Annual Report - ITC - 2009-2010

ITC LIMITED

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

Your Directors submit their Report for the financial year ended 31st March,
2010.



SOCIO-ECONOMIC ENVIRONMENT:

Following one of the deepest downturns in recent times, the global economy
staged a smart recovery during 2009/10, especially in the latter half,
driven by an extraordinary level of co-ordinated international action in
the form of policy stimulus, monetary as well as fiscal. As per the
International Monetary Fund (IMF), world output is estimated to grow by
4.2% in 2010 after a decline of 0.6% in 2009 with the emerging and
developing economies - led by China and India - set to grow by 6.3% in 2010
against a modest 2.4% in 2009 and a sharp rebound by advanced economies
with a growth in output estimated at 2.3% in 2010 against a decline of 3.2%
in 2009. However, the pace and shape of recovery remains uncertain with
concerns about the recovery losing momentum once the stimulus is withdrawn.
Recent developments in Europe, with Greece, Spain and Portugal facing
severe challenges in honouring their external debt obligations, have
amplified such concerns. While high levels of unemployment and fiscal
deficit and contraction of credit to productive sectors are the key
concerns for advanced economies, developing economies are faced with the
challenges emanating from high rates of inflation, sharp escalation in
asset prices, exchange rate volatility and increased capital inflows.

The Indian economy entered 2009/10 against the backdrop of a significant
slowdown in growth rate, with the GDP growing at just 6% during the second
half of 2008/09. A delayed and severely sub-normal monsoon coupled with
continued recession in the developed world for the better part of 2008/09
served to exacerbate the macroeconomic context. Yet, the economy staged a
remarkable recovery to grow at 7.2% during the year, facilitated by policy
stimulus and increased government spending. The enhanced allocations for
social sector schemes like the National Rural Employment Guarantee Scheme
(NREGS), higher spends on rural infrastructure creation, the implementation
of the Sixth Pay commission recommendations and the scheme of debt relief
to farmers acted as powerful catalysts to induce a consumption-led
recovery. Much of the growth was fuelled by the Industrial sector, with
renewed momentum in Manufacturing - which grew by 8.9% during the year
after eight consecutive quarters of decline in growth rates since 2007/08.
While Agricultural output declined by 0.2%, the Services sector grew,
although at a slower pace of 8.7% against 9.8% in 2008/09. The broadbased
nature of the recovery, a faster pace of growth in investments after a
marked decline in 2008/09, the sharp pick up in capital inflows and a
resurgent stock market are some of the key positives that augur well for
the economy.

The major concern during the year was the rising food inflation -
especially in the second half. While the overall wholesale price index
(WPI) based inflation was 9.9% on a year-on-year basis in March 2010, food
inflation was as high as 16.6%, reflecting the severe adverse impact of a
deficient monsoon. With persistent supply side pressures, inflation became
more generalised towards the end of the year, with inflation in non-food
manufactured products rising to 4.7% in March 2010 from (-) 0.4% in
November 2009. While inflation is expected to moderate going forward, the
trend of rising international commodity prices, particularly oil, and the
revival of private consumption pose upside risks. This apprehension is
reflected in RBI's view that the domestic balance of risks shifts from
growth slowdown to inflation'' . Accordingly, a related challenge in the
near to medium term would be the effective management of the burgeoning
fiscal deficit.

Although consensus estimates point to a robust performance of the Indian
economy in 2010/11, with the GDP growth estimated to be above 8%, it would
still be well below the average of nearly 9% per annum achieved during the
4 years preceding the economic slowdown. As aforementioned, the combination
of the threat of inflationary pressures and the inherent risks to global
economic recovery poses a tough challenge to maintaining and stepping up
the growth momentum to the desired double-digit level. With a fairly young
population, skilled manpower, rising savings and investment rates, a
vibrant service sector, a potentially large source of domestic demand
(particularly rural) and the emergence of globally competitive firms, India
has multiple growth drivers which hold out the promise of a stable and
sustained future growth. The economic impact of these strengths will get
further augmented by the current and planned investments in infrastructure
development.

High levels of sustained economic growth is a critical necessity for India
to realize its oft quoted demographic dividend' through the creation of
employment opportunities for the nearly 15 million people expected to enter
the working age each year, the majority of whom would be from rural India.
As observed in the Economic Survey 2009-10, ...growth is necessary for
eradicating poverty but is not a sufficient condition. In other words,
policies for promoting growth need to be complemented with policies to
ensure that more and more people join in the growth process and, further,
that there are mechanisms in place to redistribute some of the gains to
those who are unable to partake in the market process and, hence, get left
behind . Equally, the manner of industrial growth continues to take an
immeasurable toll of finite natural resources. Indeed, the key challenge
for India is to sustain high rates of economic growth even while addressing
the problems of inequitable income distribution and over-exploitation of
environmental resources.

A comprehensive growth strategy for rural India, including the agricultural
sector which continues to underperform, is necessary to address the serious
issues relating to sustainability and inclusive growth. The government's
focus on social sector programmes such as Bharat Nirman, NREGS, Sarva
Shiksha Abhiyan, food security legislation and strategies to improve
benefit delivery mechanisms have the potential to transform the Indian
rural landscape. Unique business models like the ones forged by your
Company can supplement the efforts of the government in creating societal
value and enhancing societal capital. Your Company's e-choupal network
continues to provide the farming community with a host of value added
services such as crop advisories, relevant weather information, price
discovery and access to high quality agri-inputs apart from dis-
intermediating the value chain. The throughput of this network, which is
the foundation of your Company's agri-commodity sourcing value chain, is
growing rapidly in sync with the expanding consumer franchise for your
Company's branded packaged food products. Entry into newer categories of
food products will progressively increase sourcing through this network in

the ensuing years.

Similarly, your Company's unique and path-breaking Choupal Pradarshan
Khet' (CPK) - a collaborative and paid extension service aimed at enhancing
farm productivity with emphasis on adoption of agricultural best practices
- is yet another demonstrated example of how private sector initiatives can
complement State interventions to create significant value for the Indian
farmer. During the year, the scope of the CPK initiative was expanded to
include horticultural crops such as banana, brinjal, chilli, grape, orange,
pomegranate etc. Activities under this initiative currently span six States
with a total coverage of nearly 70,000 hectares. The CPK model is focused
on building competencies at the farm gate level and will go a long way in
enhancing the competitiveness of India's agricultural sector.

The growth agenda can become sustainable only if it includes in its wake
strategies, both national and corporate, to enhance environmental and
societal capital, thereby translating to development. In line with this
philosophy, your Company is pro-actively engaged in enlarging its
contribution across the three dimensions of the Triple Bottom Line' -
economic, environmental and social - through a conscious strategy of
investment and operations that enhances the competitiveness of entire value
chains it is engaged in.

Highlights of your Company's progress in the pursuit of the Triple Bottom
Line' objectives are discussed in the sections that follow.

