Diversification Strategy

The journey of ITC has been extraordinary transformation, from small subsidiary of a foreign
company with single product line to one of admired and valuable multi-business enterprise.
ITC is a diversified multi-business conglomerate and it has a market capitalisation of over
US $ 45 billion and a turnover of over US $ 8 billion. ITC currently focusses on five-business
groups FMCG (cigarette and non-cigarette), hotels, paper & packaging, agribusiness and
Information technology. ITC has a meaningful presence in all the three sectors -agriculture,
services and manufacturing Predominantly a tobacco company, ITC is slowly
gaining success in increasing earnings from non-cigarette segments. Currently 58% of net
revenue comes from non-cigarette segments.

ITC is board managed professional firm, committed to creating value for all stakeholders.
The company formulate its policy at the corporate level based on its business capabilities to
enable focus and to harness diversity. ITC embraced diversification anchored on its core
competency of business portfolio management skills. The hotels business leveraged ITC's
marketing acumen, deep consumer insights, and business leadership capabilities, while
paperboards was a vertical backward integration for its printing and packaging business
which had already developed sophisticated technology & skills platform.

The company has developed strategy to pursue multiple drivers of growth based on the
proven competency and strong synergy between its businesses and R&D activities. Its
ability to leverage the internal synergy which exist in across the diverse businesses provides
competitive advantage to its products and services. ITC is leading player in FMCG sector
and market leader in Paperboard and Packaging industry, a pioneer in empowering farmers
through its Agri business, countrys second largest hotel chain, and fast growing IT company
in mid tier segment.

ITC

AGRI- PAPERS & Information

FMCG HOTELS
BUSINESS PACKAGING Technology

CIGARETTES OTHER
During an era when enterprise strategy was being shaped by the then fashionable
concept of unrelated diversification, ITC was embracing diversification anchored on
its core competency of business portfolio management skills. The hotels business was
premised on leveraging ITC's deep consumer insights, marketing acumen,
engineering skills, and business leadership capabilities, while getting into
paperboards was a vertical backward integration for its printing and packaging
business which had already developed a sophisticated technology and skills platform.

Visionary leaders were driving force behind the transformational journey of ITC.
A stellar example of "national interest" driving ITC's early diversification is its entry into the
hotels and paperboards businesses in the mid-seventies.

Creating "national value" was as central to this vision as growing "shareholder value".

Though cigarettes continue to contribute more than 70% of total net revenues, the operating profit earned from
this business has sequentially dropped from 83% of the total profit in the quarter ended June 2010 to 77.5% in
the September quarter this fiscal. The cigarette business contributed 62% of revenues and 88% of the operating
profits. In the latest September quarter, the y-on-y growth in net sales stood at 16.3% with all the businesses
giving a handsome growth while the net profit grew by 23.5%. Logging a growth of 22%, the non-cigarette
FMCG business has been the fastest growing business revenuewise. This was closely followed by the agri-
business that grew by 21.5%.

Comparison of earnings across segments showed that paper & packaging business had achieved the highest
growth of 32% followed by the hotel business. Operating margins have also improved across all its businesses.
The hotel business, which had been dented due to recessionary pressures, is now on its path of steady
recovery. The only lossmaking business in ITCs portfolio continues to be the non-cigarette FMCG business. It
includes packaged foods, garments, stationary products and personal care products.

The earnings still remain negative because of the high costs involved in the business development, brand
building and gestation costs of other packaged foods and personal care products. However, the good news for
investors is that this fast-growing segment has been steadily reporting declining losses quarter after quarter.

Though ITC continues to invest and grow in its traditional business of cigarettes, it is well-equipped to beat the
intense competition in the non-cigarette consumer and agri space due to its large distribution network and the
vast experience in handling cigarette brands. Investors shall continue to benefit as the companys strategy of
derisking its portfolio is executed successfully.

ITC invested in all the complementary businesses associated with cigarettes in India. In 1954, it
entered the aluminium foils business. The company commenced the manufacture of cigarette
making machinery in 1960, entered the fibreboard containers business in 1963, and began to
manufacture cigarette filter rods in 1969.

The company responded by changing its name to I.T.C. Ltd in 1974, in order to symbolize the move
beyond tobacco. It also drew up plans to enter the core industry sectors where the Government
found it difficult to attract investment by big industrial undertakings. After careful deliberation, ITC
decided to diversify into Hotels, Paperboards and Marine Foods. While paperboards had linkages to
the cigarette business, hotels and marine foods were potential foreign exchange earners. Being
employment-intensive, the hotel business served the larger social needs of the country even as it
utilized the companys marketing expertise and consumer service skills in an industry environment
where the competition was nearly absent. However, the parent company held strong reservations
about ITCs ability to manage its diversification forays.

ITCs diversification agenda progressed under Mr. Saprus watch, even though the company ceded
some market share in its flagship cigarette business to nimble competitors. ITC Classic Finance was
set up in 1986 as a non-banking finance company. An Agri-Business Division was set up at Hyderabad
in 1988, with the mandate to produce hybrid seeds, market edible oil and export agricultural
products. In 1989, ITC acquired a 51% stake in Tribeni Tissues Limited. The company also opened
Bukhara restaurants in the United States

In November 1994, Mr. Chugh unveiled ITCs plans to diversify into core sectors such as power. This
did not fit into BATs global portfolio, and was thus vehemently opposed by the parent company.A
stormy Extraordinary General Meeting (EGM) held in March 1995 to seek the permission of the
shareholders for further business diversification ended up in chaos.

On the other hand, significant investments were made in the companys core businesses of
cigarettes, hotels and paper board. ITCs brand portfolio of cigarettes was rationalized to help the
company emerge as a much stronger market leader, and its cigarette manufacturing facilities were
significantly upgraded. The footprint of the hotels division was revitalized through a rebranding
exercise, and expanded through the development of new properties as well as the enhancement of
some existing ones. In the paperboards business, a state-of-the-art 100,000 tpa elemental
chlorinefree fiber line was set up. To capture operational and strategic synergies, the paper and hotel
divisions were folded back into ITCs integrated structure