Microeconomics Final Project Report

Impact of COVID-19 Pandemic on ITC

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Takeaways
● Significant reductions in income, a rise in unemployment, and disruptions in the
transportation, operations, and manufacturing industries result in upsetting the economic
ecosystem of the company. The consumer demand for the primary necessity segment
grew exponentially while the luxury segment went down.
● ITC’s revenue from operations saw a sharp decline pertaining to the nationwide
lockdown from March 2020 - the company faced a sharp decrease in demand in its
hospitality sector due to Covid-19 restrictions and decreased consumer purchasing
power.
● The FMCG sector accelerated due to increased demand and consumption of health
and hygiene products like soaps and sanitizers and staples such as pulses, spices, flour
and convenience foods. The paperboard, paper and packaging sector also saw a
significant increase in demand due to the improvisation of online delivery services.

Introduction
Amidst the Covid-19 outbreak, the micro-economic environment was challenging as it was
marked by a deceleration in economic activity, accentuated by a sharp decline in
consumption, especially in rural areas. ITC’s situation was difficult since it was characterized by
- a slowdown in economic activities, exacerbated by a dramatic drop in consumption,
particularly in rural areas. Due to weak demand circumstances, tight market liquidity, and
delayed monsoons, the FMCG industry's growth slowed dramatically during the year after the
outbreak of COVID-19. The company faced challenges in its education and stationery products
businesses as it coincided with the peak season. Its fast-moving consumer goods business
benefited from increased consumption of health and hygiene products like soaps and sanitizers
and staples such as pulses, spices, flour and convenience foods. ITC operates across various
sectors from FMCG to hospitality - Covid-19 has affected each industry differently - adverse for
some, favorable for the others. ITC will help us understand the criticality of the pandemic
effectively.

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Background
ITC Limited is a diversified conglomerate established in 1910, with businesses spread across
Fast Moving Consumer Goods comprising Foods, Personal Care, Cigarettes and Cigars, Branded
Apparel, Education & Stationery Products, Incense Sticks and Safety Matches; Hotels,
Agri-Business and Information Technology, Paperboards and Packaging. The Company is known
as one of India's most valuable business corporations with a Gross sales value of ₹ 74,979 crores
and a Net Profit of ₹ 13,032 crores (as of 31.03.2021).
ITC's wholly-owned subsidiary, ITC Infotech, is a specialized global digital solutions provider.
While ITC faced severe repercussions Rising to the occasion, ITC also crafted innovative
solutions to ensure business continuity and addressed consumers’ emerging needs with
first-of-its-kind speedy innovations in products and processes. Covid-19 has also created an
opportunity for ITC to reimagine the future and make an ever-growing contribution to the nation
and its people.

We are majorly focusing on analyzing -

● The decline of ITC’s cigarette and hotel businesses.
● Growth of ITC’s FMCG sector due to increase in demand
● Increase in production of paperboard, paper & packaging

We will be minutely analyzing various microeconomics concepts such as demand and supply
curve for the two happenings of COVID-19 and cost and production analysis of the different
segments in the current and post-COVID market.

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ITC’s Businesses that build value for the Indian Economy

Business Contributions

FMCG - Others ● Branded Packaged Foods, Personal Care Products, Education and
Stationery Products, Incense Sticks (Agarbattis), and Safety
Matches are part of ITC's FMCG-Others category.
● The varied portfolio is built on a foundation of over 25
world-class, purpose-driven Indian companies focused on
creating, capturing, and preserving value in India.
● The company's FMCG products are distributed to over 150 million
Indian households.
● One of India's fastest-growing branded packaged food companies.
● Multi-channel Go-To-Market strategy; supply chain that is smart,
agile, and responsive.

FMCG - ● Clear Market Leader

Cigarettes
● A well-balanced brand portfolio, a broad and deep distribution
network, and world-class products and processes built on
innovation.
● Cutting-edge manufacturing facilities
● Leaf tobacco and Packaging & Paperboards businesses have
strong vertical integration.
● Globally, best-in-class profitability and returns.

Hotels ● The country's second-largest hotel chain, with four brands and 107
notable luxury locations.
● A pioneer in the field of "Responsible Luxury," with all Premium
Luxury hotels earning LEED Platinum certification.
● Its classic cuisine brands are well-known around the world.
● ITC Windsor, Bengaluru - The first hotel in the world to be
awarded the renowned LEED Zero Carbon Certification by the

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 United States Green Building Council.
● Asset-based growth strategy; solid management contract pipeline

Agri-Business ● India's leading agribusiness company.