COMPANY PERFORMANCE:

Your Company posted yet another year of impressive performance with a
healthy topline growth and high quality earnings, reflecting the robustness
of its corporate strategy of creating multiple drivers of growth. This
performance is stellar when viewed against the backdrop of the extremely
challenging business context in which this was achieved, namely the
unprecedented increase in excise duties on non-filter cigarettes in the
preceding year, the arbitrary increases in VAT on cigarettes, steep decline
in hotel revenues as a consequence of the Mumbai terrorist attack and the
global economic slowdown, the incubation costs incurred by the new FMCG
businesses, the impact of the significant investments made in augmenting
distribution infrastructure and the gestation costs of the large
investments in the hotels business.

Gross Turnover for the year grew by 13.5% to Rs. 26259.60 crores. Net
Turnover at Rs. 18153.19 crores grew by 16.3% primarily driven by a 20.9%
growth in the non-cigarette FMCG businesses, a 19.8% growth in the
Cigarettes business and a 17.4% growth in the Paperboards, Paper &
Packaging segment. Pre-tax profits increased by 24.7% to Rs. 6015.31 crores
while Post-tax profits at Rs. 4061 crores registered a growth of 24.4%.
Earnings Per Share for the year stands at Rs. 10.73 (previous year Rs.
8.66). Cash flows from Operations stood at Rs. 6620 crores during the year,
compared to Rs. 4682 crores in the previous year.

Your Company will complete 100 years in August 2010. It is a matter of
great pride to reflect on the enormous progress made by your Company over
the years. Your Company today is the leading FMCG marketeer in India, the
second largest Hotel chain, the clear market leader in the Indian
Paperboard and Packaging industry and the country's foremost Agri-business
player. Additionally, its wholly owned subsidiary is one of India's fastest
growing Information Technology companies in the mid-tier segment.

Over the last fifteen years, your Company has created multiple drivers of
growth by developing a portfolio of world-class businesses. During this
period, your Company's Gross Turnover and Post-tax profits recorded an
impressive compound growth of 12.4% and 21.7% per annum respectively.
Profitability, as measured by Return on Capital Employed improved
substantially from 28.4% to 41% during this period. Total Shareholder
Returns, measured in terms of increase in market capitalisation and
dividends, grew at a compound rate of 24.3% during this period, placing
your Company amongst the foremost in the country in terms of efficiency of
servicing financial capital. Your Company today is one of India's most
admired and valuable corporations with a market capitalisation in excess of
Rs. 100000 crores.

In celebration of your Company completing a century, your Directors are
pleased to recommend a Special Centenary Dividend of Rs. 5.50 per share in
addition to a dividend of Rs. 4.50 per share (previous year: Rs. 3.70) for
the year ended 31st March, 2010. Total cash outflow in this regard will be
Rs. 4452.33 crores (previous year Rs. 1633.87 crores) including Dividend
Distribution Tax of Rs. 634.15 crores (previous year Rs. 237.34 crores).
Your Board further recommends a transfer to General Reserve of Rs. 406.10
crores (previous year Rs. 1500.00 crores). Consequently, your Board
recommends leaving an unappropriated balance in the Profit and Loss Account
of Rs. 61.31 crores (previous year Rs. 858.14 crores).

FOREIGN EXCHANGE EARNINGS:

Your Company continues to view foreign exchange earnings as a priority. All
businesses in the ITC portfolio are mandated to engage with overseas
markets with a view to testing and demonstrating international
competitiveness and seeking profitable opportunities for growth. The ITC
group's contribution to foreign exchange earnings over the last ten years
amounted to nearly USD 4.1 billion, of which agri exports constituted 60%.
Earnings from agri exports are an indicator of your Company's contribution
to the rural economy through effectively linking small farmers with
international markets.

During the financial year 2009/10, your Company and its subsidiaries earned
Rs. 3140 crores in foreign exchange. The direct foreign exchange earned by
your Company amounted to Rs. 2355 crores (Rs. 2226 crores in 2008-09),
powered by exports of major agri-commodities. Your Company's expenditure in
foreign currency amounted to Rs. 1042 crores, comprising purchase of raw
materials, spares and other expenses of Rs. 774 crores and import of
capital goods at Rs. 268 crores. Details of foreign exchange earnings and
outgo are provided in Schedule 19 to the Accounts.

PROFITS, DIVIDENDS AND RETENTION:

(Rs. in Crores)
2010 2009
a) Profit before Tax 6015.31 4825.74

b) Income Tax 1954.31 1562.15

c) Profit after Tax 4061.00 3263.59

d) Add: Profit brought forward from previous year 858.14 724.45

e) Surplus available for Appropriation 4919.14 3988.04

f) Transfer to General Reserve 406.10 1500.00

g) Proposed Dividend for the financial
year at the rate of Rs. 4.50 per 1718.18 1396.53
ordinary share of Re. 1/- each
(previous year Rs. 3.70 per share)

h) Proposed Special Centenary
Dividend of Rs. 5.50 per ordinary 2100.00 -
share of Re. 1/- each

i) Income Tax on proposed dividends 634.15 237.34

j) Earlier year's provision no longer
required (0.60) (3.97)

k) Retained Profit carried forward to
the following year 61.31 858.14

4919.14 3988.04

BUSINESS SEGMENTS:

A. FAST MOVING CONSUMER GOODS:

FMCG - Cigarettes:

India is the third largest producer of tobacco in the world. It is
estimated that more than 36 million people including farmers, farm workers,
retailers etc. in the country depend upon tobacco for their livelihood.
While the economic importance of tobacco has been acknowledged in several
Government studies and reports, the cigarette industry in India has been
contending with the twin challenges of discriminatory and punitive taxation
and increased regulation for several years in succession.

Internationally, more than 90% of tobacco is consumed in the cigarette
form, and accordingly tobacco taxation and regulation, in effect, means
regulating and taxing cigarettes. However, in India only about 15% of
tobacco is consumed in the cigarette form, whilst the remaining consumption
is through other forms of tobacco products like bidi, khaini, gutkha, zarda
and kimam. It is therefore clear that the spate of taxation and regulations
targeted almost exclusively at the cigarette industry in India is
influenced by trends that are relevant in the developed world, but have
little connection with the realities of the Indian market. Such a punitive
and discriminatory approach has resulted in the share of cigarettes in
total tobacco consumption in India progressively declining from 23% in
1971/72 to only about 15% currently. In this context, a recap of
developments in the past few years would be relevant.

On the taxation front, excise duty rates went up in excess of 6% in the
Union Budget 2007 and cigarettes were brought under the ambit of Value
Added Tax (VAT) at a rate of 12.5% on invoice price with effect from 1st
April 2007, resulting in a total tax equivalent of a 30% increase in excise
duties. Other tobacco products were either exempted from VAT or taxed at
lower rates. Consequently, cigarette industry volumes came under serious
pressure in FY08 as consumers migrated to alternate and lightly taxed forms
of tobacco.

The Union Budget 2008 followed through with an unprecedented increase in
excise duty of the order of 140% and 390% respectively on regular and
micro-sized non-filter cigarettes. This exceptional hike in rates forced
the organized cigarette industry to substantially vacate this category. The
resultant void created the headroom for tax-evaded cigarettes to enter the
market in a big way. These tax-evaded cigarettes sell in the market at
prices that do not even cover the cost of taxes payable thereon. Such
cigarettes, estimated to constitute more than 8% of the Indian market, not
only deprive the legitimate industry of revenues and profits that it
rightfully deserves but also deny the Exchequer of its fair share of taxes.
It is imperative that the authorities strengthen enforcement to eliminate
this fast growing illegal industry.

