Management Approach

ITC's commitment towards maintaining its high economic growth trajectory is encapsulated in its Vision statement, which is to 'Sustain ITC's position as one of India's most valuable corporations through world-class performance, creating growing value for the Indian economy and the Company's stakeholders'. ITC's Mission is 'to enhance the wealth generating capability of the enterprise in a globalising environment delivering superior and sustainable stakeholder value'.

The Company's strategy is to ensure that each of its businesses is world-class and internationally competitive in not only the global Indian market but also progressively in offshore global markets.

As a premier 'Indian' enterprise, and with a larger commitment to enhancing its Triple Bottom Line contribution, ITC has consciously crafted innovative strategies for ensuring the competitiveness of the entire value chain of which it is a part. This philosophy has shaped the Company's approach to business to embrace 'a commitment beyond the market'.

Goals and Performance

At the enterprise level, the Company's goals include -

• Sustaining ITC's position as one of India's most valuable corporations.
• Achieving leadership in each of the business segments within a reasonable time frame.
• Achieving a Return on Capital Employed (ROCE) in excess of the Company's cost of capital, at all times.

Please refer to the 'Report of the Directors and Management Discussion and Analysis' section of the Report and Accounts 2014 (available on www.itcportal.com) for a detailed discussion on the Company's market standing in each of the business segments, as well as the operating business environment, opportunities, key challenges, etc. pertaining to each of the Company's businesses.

Economic Performance

ITC continued to deliver strong financial performance with healthy growth in revenues and high quality earnings. This performance is particularly significant when viewed against the backdrop of the extremely challenging business context in which it was achieved, namely, a sluggish macro-economic environment which saw GDP growth remaining below 5% for the second year in succession. ITC's robust financial performance was achieved against the backdrop of high inflation and a marked deceleration in the rate of growth of Private Final Consumption Expenditure; steep increase in taxes/duties on Cigarettes for two years in a row; weak demand conditions in the FMCG industry; gestation costs relating to the new FMCG businesses; sharp escalation in input costs in the Paperboards, Paper & Packaging Business and a weak demand & pricing environment in the Hotels businesses.

Gross Revenue for the year grew by 11.7% to Rs. 46,713 Crores. Net Revenue at Rs. 32,883 Crores grew by 11.1% primarily driven by a 16.0% growth in the non-cigarette FMCG businesses, 14.7% growth in Paperboards, Paper & Packaging together with 10.6% growth in the Cigarettes Business. Profit Before Tax increased by 18.5% to Rs. 12,659 Crores while Net profits at Rs. 8,785 Crores registered a growth of 18.4%.

Earnings Per Share for the year stood at Rs. 11.09 (previous year Rs. 9.45), while Cash flows from Operations aggregated Rs. 10,760 Crores compared to Rs. 9,596 Crores in the previous year.

Continuing with its chosen strategy of creating multiple drivers of growth, the Company is presently the leading FMCG marketer in India, a trailblazer in 'green hoteliering' and the second largest Hotel chain in India, the clear market leader in the Indian Paperboard and Packaging industry and the country's foremost Agri business player.

ITC's wholly owned subsidiary, ITC Infotech India Limited, is one of India's fast growing Information Technology companies in the mid-tier segment.

ITC is one of India's most admired and valuable corporations with a market capitalisation of over Rs. 2,70,000 Crores and has consistently featured amongst the top 10 private sector companies in terms of market capitalisation and profits over the last eighteen years.

Additionally, during this period, the Company's Net Revenues and Profits after taxes recorded an impressive compound growth of 15.3% and 21.6% per annum respectively. Return on Capital Employed improved substantially from 28.4% to 45.8%. Total Shareholder Returns, measured in terms of increase in market capitalisation and dividends, grew at a compound annual growth rate of over 25.9%, placing the Company amongst the foremost in the country in terms of efficiency of servicing financial capital.

For the year ended 31st March, 2014, ITC declared a Dividend of Rs. 6.00 per share (previous year Rs. 5.25 per share).

Direct Economic Impact

* Detailed Financial Performance available at www.itcportal.com

Revenue And Profit Before Depreciation Interest and Tax (PBDIT)

Total Assets and Returns

Despite the extremely challenging business environment during the year under review, ITC continued to make significant investments across its business domains, even as it has been successful in progressively generating higher returns on the assets deployed. Therefore, while the Balance Sheet size of the Company has expanded at a compound rate of 14% over the previous five years to reach ` 39,229 Crores as at 31st March, 2014, returns on assets deployed have increased from about 26% to about 32% during the same period.

Market Capitalisation and Earnings Per Share

ITC is one of India's most admired and valuable corporations and has, over the last 18 years, consistently featured amongst the top 10 private sector companies in terms of market capitalisation & profits. The Company's shares are amongst the most influential stocks in the Indian equity market.

** EPS adjusted for impact of Corporate Actions to facilitate like to like comparison.

Analysis of Value Added

Contribution to the National Exchequer

The Company's contribution accounts for about 7.7% of the total excise revenue of the Government of India. In the area of income tax, the Company is the highest tax payer in eastern India and among the top tax payers nationally in the private sector.

Dividend Payout

For the current year, the Company has declared a dividend of ` 6.00 per share of Re.1/- each.