● Operations in 22 states for sourcing and supply covering more
than 20 agribusiness value chains clusters.
● After FCI (Food Corporation of India), it is the largest wheat
procurer.
● Agri commodity with high quality and low-cost sourcing.
● Supporting institutions and empowering people Institutions at the
grass-roots level
● Providing ITCs with a competitive advantage Businesses that sell
branded packaged foods have a large profit margin.
● Agri-sourcing of high quality and at a low cost.
● Concentrate on growing the value-added segment.

Paperboards, ● ITC’s Paperboards & Specialty Papers business are a clear market
Paper &
leader.
Packaging
● Fully integrated business strategy with in-house pulp manufacture
and a secure, renewable, and cost-competitive fiber basis.
● India's largest, most technologically advanced, and
environmentally friendly paper and paperboards company; a
‘Make In India' model.
● 40+ B2B Brands with Unique & Innovative Offerings.
● Environmental performance on par with the best in the world; use
of renewable energy and large-scale afforestation programs.
● Multi-technology platform capabilities and a broad production
base make this a one-stop packaging solutions provider.

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The State of Affairs

Impacts of the Covid-19 outbreak

To increase product availability, ITC, like many other FMCG businesses, created direct-to-home
distribution techniques such as "ITC on wheels" and collaborations with food aggregators. ITC’s
brands represented annual consumer spends of around Rs 19,700 crore after launching over 60
new goods in FY20 and numerous more hygienic products during the lockdown. Due to a
statewide shut down for more than a week in March 2020, revenue from operations declined 6.4
percent year on year to Rs 11,420 crore. Revenue dropped 9.6 percent to Rs 10,842.2 crore
compared to the corresponding period last fiscal. “Rural growth stood at 0.8 times of urban
markets in FY20 compared to 1.4 times in FY19," ITC said in its latest annual report.

Key issues we are analyzing

● The decline of ITC’s cigarette and hotel business - ITC Ltd, whose primary focus is
the cigarettes business, reported a 6.5% drop in its revenues for the fourth quarter of
FY20. The revenue of ITC's hotel business dropped 8.6% on year in the fourth quarter of
FY20. Due to Nationwide lockdown and govt restrictions pertaining to the Covid-19
outbreak, there was a decrease in consumer demand for cigarettes and hospitality in
India. The second pandemic wave triggered a fresh round of mobility and travel
restrictions, leading to severe disruptions, impacting the progressive recovery witnessed
in H2 of FY21. With a reduction in new Covid infections and easing of travel restrictions
in June’21, the domestic leisure segment has seen an uptick. Focused and curated
packages were deployed to garner business. Cigarette manufacturing also saw a slight
decline due to manufacturing units being shut down during the period. The substantial
volume recovery momentum witnessed in the second half of FY21 was impacted by
localised lockdowns and restricted hours of convenience store operations in the wake of
the second wave of the pandemic. The effect for cigarette industry has been illustrated in
the diagram below:

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Fig I: Change in market equilibrium for the cigarette industry.

Fig II: Change in market equilibrium for the Hospitality industry

● Growth of ITC’s FMCG sector due to increase in demand - The FMCG businesses
reacted with speed and agility, showcasing resilience and adaptive capacity while
operating in the ‘new normal. Segment revenue stood at Rs 3726cr, up 10.4% y‐o‐y on a
high base. ITC said in the case of FMCG-others segment, EBITDA for the quarter was

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 reported to be Rs 256.47 crore, increasing in comparison to Rs 228.27 crore in the same
period previous year while the full year FY20 EBITDA jumped to Rs 914 crore from Rs
688.2 crore during the last year. ITC launched two major products under the Savlon brand
during the lockdown period - advanced hand sanitizer Savlon Hexa and surface
disinfectant spray.

Fig III: Change in market equilibrium for the Sanitizer & Hand Wash industry

● Increase in production of paperboard, paper & packaging - This segment showed a

great result with Segment Revenue up to 54% y‐o‐y; Segment Results up 145 percent
with significant margin growth. Expansion during the quarter was driven by Value
Added Paperboards, Décor paper and Carton packaging. Further, exports recorded robust
growth as customers increased their inventory levels amidst heightened uncertainty.
Domestic consumer offtake saw positive trends in most key segments such as pharma and
consumer goods. However, specific end‐user segments such as publications, cup stock,
On‐the‐Go liquid packaging and wedding cards continued to be impacted by the
pandemic‐related disruptions. An increase in realizations drove significant improvement
in margins, structural investments to enhance competitiveness, including in‐house pulp
manufacturing capacity expansion and a greater focus on operational efficiency
leveraging big data analytics and Industry 4.0. The businesses continue to focus on

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 instilling sustainable paperboard and packaging solutions for end customers leveraging
the Company’s state‐of‐the‐art Life Sciences and Technology Centre.

Challenges and Opportunities: Present

ITC's performance in the June quarter was hampered by the Covid-19 epidemic and the
following lockdown. While it sees a gradual return to normalcy in segments other than hotels,
recent local lockdowns have brought fresh obstacles. The company's net profit fell by more than
26% to Rs 2,342.76 crore, missing analysts' expectations by a razor-thin margin.

The following are the essential takeaways from ITC's first-quarter earnings:

● Revenues drop: Gross income was Rs 9,435.61 crore, down 17% from the previous year.
The lockdown had the most significant impact on the hotels, cigarettes, education and
stationery goods business (ESPB), and paperboards and packaging industries. Revenues
from the hotel segment fell over 94% yearly to Rs 24.92 crore, as the Covid-19 pandemic
impacted hard.

● Towards normalcy or not: The company stated that all operating segments experienced
gradual normalization in the second quarter except for the hotels business. However,
according to the report, the recent installation of localised lockdowns in numerous
country sections is causing operational issues and slowing the recovery process.

● Cigarette sales went down: Cigarette sales are down due to extraordinary disruption
across the value chain, with production, selling, and distribution operations severely
limited following the enforcement of the lockdown. It further stated that unfair taxing on
cigarettes has gradually shifted away from duty-paid cigarettes and toward other low
taxed/tax-evaded tobacco goods, such as contraband cigarettes.

● FMCG stands out: Enhanced awareness of quality products anchored on vectors of

health, wellness, and immunity, as well as the expanding trend of ‘at-home rather than

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 ‘out-of-home consumption, enabled the segment sales to grow 12.2 percent on a
comparable basis.

● Agribusiness grows: The agribusiness saw a 3.7 percent increase in segment revenue,
owing to trading opportunities, primarily in oilseeds and rice.

● Paper and packaging saw a 32.8 percent loss in revenue, owing to the difficulties
caused by the Covid-19 epidemic. The strong growth in exports helped to compensate for
the sluggish domestic demand.

A rapid pace of vaccination and a more substantial healthcare infrastructure would be critical in
mitigating the impact of any impending outbreaks. Rural demand, which was strong in the
previous fiscal, is expected to be affected given the spread of the virus in rural areas on a grander
scale than in urban areas. Medical expenses are also being taken into account by consumers. In
contrast to the first wave, the metropolitan economy will likely recover more slowly since
consumers save precautionary funds and healthcare costs increase.

● ITC increased vital product manufacturing capacity and restarted distribution in record
time while adhering to strict safety regulations.
● ITC introduced new and innovative solutions to fulfill its customers' increased nutritional
and sanitary needs.
● To better serve customers, the company expanded its product portfolio's presence in
alternative channels and collaborated with new partners (swiggy, dunzo, etc.)
● ITC Store on Wheels, an innovative approach for directly servicing consumers in 900+
residential societies in leading cities, was the first of its kind.
● The recently launched exclusive ‘ITC e-store' was also effectively used to provide
consumers in select markets with on-demand access.
● Due to stable agricultural output, government support, and reverse migration, rural
demand in FY 2020-21 has been strong, and the outbreak could dampen it in the second
wave of the disease.

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 ● ITC’s gross revenues in FY 2020-21 were approximately 48,151.24 crores; its profit after
tax was approximately 13,031.64 crores.
● Economic activity picked up after the gradual easing of restrictions and the broader range
of mobility available to the company, which manufactures cigarette packets and hotels in
the second half of the last fiscal year.
● Last year, the government implemented a stringent lockdown to stop the spread of the
virus and stepped up positive economic stimulus programs to support livelihoods and
economic activity.
● A variety of ITC's business interests was impacted by the covid waves, though to varying
degrees. Fast-moving consumer goods increased in sales during the first half of the year
due to consumption increases of detergents and soaps, in addition to staple foods like
pulses, spices, flour, and convenience foods.
● At the same time, discretionary and out-of-home rose in number.
● Over 120 new products were launched by the company that sells Aashirvaad flour, chips,
YiPPee noodles, Sunfeast biscuits, and Classmate notebooks during the last fiscal year.
● FMCG sales through e-commerce increased by over twofold during the year, accounting
for over 5% of segment revenue in the FMCG business (excluding cigarettes).
● Increasing the number of digital channels for reaching shoppers was a significant focus
for ITC. ITC said it further scaled up its direct-to-consumer channel, ITC e-Store, during
the last fiscal year.
● The firm is focused on accelerating revenue growth in FMCG businesses and building a
future-ready portfolio. As a result of its continued expansion of packaged consumer
goods, ITC plans to build a more substantial company.

Challenges and Opportunities: Future

ITC, a diversified conglomerate, wants to reach Rs 1 lakh crore in revenue by 2030, and it plans
to do it by capitalising on India's consumer boom. Since the industry deals in a highly
competitive market, the goods are easily substitutable. Thefor demand curve is perfectly elastic
for each of the individual firms that participate in the market. Many firms exist in the market,
and the nature of the product is homogeneous.

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 ● The organization has identified several future consumer trends and any opportunities that
correlate with these trends and add value to the company from an economic perspective.
● ITC is looking forward to upscale the food processing industry via increased production
and meeting consumers’ increasing demand.
● While the management has long articulated the objective for the future, there are still
hurdles in putting it into action. It has been an unwavering focus of ITC to build a
formidable FMCG business at scale.
● COVID-19 fast-tracked the future into the present in ways never imagined before. ITC's
presence across the three sectors of the economy and their more robust Sustainability 2.0
goal will enable them to make a multi-dimensional contribution to social value creation
as the globe embraces a new era of Responsible Capitalism.
● They have imagined ITC Next, the company's future horizon, which they will continue to
pursue to produce long-term value for its stakeholders.
● ITC aims to invest over USD 2 billion (approximately Rs 14,851 crore) as part of its 'ITC
Next' strategy, which would look for ways to create "disruptive business models."
● ITC plans to increase capacity to fulfill demand, stay competitive, and invest in
technology, quality improvements, and identify new growth vectors.
● ITC is also searching for acquisitions as part of its expansion goals, which will cost
more than the company has budgeted.

The Way Forward

In these testing times, some of the most significant economic and sustainability factors ITC
should comprehend have been discussed below -

● Increasing ITC's presence in the agriculture, manufacturing, and service sectors to

contribute more to national priorities
● ITC brands are becoming the most favored choice for every home in India by creating
Indian brands of global significance.
● It is investing aggressively in all of the Company's activities to improve its market
position and long-term wealth generation capabilities.

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 ● Maintain and strengthen ITC's human capital capabilities to fulfill business goals and
increase the company's reputation as a top employer by making purposeful investments in
people development and talent management processes that continue to improve the
company's competitiveness.
● Renewable energy accounts for 50% of total power.
● By 2030, rainwater collection capacity will be more than five times the net water use
from activities.
● All packaging must be reusable, recyclable, or compostable.
● By 2030, there will be a 50% decrease in particular emissions and a 30% reduction in
specific energy consumption compared to the 2014-15 baseline.
● To allow for the long-term management of trash generated more than the amount of
packaging available on the market.
● Reduce particular water use by 40% compared to the 2014-15 baseline.
● By 2030, ten million people will have sustainable livelihoods.

Conclusion
After studying the several microeconomic aspects of ITC before and after COVID-19, we have
drawn the following conclusions -
● ITC’s revenue from operations saw a sharp decline pertaining to the pandemic hit in early
2020 - lockdown was a significant setback for the company.
● The company faced a sharp decline in demand in specific goods and services sectors due
to Covid-19 restrictions and decreased consumer purchasing power.
● While the hotel industry decelerated, the FMCG sector accelerated due to increased
demand and consumption of health and hygiene products like soaps and sanitizers and
staples such as pulses, spices, flour and convenience foods.
● Although the conglomerate faced several challenges, COVID-19 has fast-tracked the
future into the present in ways never imagined before. ITC's presence across the three
sectors of the economy and their more robust Sustainability 2.0 goal will enable them to
make a multi-dimensional contribution to social value creation as the globe embraces a
new era of Responsible Capitalism.

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References
● https://www.itcportal.com/about-itc/shareholder-value/itc-integrated-report-2020.pdf
● https://www.itcportal.com/about-itc/shareholder-value/annual-reports/itc-annual-report-2
021/pdf/ITC-Report-and-Accounts-2021.pdf
● itcportal.com/about-itc/shareholder-value/itc-integrated-report-2021.pdf
● https://www.livemint.com/companies/news/itc-to-invest-around-14-851-cr-under-next-str
ategy-to-look-for-acquisitions-11628766744757.html

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