The year under review saw several States departing from the consensus VAT
rate of 12.5% and increase the rates of VAT on cigarettes from time to
time. Certain States also levied entry tax on cigarettes in addition to VAT
and some others increased the entry tax rate. Most States, like the Centre,
largely targeted the cigarette sector. Consequently, tobacco consumption in
the cigarette format suffered.

Further, as a result of such unilateral and arbitrary increases, the
incidence of State and other Local taxes varied from 12.5% in some parts of
India to as much as 25% in others. Such massive tax differentials between
States led to trade diversion that not only compromised the industry's
ability to service the market effectively but also resulted in sub-
optimization of cigarette tax revenues to the State Exchequers. Drawing
from international experience, it is apprehended that the illegitimate
funds generated through trade diversion by criminal syndicates is being
used to finance anti-social activities in the country.

During the year, graphic statutory warnings on retail packages of tobacco
and tobacco products were introduced and further restrictions on sale of
tobacco products were notified. Such graphic warnings, which are more
impactful on cigarettes than on other forms of tobacco by virtue of the
design specifications, have placed cigarettes in a disadvantageous
position.

Such regulations and others like the ban on smoking in public places
together with the high incidence of tax on cigarettes encourage consumers
to shift to cheaper and lightly taxed tobacco products. Consequently,
whilst consumption of tobacco in the cigarette form is on the decline, the
overall consumption of tobacco in the country continues to rise.

Tobacco Consumption (Million kg)

Year Cigarettes Non-Cigarette Total
Forms

1981/82 86 320 406
2008/09e 74 421 495
Difference (-) 14% (+) 32% (+) 22%

Source : USDA; Tobacco Institute of India

Paradoxically, the social objective of control of tobacco consumption in
the country gets defeated even as the revenue potential of tobacco sector
as a whole is sub-optimised. It is relevant to note that every percentage
point increase in the cigarette share of tobacco consumption would yield
the government additional revenues of Rs. 650 crores annually in duties
alone.

Despite having only a 15% share of consumption, cigarettes contribute more
than 85% of the tax revenues from the tobacco sector. Taxes realized from
every kilogram of tobacco consumed in the cigarette format are 35 times
higher than those from other forms of tobacco products. In contrast, a
country like China, given its equitable tax regime and a practical
regulatory framework, is able to collect tax revenues from cigarettes that
are 14 times higher than that in India despite the rate of tax being half
of that of India. Clearly, there is a need to pursue a balanced agenda,
which is equitable to all stakeholders, even as it progressively achieves
the social objective of controlling tobacco consumption.

Notwithstanding these challenges, your Company retained its leadership
position in the market and improved its standing in the consumer mind-
space, attesting the salience and resilience of its brands. The stability
in cigarette excise duties in 2009 resulted in the industry recovering some
of the consumer franchise lost earlier.

The potential of the Indian market coupled with its economic outperformance
in a year of global downturn is attracting global cigarette majors. They
are seeking a direct play in the Indian market by incorporating majority-
owned entities to carry on the business of wholesale trading operations in
India involving sourcing, selling, distribution and marketing of cigarettes
and other tobacco products. Even so, the incidence of smuggled cigarettes
continues to be high.

During the year under review, the business effectively met such competitive
challenges and improved its market standing through the delivery of
superior consumer value based on a combination of deep consumer insights,
contemporary product development and cutting-edge technology. Market
interventions during the year included the launch of new variants of Gold
Flake' and Navy Cut Filter Kings' with innovative product features,
limited edition packs of Classic' and launch of new brands like Flake
Excel Filter' and Duke Filter'. The business also launched its premium
line of hand-rolled cigars in select markets under the brand name
Armenteros'. Manufactured exclusively for ITC by expert cigar rollers in
the Dominican Republic, with the finest quality Cuban, Nicaraguan and
Brazilian seed tobacco, the Armenteros' range is truly world-class and has
been well received by the most discerning cigar aficionados in the country.

During the year, the business leveraged its existing industrial licence in
Maharashtra to set up a cigarette factory at Ranjangaon, Pune. Production
has commenced, enabling your Company to service proximal markets. The
strategic initiative of upgrading primary and secondary technology
platforms at the cigarette factories continued to be implemented. Further
improvements in quality and productivity were achieved consequent to the
induction of high speed cigarette making and packing machines across all
factories. The Process Improvement Practices' initiative, using structured
problem-solving methodologies such as Lean' and Six Sigma', contributed
to sustainable improvements in key operating metrics and internal processes
across all units.

In line with your Company's commitment to building sustainable
environmental capital, the business is investing in wind farms in certain
States to reduce dependence on conventional sources of energy. The
cigarette factories continued to recycle 100% of the solid waste generated.
They also maintained the highest standards of Environment Health and Safety
(EHS) and won recognition by way of numerous awards. The Saharanpur factory
won the CII National Award for Excellence in Energy Management' and the
CII National Award for Excellence in Water Management'. The Munger factory
was awarded the 1st prize for outstanding performance by CII Eastern Region
for Safety, Health Environment (SHE) for 2009-10 as well as the 1st prize
for outstanding performance by CII Eastern Region for Energy Conservation
for 2009-10. The Kidderpore factory received the CII Eastern Region SHE
Award for 2009-10. The Bengaluru factory was awarded the Safety Award in
the Large-Scale Category as well as the Safety award for Best Boiler' by
the Department of Factories, Boilers, Industrial Safety and Health,
Government of Karnataka.

Pro-active interventions in employee-relations in all manufacturing units
ensured an enabling operating climate. Long term agreements with unionised
workforce continue to be leveraged to further improve shop floor
productivity, flexibility and responsiveness. During the year under review,
the long term agreement at the Saharanpur factory was successfully
concluded.

The year ahead will be challenging with continued discriminatory taxation,
restrictive regulation and hardening competitive pressures. Cigarette
excise duty rates have yet again been increased by about 17% in Budget 2010
and several States have further increased VAT and entry tax imposts in the
recent round of budgets. While this is likely to put industry volumes under
pressure, the newly created excise duty slab for medium-sized filter
cigarettes may provide the legitimate industry a platform to combat the
menace of illegal domestic cigarettes.

Your Company will continue to engage with policy makers for a balanced
regulatory and fiscal framework for tobacco that addresses the genuine
concerns of all stakeholders. The robustness of your Company's strategies
and its execution excellence will enable it to sustain and enhance its
leadership position.

FMCG - Others:

It is your Company's strategic intent to secure long-term growth by
synergising and blending the diverse pool of competencies residing in its
various businesses to exploit emerging opportunities in the FMCG sector.
Your Company's institutional strengths - deep understanding of the Indian
consumer, strong trademarks, deep and wide distribution network, agri-
sourcing skills, packaging know-how and cuisine expertise - continue to be
effectively leveraged to rapidly grow the new FMCG businesses.