I

Locally Based Suppliers

The Company's suppliers, both local and international, constitute one of its important stakeholder groups. Supplier engagements are established on a conducive procurement culture supported by policies, processes and best practices to ensure that procurement activities are conducted in an open, transparent and non-discriminatory manner. Strong processes are in place to identify, develop and qualify vendors on the basis of supply assurance, innovation quotient, product quality and delivering value for money. Procurement activity is conducted through established formal competitive processes and documented discussions, recommendations and decisions.

All businesses of the Company operate modern facilities and utilise state-of-the-art technologies to ensure benchmarked quality and value. Accordingly, the Company sources specialised production machinery from reputed international and Indian manufacturers – across large, medium and small scale sectors. Utility machinery such as boilers, generator sets, air-conditioning and refrigeration machinery and electrical & electronic systems are sourced largely from Indian or India-based suppliers. Competent Indian contractors carry out construction and renovation of new manufacturing facilities, hotels, warehouses & offices. More than 87% of raw materials and stores & spares have been locally procured during the reporting year.

The Company actively encourages competency development among local vendors and its vendor base includes numerous medium and small scale enterprises that are proximate to its manufacturing locations. Where appropriate, vendors are provided technical support and managerial inputs to enable them to move in tandem with the Company's business plans. The Company also supports several vocational training initiatives in the vicinity of its operations. These have been effective in empowering youth with requisite skills and increased opportunities for entrepreneurial development. In addition, the Company has continued to set up sourcing centres in rural India for several of its product categories, both directly and in collaboration with various State agencies and NGOs to assist in the creation of sustainable livelihoods.

Financial Assistance from Government

The states of Andhra Pradesh and Tamil Nadu offer incentives by way of deferment of Sales Tax, which is repayable over a period ranging from 10 to 14 years. The amount of such assistance in the form of Deferred Sales Tax due to be repaid by the Paperboards and Specialty Papers Division (PSPD) is given below:

Engaging Talent, Local Hiring and Senior Management

ITC's human resource management systems and processes are relentlessly customer-focused, competition-differentiated, performance-driven and future-capable. The Company's Human Resource Development strategy seeks to fulfil this mandate through careful selection and rigorous implementation of a wide range of programmes and interventions.

ITC believes that its competitive capability to build future-ready businesses and create enduring value for stakeholders is enriched by a dedicated and high-quality human resource pool. Therefore, nurturing quality talent and caring for the well-being of employees are an integral part of ITC's work culture, which focuses on creating a conducive work environment that helps deliver winning performance.

The Company's policy on "Diversity and Equal Opportunity" is premised on its fundamental belief that diversity at the workplace creates an environment favourable to engagement, alignment, innovation and high performance. The Policy provides for diversity and equal opportunities to all employees across the Company, based on merit and ability. The policy also ensures a work environment that is free from any form of discrimination amongst its employees in compensation, training and employee benefits, based on caste, religion, disability, gender, sexual orientation, race, colour, ancestry, marital status or affiliation with a political, religious or union organisation or majority/minority group.

The Company's talent management strategy is focused on building a future-ready talent bank in the organisation to ensure a pipeline of high-quality managerial talent, specialists and business leaders. ITC's talent engagement approach focuses on attracting and nurturing quality talent, supported by significant investments in learning and development.

In 2013-14, the minimum wage paid to entry level workers of the Company was equal to or more than the statutory minimum wage applicable at all locations of ITC's operations. Employees' Retirement Benefit Schemes include employee pension, provident fund and gratuity, which are administered through duly constituted and approved independent trusts. Provident Fund and Family Pension contributions in respect of unionised staff, as required by applicable statutes, are deposited with the Government in a timely manner.

Pension plans and other applicable employee benefits obligations are determined and funded in accordance with independent actuarial valuation. Expected rate of return on plan assets is based on the current portfolio of assets, investment strategy and market scenario.

ITC has diversified plan assets in order to protect capital and optimise returns within acceptable risk parameters. In addition, funds are consistently sustained to meet requisite superannuation commitments.

Corporate Social Responsibility

ITC's overarching aspiration to create significant and sustainable societal value is inspired by a vision to subserve a larger national purpose and abide by the strong value of trusteeship. This larger commitment is manifest in ITC's CSR initiatives that include the most disadvantaged sections of society, especially in rural India, through economic empowerment based on grassroots capacity building. In the social sector, the two most important stakeholders for the Company are:

• Rural communities with whom ITC's agri-businesses have forged a long and enduring partnership through their crop development activities and the ITC e-Choupal, the world's largest unique rural digital infrastructure network that enables dissemination of valuable information relating to weather conditions, agricultural best practices, ruling market prices etc.; these households operate in rain-fed conditions in some of the most moisture-stressed regions of the country.
• Communities residing in close proximity of the Company's production units, whose full potential cannot be realised due to poor social infrastructure in the areas of education and health.

In pursuance of the Company's policy on Corporate Social Responsibility (ITC's CSR Policy detailed in the Policies & Guidelines section of this Report and in the section on Report of the Directors & Management Discussion and Analysis in the Annual Report and Accounts 2014), the thrust of the Company's CSR strategy and programmes has been focused on (a) Diversification of farming systems of rural communities by broad-basing the farm and off-farm based livelihoods portfolio of the poor, through an integrated approach that includes the development of wastelands, watersheds, agriculture and animal husbandry, and (b) Economic empowerment of women and creation of social capital in the catchment habitations of manufacturing units to enable these communities to acquire relevant and contemporary skills.

Various CSR activities in which the Company has been engaged during the current year are listed on the next page.

* Details are available in the Social Investments - Mission Sunehra Kal section of this Report

The Company's CSR spends over the last three years is as follows: