Bidi, Khaini, Chewing Tobacco and Gutkha which are the most dominant forms of tobacco consumption in India and constitute as much as 85% of total usage.  

- A plethora of 29 different tax rates are currently applicable on cigarettes across States in India which has forced manufacturers 

to adopt State specific pricing. 

- 

The findings reported in the Global Adult Tobacco Survey (GATS) India, 2009-10 study, conducted under the aegis of the Ministry of Health & Family Welfare, shows that whilst the consumer base of tobacco in India stands at 34.6% of all adults, the cigarette share is only 5.7%.
- The domestic legal cigarette industry is faced with the growing menace of illegal cigarettes. Independent research indicates that, in India, whilst there is a fall in volumes of ‘duty paid’ cigarettes by 4.4% during the period 2005 to 2010, the ‘duty-not-paid’ volumes grew by 49.3% during the same period. India has now been recognised as one of the leading destinations for illegal cigarettes.
- Attractive tax arbitrage opportunities, as a result of high level of taxes on the legal domestic cigarette industry in India, incentivises illegal flow of cigarettes into the country.
 - FMCG - Others
- The Indian FMCG industry is estimated to be over 160000 crores in size and accounts for nearly 2.2% of

the GDP of the country. The industry has tripled in size over the last 10 years and has grown at  approximately 17% CAGR in the last 5 years
- These growth drivers are expected to continue to favourably impact the industry which is estimated to reach ` 400000 crores by 2020 (Source: CII, FMCG Roadmap to 2020). According to a recent study by the consultancy firm Boston Consultancy Group, the Indian consumer market is poised to grow at a compounded annual growth rate of 15% between 2010 and 2020, faster than most other emerging markets.
- Given these positive fundamentals, your Company has been rapidly scaling up its new FMCG businesses
comprising Branded Packaged Foods, Personal Care Products, Education and Stationery Products, Lifestyle Retailing, Incense Sticks (Agarbattis) and Safety Matches with Segment Revenues growing at an impressive compound annual growth rate of nearly 40% since 2005-06. 2012 Sales 5545 crores.
- Segment Results reflect the gestation costs of these businesses largely comprising costs associated with brand building, product development, R&D and infrastructure creation. The year under review saw a 24% growth in Segment Revenues and a significant improvement in Segment Results.
Branded Packaged Foods
- During the year, the business witnessed inflationary pressures on input costs. Supply side constraints coupled with growing demand caused prices of edible oil, packaging material and industrial fuel to remain at inflated levels. These cost pressures were mitigated through a combination of improvements in product and process efficiencies, smart sourcing and supply
chain initiatives.
- Your Company ventured into the Instant Noodles category towards the end of 2010. The product has been well received by consumers and is already the second largest Instant Noodle brand in the country.
- The accelerated growth of the Branded Packaged Foods business will be sustained in the years ahead and be driven by focus on product quality, innovative product development, multi-point contact with consumers and high quality of service to all segments of trade.
Education & Stationery Products
- Your Company is the leading and fastest growing player in the Indian stationery market. The Classmate range of products is sourced from small scale manufacturers, who have over the years
continuously improved their delivery and quality capabilities. A majority of them, with your Company’s assistance, are ISO 9001:2008 certified. Paper and recycled board are sourced from your Company’s mills.
9. EMPLOYEE STOCK OPTION SCHEME

8,02,80,020 Ordinary Shares of 1/- each, were issued and allotted during the year upon exercise

of 80,28,002 Options. the Issued and Subscribed Share Capital of your Company as at 31st March, 2012 stands increased to 781,84,24,300/- divided into 781,84,24,300 Ordinary Shares of  1/- each.
(Increase of 1% over last year)
10. The total number of employees as on 31st March, 2012 stood at 25,165.