Your Company remains bullish on the prospects of the FMCG industry in
India. According to a recent study by the Mckinsey Global Institute, it is
estimated that India is set to climb from its position as the 12th largest
consumer market today to become the world's fifth largest by 2025. Income
levels are set to triple during this period with India's middle class
(annual income ranging from Rs. 2 lakhs to Rs. 10 lakhs) increasing by
about ten times its current size to around 583 million people. Favourable
demographic trends - with nearly 15 million additions to the working age
population every year for the next 10 years and a resultant low dependency
ratio - will drive industry growth. Similarly, the trend of increasing
urbanisation - with urban population expected to constitute around 44% of
the population by 2035 as per United Nations Population Division (UNPD)
from less than 30% presently - is expected to provide added fillip to the
demand for branded consumer goods. Higher levels of consumer awareness,
relatively low levels of per capita consumption and penetration and
increased government spending on education are some of the other key
factors that are expected to drive transformational change in the Indian
FMCG industry.

Over the last few years, your Company has rapidly scaled up presence in its
newer FMCG businesses comprising Branded Packaged Foods, Lifestyle
Retailing, Education and Stationery products, Personal Care products,
Safety Matches and Incense Sticks (Agarbatti) with Segment Revenues growing
at an impressive compound annual growth rate of 38% during the last 5
years. Within a relatively short span of time, your Company has established
several strong consumer brands including Sunfeast' and Aashirvaad' which
are presently clocking annual sales in excess of Rs. 1000 crores each in
terms of consumer spend. 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 21% growth in Segment Revenues and a significant improvement in
Segment Results which recorded a positive swing of Rs. 134 crores at the
PBIT level.

Your Company's unwavering focus on quality, innovation and differentiation
backed by deep consumer insights, world-class R&D and an efficient and
responsive supply chain will further strengthen its leadership position in
the Indian FMCG industry.

Highlights of progress in each category are set out below.

Branded Packaged Foods:

The Branded Packaged Foods business continued to expand with sales growing
19% over the previous year. During the year, the business focused on
enhancing consumer franchise through new product launches, heightened
communication and increased levels of promotions. Value capture was
improved through cost reductions across the supply chain and optimisation
of capital deployment. A wide range of well-differentiated products,
supported by significant investments in product development, innovation,
manufacturing technology and unmatched distribution infrastructure have
substantially enhanced the market standing and consumer franchise of your
Company's brands. The quality of your Company's products continues to be
best-in-class' and is seen as a benchmark in the industry across all
segments.

During the year, the business was adversely impacted by historically high
input commodity prices. Wheat, flour, dairy inputs and sugar witnessed
sharp price hikes, with sugar prices registering an increase of nearly 150%
over last year's levels. The impact of input cost increases was largely
contained through a combination of smart sourcing and increased internal
efficiencies, minimizing the cost-push' impact for consumers. Towards the
close of the year commodity price inflation started showing signs of
levelling-off as a result of the government's proactive price-management
actions, higher wheat output and easing off of sugar prices.

In the Staples category, sales of Aashirvaad' atta grew 21% and the brand
sustained its leadership position with a market share of 56% among national
branded players. The brand was further fortified during the year with the
launch of Aashirvaad' multigrain atta for the health conscious consumer.

The Biscuit industry witnessed an impressive growth of around 14% during
the year. Your Company's Sunfeast' brand continued to consolidate its
position with an All India-Urban market share of 11%. The Sunfeast' range
witnessed enrichment of its product-mix with higher sales of value-added
products such as Marie, Special Creams and Cookies.

In the Confectionery category, Candyman' is the clear market leader in the
hard boiled segment. mint-o GOL' was successfully launched during the year
in the chews' category. The continued success of Toffichoo', Lacto' and
Choco-Double Eclairs' provided further impetus to the overall growth of
the Confectionery business. In the Ready-to-Eat segment, Sunfeast - Pasta
Treat' has emerged as a unique product with a loyal consumer base. Research
among trialists confirms encouraging consumer response and holds out the
promise of this product emerging as a sizeable winner over the medium term.

In the Salty Snacks segment, Bingo!' penetrated new markets, gaining
further consumer franchise. Word of mouth and clutter breaking
advertisements improved brand salience. Product portfolio was further
strengthened during the year with the launch of the Tedhe Medhe' and
International Cream & Onion' variants.

The business is investing in manufacturing and distribution infrastructure
to support larger scale in the wake of growing volumes. The business
continued to focus on supply chain improvements to enhance product
freshness, market servicing and margins.

Driven by an improving economy, the year ahead is expected to witness an
accelerated growth of 15% in the Branded Packaged Foods category.
Innovative brand building interventions will continue to be critical in
driving sales and strengthening consumer and trade loyalty. Consumer
activation beyond conventional' media and a 360 degree approach to engage
customers at all touch points will be essential to developing a strong
consumer franchise. Research and Development will continue to be leveraged
to launch innovative and differentiated products across all segments under
various platforms of taste, energy, health and wellness. Effective and
cost-efficient servicing of target markets will be a key success factor.
The business will continue to leverage your Company's sales and
distribution network to achieve deep penetration, visibility, availability
and competitive freshness for its products.

Lifestyle Retailing:

During the year, your Company's Lifestyle Retailing business further
consolidated and strengthened its position in the branded apparel market.
Wills Lifestyle' is now an established premium lifestyle brand in the
country and John Players' a leading fashion brand for the youth. Reviving
consumer sentiments and the heightened interest in these two brands bode
well for your Company's strategy of significantly ramping up its retail
network with more stores in existing cities and penetration into new
markets.

Wills Lifestyle's vibrant range with high fashion imagery, its growing
consumer preference and its rich product mix are reflective of the strong
market standing and consumer loyalty it enjoys. The brand is now available
at 56 exclusive stores in 30 cities and in more than 150 shop-in-shops' in
leading departmental stores. Its premium imagery was further reinforced
through its association with the Wills Lifestyle India Fashion Week', the
country's most prestigious lifestyle event. Under the Ramp to Racks'
initiative the brand has tied up with leading designers of the country such
as Rohit Bal, Rohit Gandhi-Rahul Khanna, Rajesh Pratap Singh, JJ Valaya,
Satya Paul and Ranna Gill to co-create the Wills Signature' range of
designer-wear. This initiative has enhanced the brand's exclusive aura,
strengthened its premiumness and deepened its aspirational dimension.

Leveraging synergies within the ITC Group, the business launched two Wills
Lifestyle' boutique stores during the year at the ITC Royal Gardenia and
the ITC Mughal hotels in Bengaluru and Agra respectively. The Essenza Di
Wills' and Fiama Di Wills' range of personal care products continue to
augment the lifestyle portfolio of the business, reinforcing synergies
between fashion and beauty.

The customer privileges programme, Club Wills', comprising over 100,000
loyal and discerning members, notched up higher levels of visit frequency
and transactions.

In the popular Youth' segment, John Players' marked a strong presence
with its impactful imagery and vibrant product portfolio. Its new
association with the well known film star, Ranbir Kapoor, was well received
by consumers, further enhancing brand desirability. John Players' has a
pan India presence in over 225 flagship stores and 1200 multi-brand outlets
and departmental stores. The growing influence of digital and social
networking space was effectively leveraged during the year to launch new
initiatives, including innovative tie-ups with celebrities, to widen and
deepen engagement with the youth community.

Continuing weak economic conditions in the US and European markets
adversely affected exports from the country during the year. The business
leveraged this opportunity emerging from the downturn to strengthen its
customer relationships by offering value added product development services
and flexible manufacturing facilities.

In the face of the economic slowdown, the business responded with cost
management actions, streamlining of processes and improved working capital
management. Further, training interventions to improve frontline-staff
productivity and initiatives to strengthen product development and design
were implemented. Superior vendor collaboration enabled the business to
introduce premium offerings and improve sourcing efficiencies. Investments
in store design, visual merchandising and customer service are continuing
to enhance the international quality shopping experience which has become
synonymous with Wills Lifestyle'.

The business will continue to increase the fashion quotient of its offering
on the basis of deeper consumer insights and deliver products benchmarked
to world-class quality standards.

Education & Stationery Products:

The Education & Stationery Products business registered an impressive sales
growth of 40% over the previous year. This growth was powered by brand
Classmate' which continued to consolidate its leadership position in
student notebooks.

During the year, the business launched a slew of complementary stationery
products under the Classmate' brand. These included gel & ball pens,
mechanical & wood cased pencils and geometry boxes.

Youth icons Yuvraj Singh and Soha Ali Khan were signed on as brand
ambassadors to endorse Classmate'. An impactful television commercial and
a range of point of sale materials featuring these brand ambassadors were
deployed during the back to school' season. These interventions have
enhanced the level of consumer awareness of Classmate's growing product
basket beyond its flagship category of notebooks.

The distribution footprint of the business has been enlarged significantly
to cover 2,800 markets, over 1,000 wholesale dealers and 72,000 stationery
retail outlets.

The Classmate' range of products continued to be outsourced from best-in-
class vendors. Notebooks were sourced from small scale manufacturers, who
have continuously improved their delivery and quality capability. A
majority of them, with your Company's assistance are ISO 9001:2000
certified. Paper and recycled board are sourced from your Company's mills
at Bhadrachalam and Kovai respectively. The paper used in Classmate
notebooks leverages your 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. These product values, which are contributing
significantly to creating sustainability awareness among the country's
younger population, have distinctly enhanced classmate's brand equity.

Every Classmate' notebook also carries a powerful social message that
reflects your Company's commitment to improve the quality of primary
education in rural India.

During the year the business took significant steps to promote
Paperkraft', its executive and office supplies stationery brand. Working
in tandem with your Company's Paperboards & Specialty Paper 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 your Company membership
of the prestigious Global Forest & Trade Network, an international
initiative of the WWF (World Wide Fund for Nature) and your Company's
social forestry programme which has created a green cover of over 100,000
hectares by planting high yielding varieties of trees. Paperkraft's green'
profile has begun to appeal to a number of corporate and other
institutional consumers who are switching over to Paperkraft to symbolise
their own commitment to reduce their carbon footprint.

The Paperkraft' range was enlarged during the year to include markers and
highlighters in addition to new varieties of executive notebooks and
notepads.

The Education & Stationery Products industry continues to grow on the back
of massive government and private investments in the Education sector. The
Government's flagship Sarva Shiksha Abhiyan programme coupled with the mid-
day meals initiative is successfully enhancing enrolment and reducing
dropouts at the primary school level. Efforts are also underway to improve
the enrolment ratios at the secondary and tertiary levels. Progressive
reforms will enable flow of private sector investments into capacity
building and quality enhancement in education delivery. The recent
enactment of the Right to Education Bill will further accelerate growth in
the education and stationery supplies sectors. Your Company, with its
widening high quality product range and excellent distribution
infrastructure, is poised advantageously to respond to this opportunity.

Safety Matches:

Your Company's Safety Matches business alongwith that of Wimco Ltd
registered a top line growth of 10.8% over the previous year driven by
continued consumer preference for its strong brand portfolio across all
market segments. The business also increased its presence in international
markets by growing its exports of value added products, particularly to
Africa and the Middle East.

Domestic volumes continued to witness a decline during the year as a result
of an increase in consumer prices effected in the previous year. Increased
penetration in international markets helped shore up volumes. Your Company
will continue to grow its presence in overseas markets, and improve its
share in the home market through new product launches. Continued escalation
in the prices of raw materials like wood, paperboard and key chemicals
brought margins under pressure. However, the adverse impact of input cost
increases was partly mitigated by a series of strategic cost management
actions initiated by the business during the year.

Your Company continues to partner the small scale sector by sourcing a
significant portion of its requirement from multiple units in this sector.
Your Company is helping to improve the competitive ability of these units
by providing technical inputs to strengthen their process capabilities.

Technology induction in manufacturing is crucial for the long term
sustainability of this industry. A uniform taxation framework which
provides a level playing field to all manufacturers is necessary to trigger
the required investments for modernising this industry. Government policy
should create this supportive environment to enable the industry to become
globally competitive. Mordernisation will also create a safe working
environment for the significant worker population engaged in this industry.

Incense sticks (Agarbattis):

The Agarbatti business recorded an impressive 55% growth during the year,
driven by increasing consumer franchise for the Mangaldeep' brand combined
with enhanced distribution reach and innovative consumer offerings.
Mangaldeep' is currently the second largest national brand.

During the year the business launched a new variant, Fragrance of Temple',
in Tamil Nadu, under the Mangaldeep' brand. This product, which delivers
temple aroma, has received wide consumer acceptance. It will be
progressively rolled out across India.

In line with your Company's commitment to the Triple Bottom Line', the
Agarbatti business provides livelihood opportunities to more than 8000
under-privileged women through Self Help Groups, small scale entrepreneurs
and NGOs across India. During the year, the business entered into
partnerships with the Governments of Orissa, Assam and Tripura to set up
sourcing centres which would create livelihood opportunities for rural
women through agarbatti rolling.

Your Company continues to partner with small and medium enterprises to
assist them in raising their process and quality standards.

Personal Care Products:

India's Personal Care industry is estimated to have grown by around 12%
during the year to about Rs. 29000 crores. This demand-led growth was
driven by the increasing frequency of usage among all consumer segments and
higher rural disposable incomes consequent to the government's initiatives
like NREGS, farm loan waivers, increase in minimum support prices for agri-
commodities etc. However, heightened competitive intensity and higher input
costs adversely impacted industry margins.

Your Company's Personal Care business made significant strides during the
year in gaining consumer franchise. The business continued to roll out
product offerings under the Essenza Di Wills', Fiama Di Wills', Vivel Di
Wills', Vivel', and Superia' brands across new geographies. It focused on
enhancing consumer benefits by introducing new variants in the soaps and
shampoos categories. The launch of Fiama Di Wills' Gel Bathing Bar
augmented the premium portfolio. Besides being extremely well received by
consumers, it was voted Product of the Year' in the soaps category based
on a survey of over 30,000 Indian consumers by AC Nielsen. Brand Vivel'
was further strengthened with the launch of the Milk Cream & Glycerine'
bathing bar in the winter care segment, and Deo Spirit' in the freshness
segment. Similarly, the Superia' soap portfolio saw the addition of Milky
Glow' and Lemon Fresh' variants. It is estimated that Vivel' and
Superia' soaps and shampoos have together been purchased by over 7 crore
households so far (Source: IMRB Household Panel: February 2010)
representing nearly 30% of aggregate Indian households.

The business continues to communicate with the consumer through multiple
channels, including TV, digital social-networking, print / outdoor
advertising, point of sale merchandising, trade schemes, one-on-one
consumer interactions, etc. The business grew at a pace distinctly ahead of
industry despite extreme competitive pressures from entrenched players.
This was achieved through a judicious mix of attractive consumer offers,
competitive pricing and deeper penetration into remote markets by
leveraging the distribution network of your Company. The business has
notched a volume market share of approximately 5% in soaps, and around 3.4%
in shampoos, within a short span of 2 years. Currently, brands Vivel' and
Superia' are each estimated to be more than Rs. 200 crores per annum in
consumer spend. Responding to the growing demand for its products, the
business added capacity at its plant at Haridwar in Uttarakhand and
commissioned a new plant at Manpura in Himachal Pradesh. Apart from the
fiscal benefits that will accrue from such investments in tax-exempt zones,
these facilities will provide a higher degree of flexibility in
manufacturing and ensure the highest standards of product quality.

The business continues to invest in building a strong portfolio of brands
and products through well-defined research and development strategies
backed by the Company's dedicated and state-of-the-art R&D Centre. 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.

The Personal Care Products business continued to roll out its product
portfolio under the Essenza Di Wills', Fiama Di Wills', Vivel Di Wills',
Vivel' and Superia' brands across new geographies. Fiama Di Wills' Gel
Bathing Bar was voted Product of the Year' in the soaps category based on
a survey of over 30,000 households by AC Nielsen.

Your Company is focused on leveraging its institutional strengths in brand
building, trade marketing and lifestyle retailing to rapidly grow the
Personal Care business on the strength of its excellent product portfolio.

B. HOTELS:

The aftermath of the terrorist attack in Mumbai in November 2008, the
swine-flu pandemic and the general squeeze on corporate travel combined to
adversely affect the performance of the Indian hotel industry during the
year. The impact was particularly severe during the first half with
occupancies and average room rates witnessing steep declines. The
situation, however, improved during the second half aided by a strong
showing by the Indian economy and the beginnings of a gradual recovery in
major source markets like the USA and Europe. Reversing a declining trend
after twelve consecutive months, foreign tourist arrivals started to
increase from December 2009 clocking an average growth of 15% during the

last four months of the year. Marked improvement has also been seen in
domestic air travel. While the worst is clearly over, RevPar (Revenue per
Available Room) levels remain more than 20% below the three year average
preceding the downturn in 2008/09.

Given the adverse business environment, your Company's hotels business
posted a 9% decline in Net Revenues during the year. Though Operating
Profit (PBDIT) at Rs. 295 crores de-grew by 23% over the previous year, the
business maintained its leadership position in terms of operating
efficiency with a PBDIT to Net Revenues ratios of 35%. Net Revenues and
PBDIT grew by 16% and 13% respectively during the last quarter of the
fiscal year, reversing the declining trend witnessed in the first three
quarters of the year.

Besides generating valuable foreign exchange, the tourism industry has a
large economic multiplier impact contributing to significant employment
creation, a dire need in the Indian context of achieving inclusive growth.
However, despite India's enormous potential, its share in world travel and
tourism remains extremely low. The country is not able to service even this
relatively miniscule demand to full guest satisfaction due to demand-supply
mismatch and infrastructural deficiencies. That India is grossly under-
roomed is evident from the fact that some of the much smaller South-East
Asian countries like Singapore, Malaysia and Thailand have much larger room
capacities in the 5 Star/Luxury segment. The World Travel and Tourism
Council (WTTC) estimates that the Indian travel and tourism industry will
grow at 12% annually until 2019, requiring an additional 50,000 rooms over
the next 2 to 3 years. Astronomical land prices remain a key hurdle in
realizing this potential.

Already, a number of projects announced earlier by hotel companies and real
estate developers have reportedly been shelved.

However, given India's woefully inadequate room capacity and a weak
additional supply outlook vis-a-vis the projected growth in demand, the
longer term prospects for the industry remain robust.

Your Company now has over 100 hotels at more than 80 locations in India,
operating under 4 brands - ITC Hotel' at the luxury end, WelcomHotel' in
the 5 Star segment, Fortune' in the mid-market to upscale segment and
WelcomHeritage' in the heritage leisure segment. In addition, the business
has co-branding arrangements with two international brands - The Luxury
Collection' and Sheraton' - franchised from the Starwood group. Together,
these offerings make ITC-Welcomgroup the second largest hotel chain in
India.

In October 2009, your Company launched the ITC Royal Gardenia, a 292 room
luxury offering in Bengaluru. It is the largest LEED (Leadership in Energy
and Environmental Design) Platinum rated hotel in the world and the first
in Asia to achieve this distinction. It was recognized as the Best New
Launch in the Luxury Upscale Category' at the Hotel Investment Conference,
South Asia. It has successfully occupied the niche position of Responsible
Luxury' within a short span of time. In line with the strategy of
maintaining the contemporariness of its properties, the business undertook
several renovation programmes during the year. Key initiatives include
addition of a new shopping arcade and room renovations at the ITC Mughal in
Agra and a new Kaya Kalp' Spa at WelcomHotel Rajputana, Jaipur.

In view of the positive long term outlook for the Indian hotel industry,
your Company continues to sustain its aggressive investment-led growth
strategy. Construction activity of the new super luxury properties at
Chennai and Kolkata are progressing satisfactorily. In addition, several
new projects including joint ventures and management contracts are on the
anvil to rapidly scale up the business across all the four market segments.
In pursuit of your Company's Triple Bottom Line' objectives, the business
has invested in wind energy to provide clean power to its Mumbai property,
the ITC Maratha. Additionally, solar energy is being used to produce steam
at the ITC Maurya, New Delhi and the ITC Royal Gardenia, Bengaluru. These
green initiatives are being replicated at other locations across the ITC
Welcomgroup chain.

During the year, the Fortune' brand which caters to the mid-market to
upscale segment, forged new alliances taking the total number of hotels in
its fold to 59 with an aggregate room inventory of 4817. The brand now has
34 operating hotels. Four more hotels are slated to be commissioned during
the course of the next financial year. The remaining 21 hotels are in
various stages of development. The WelcomHeritage' brand has grown to 67
hotels, out of which 54 are operational and the remaining 13 are under
development.

The ITC-Welcomgroup chain, with its globally benchmarked levels of product
and service excellence and customer centricity is not only well positioned
to sustain its leadership position in the industry, but is also poised to
emerge as the largest hotel chain in the country over the next few years.

C. PAPERBOARDS, PAPER AND PACKAGING:

The Paperboards, Specialty Paper and Packaging segment recorded robust
growth in revenues and profits. Segment Revenues grew by 15% over the
previous year to touch Rs. 3234 crores. Segment Results at Rs. 684 crores
reflect a growth of 35%.

Paperboards & Specialty Papers:

The Global Paper and Paperboards Industry is estimated to grow at 4% in the
ensuing year after two consecutive years of slowdown. Asian markets
(excluding Japan) are expected to grow at 9% per annum in the near term
with China and India continuing to lead the growth.

The domestic Paperboards industry grew by about 7% in 2009-10 against 6% in
the previous year and is expected to gain momentum and grow at around 9%
per annum over the next 5 years. Value-added products are expected to grow
at a higher rate of about 15% per annum during this period. A robust
economy coupled with changing consumer preference for branded products with
unique and sophisticated packaging is expected to drive increased demand
for superior quality paperboards. The pharma, textiles, FMCG, modern retail
and consumer electronics segments offer significant growth opportunities.

The domestic Paperboards market size is about 2 million tons per annum and
is characterized by fragmented capacities, serviced by over 100 mills. Only
a few mills have been able to deliver desired quality standards on a
consistent basis. Your Company is the market leader in the Paperboards
segment with a wide range of products, a value market share of about 26%
and a significantly higher share of the fast-growing value added
paperboards segment. In order to sustain its pre-eminent position in the
Paperboards segment, the business plans to invest in a state-of-the-art
machine which is expected to be operational by early 2012.

The Indian Paper Industry at 9 million tons per annum accounts for about 2%
of the world's production of paper and paperboards. India is globally the
fastest growing market for paper, with paper consumption estimated to touch
14 million tons by 2015-16. Growth in the Writing and Printing' paper
industry in 2009-10 was about 6%. This segment is expected to grow at about
8% per annum during the next 5 years, with higher growth in the premium
quality coated papers and branded copier paper categories at 12%. In the
case of specialty papers, increased infrastructure spending and growth in
construction will drive demand for quality decor and insulating grades.

The state-of-the-art new paper machine commissioned in 2008 operated to
full capacity during the year, enabling your Company to make a significant
entry into the Paper segment of the industry. The copier and writing paper
produced by this machine has enabled higher order value capture on the back
of the strong forward linkages with your Company's Education and Stationery
Products business.

Your Company is the largest manufacturer of cigarette tissue in India and
continues to be the market leader with a share of 65% of the domestic
market. In the growing decor segment, your Company continues to record
steady growth with a market share of 26%.

Total production of Paper and Paperboards during the year stood at 547,931
tons compared to 469,335 tons during the previous year. Overall sales,
including internal transfers, grew by 19% to 549,181 tons, with the value
added paperboards growing at a faster pace of 29%. Export turnover for the
year grew by 38%. Currently, the business exports to more than 50 countries
including UK, UAE, Turkey, Greece, Sri Lanka, Bangladesh, Iran and Nigeria.

Despite inflation in input costs and pricing pressures in the Writing and
Printing' paper segment, the business posted a sterling performance driven
by higher overall productivity, higher value capture through increased
usage of in-house pulp, superior product mix and several cost management
initiatives.

Over the years, your Company has pursued an aggressive clonal propagation
strategy to address the twin challenges of securing long term supply of
fibre and remaining cost competitive. This strategy makes available in-
house developed high-yielding clones and seedlings of the desired pulp wood
species together with extension services to farmers engaged in plantation
of pulp wood on their marginal wastelands. The quality of these clones and
seedlings, products of your Company's bio-technology based research
programme, has been tested for its effectiveness over the last 14 years in
more than 100,000 hectares of plantations, including 13,000 hectares
planted during the year under review. Enhanced R&D activity has resulted in
the development of high yielding Subabul' clones. Continued focus on
clonal plantations in core areas is expected to yield significant
competitive advantage in the years to come. Your Company's R&D is actively
collaborating with several expert agencies to further leverage bio-
technology to enhance both farm and manufacturing yields.

Your Company continues to represent to policy makers to introduce
appropriate amendments to the Forest Conservation Act, 1980 and related
Rules to permit the industry to use degraded forest land for afforestation
linked to the end-use of such wood. An enabling policy framework that would
inter alia promote public-private partnerships for the development of
degraded forest lands would serve the multiple objectives of enhancing the
competitiveness of the Indian paper and paperboards industry, creating
sustainable livelihoods in rural India and enhancing the green cover.

Waste paper is a key source of fibre in the manufacture of recycled boards.
Unfortunately, mobilization of waste paper in India has been very low at
14% as against 60% in developed countries. Your Company has launched a
collaborative initiative, called WOW' (Wealth Out of Waste), for improving
waste paper recycling. It has established an efficient collection and
recycling chain, targeting large sources of aggregation such as schools,
offices, residential colonies and apartments. During the year, the business
sourced 18,000 tons of waste paper through this initiative.

In line with your Company's commitment to achieve yet another environmental
milestone of being solid waste recycling positive', the Tribeni and
Bhadrachalam units accomplished that goal during the year. The business has
been able to achieve an overall positive solid waste recycling footprint by
procuring and recycling over 125,000 tons of waste paper during the year.
The business is also working on various Clean Development Mechanism (CDM)
projects under the Kyoto Protocol to enable full realization of potential
benefits in this area. Your Company's unique social forestry project has
been the first of its kind in India to be registered with the United
Nations Framework Convention on Climate Change (UNFCCC) as a CDM project.
The net benefits from this project will be passed on to the partnering
farming communities. In yet another of its sustainability initiatives, the
business commissioned a green' boiler with a capacity of 90 tons per hour
in its Bhadrachalam unit during the year. The green' boiler uses biomass
sourced from wood and agricultural waste as fuel, yielding substantial cost
reduction, apart from earning CERs (Certified Emission Reduction) under the
CDM.

During the year your Company became a member of the WWF - World Wide Fund
for Nature's Global Forest and Trade Network (WWF GFTN), the first Indian
Company to have been so invited. The business also won the Forest
Stewardship Council's (an organization established to promote the
responsible management of the world's forests) Chain of Custody'
certification (FSC-COC) for its units at Bhadrachalam (FSC-Mixed) and Kovai
(FSC-Recycled). This certification is a global industry benchmark for
sustainable development. All units of the business have obtained the ISO
9001, ISO 14001 and OHSAS 18001 certification. The Bhadrachalam unit was
awarded the Sword of Honour' by the British Safety Council. All four units
got the 5 Star Rating' from the British Safety Council for the first time
in the same year. Further, the Bhadrachalam unit received the 5 Star Audit
Grading for Environment' in the very first audit.

The end-to-end ERP system was successfully implemented during the year. The
system will provide real-time information for faster decision making and
improved operational management.

Continuing inflation in the cost of domestic raw materials and imported
pulp will exert pressure on industry profitability in the near term. Your
Company, with an expanded and fully functional pulp mill and a well
differentiated product portfolio is well positioned to mitigate the impact
of these cost escalations. The integrated nature of the business model-
access to high-quality fibre from the economic vicinity of the Bhadrachalam
mill, in-house pulp mill and state-of-the-art manufacturing facilities on
the one hand and a robust forward linkage with the Education and Stationery
Products business on the other - strategically positions your Company to
further consolidate and enhance its leadership status in the Indian Paper
and Paperboards industry.

Packaging and Printing:

Your Company's Packaging and Printing business continues to make
investments in world-class technology and skills to consolidate its
position as the leading provider of high quality paperboard and flexibles
packaging in the country. The business provides strategic sourcing support
to your Company's cigarette and other FMCG businesses by ensuring security
of supplies and sustaining international quality at competitive cost.
During the year under review, the business achieved substantial growth in
its external trade and emerged as a leading supplier of value added
packaging to the Consumer Electronics and FMCG segments. The business
continued to leverage the state-of-the-art flexible manufacturing
facilities at Chennai and Haridwar to provide innovative packaging
solutions to your Company's Branded Packaged Foods and Personal Care
businesses. The in-house capability to deliver best-in-class packaging
solutions is reducing time-to-market for new launches and is a source of
competitive advantage for these businesses.

Capacities are being augmented at both the Chennai and Haridwar units to
cater to the increased packaging requirements of your Company's FMCG
businesses and to service the expanding universe of external customers.
Your Company's full range of capabilities, riding on multiple packaging
platforms, will enable the business to consolidate its strong position in
the domestic market and build a growing franchise in the export markets.

The 14.1 megawatt wind energy farm, which was commissioned in 2008, is
operating at optimum levels providing clean energy to the Chennai unit.
This initiative, flowing from your Company's commitment to the Triple
Bottom Line', obtained the UNFCCC registration under the Clean Development
Mechanism of the Kyoto Protocol during the year, making it eligible for
carbon credits.

The factories at Chennai, Munger and Haridwar maintained the highest
standards in Environment, Health and Safety (EHS) and quality management
during the year. The business won several national awards for excellence in
printing, as well as the World Star' award for excellence in packaging.
The Munger unit was certified at Level 8 of the International Quality
Rating System (IQRS) as audited by Det Norske Veritas (DNV) during the
year. This is the second such certification for the business with the
Chennai unit having achieved the distinction of being the first unit in
India to receive this rating in the year 2007. All the three units at
Chennai, Munger and Haridwar received the 5 Star Rating' for safety from
the British Safety Council.

With substantial investments in technology, well-honed quality systems and
distributed and diversified manufacturing capability, the business is well
poised to sustain its position as one of the foremost packaging houses in
the country.

D. AGRI BUSINESS:

Cigarette Leaf Tobacco:

Triggered by increasing farm prices on the one hand and growth in the
global Cigarette markets on the other, tobacco production continued to
increase, largely driven by producers in Asia and Africa. While the four
large international cigarette manufacturers and the Chinese monopoly were
the key drivers of demand growth, China, India and Africa (Zimbabwe,
Malawi, Tanzania, Zambia, Uganda, Kenya and Mozambique) were the main leaf
tobacco supply regions. In India, driven by the unprecedented farm price
increase during 2008 and an enhanced export demand, leaf tobacco production
scaled a new peak during 2009 with all major flue-cured and burley crops
registering an increase in acreage and productivity. Farm prices registered
a further increase over the 2008 levels, making leaf tobacco one of the
most remunerative crops for the farmer. However, enhanced production in
China and increased availability of leaf tobacco in Africa are expected to
stabilize the escalating demand and spiraling prices of the past few years.
Burley and oriental tobaccos have moved into a moderate over supply
situation with the revival of the crop in Malawi, Mozambique and other
African nations. In 2010, the global supply-demand situation is expected to
sustain growing dependence of international blends on Indian tobaccos. With
demand estimated to continue exceeding supply, Indian tobaccos are expected
to retain customer preference. Since flavour is not a competitive strength
of Indian tobacco, focussed attention to reliability, scalability, product
integrity service and competitive pricing would be imperative to sustain
and grow market share.

In addition to the development of the first series of Flue Cured Hybrids,
your Company's concerted efforts during the year on varietal improvement
resulted in the identification of two Advanced Breeding Lines for specific
regions in Andhra Pradesh and Mysore. A new system of improved nursery
management was designed to enhance seed use efficiency. It has resulted in
the production of superior quality seedlings with an optimum use of crop
production chemicals, besides conserving irrigation water. Appropriate
agronomical practices were formulated to harness the potential of the newly
developed varieties. Farmers benefited through significantly higher
productivity coupled with desirable quality traits. Further, technical
collaboration with international agencies in burley and oriental tobaccos
helped in devising crop specific package of practices for the production of
preferred styles. These pioneering R&D interventions augmented with
dedicated crop development initiatives in different growth regions have
ensured desirable levels of production, enabling the Indian farmer to move
towards global standards in crop cultivation. Capitalising on your
Company's R&D efforts on varietal improvement, the growing areas of Flue-
Cured Virginia hybrids were substantially increased in collaboration with
the Central Tobacco Research Institute and the Tobacco Board of India. In
addition, chemistry and flavour benchmarked grades of tobacco have started
yielding benefits in terms of product characteristics and financial
returns.

Leveraging the growing demand for the Indian crop, your Company further

cemented its position as the foremost supplier of quality Indian tobaccos
in the global market, achieving a record export growth of 86% over last
year. Your Company is now ranked 6th among global leaf tobacco exporters.

The business continued to provide strategic sourcing support to your
Company's Cigarette business.

On the domestic front, deepening challenges are manifesting in multiple
ways. As explained in an earlier section of this Report, Indian cigarette
manufacturers continue to face unilateral and arbitrary increases in excise
duties, VAT and entry tax coupled with restrictive regulations and the
menace of illegal domestic cigarettes. The combination of high taxation and
harsh regulations, targeted almost exclusively at the cigarette industry,
is putting serious pressure on consumers to migrate to alternate and
lightly taxed tobacco products. Such a punitive and discriminatory approach
to cigarette taxation and regulation will adversely impact domestic demand
with severe consequences for tobacco farmers and all others who depend on
the tobacco value chain for their livelihood. An equitable and balanced
approach to cigarette taxation is imperative to de-risk the tobacco
dependants from harsh consequences to their livelihoods.

Your Company continues to focus on maintaining the highest quality and
safety standards in the factories. During the year, the Anaparti unit
upgraded its Quality Management System from ISO 9001:2000 to ISO 9001:2008.
Both the Chirala and Anaparti units upgraded Social Accountability
Management System from SA 8000:2001 to SA 8000: 2008. The Chirala unit also
upgraded its Occupational Health and Safety Assessment Series (OHSAS) from
the 1999 standard to the 2007 standard.

In order to meet the increasing requirement for processing capacity, the
business is in the process of establishing a green leaf processing plant
near Mysore.

Your Company, with its outstanding R&D capability, unique crop development
and extension expertise, contemporary processing facilities and deep
understanding of customer and farmer needs is poised to leverage the
emerging opportunities for the Indian leaf tobacco industry.

Agri Commodities:

Global agricultural commodity prices were soft and benign for most part of
the year in the wake of a recessionary overhang. In India however, a poor
monsoon during 2009 led to an 8% fall in agricultural production with food
grain output falling by about 10%. Food inflation, which touched a high of
20% in December 2009, emerged as a key concern in macro-economic
management. Domestic prices of all agricultural produce continued their
upward trend. This led to the Government of India extending the ban on
export of rice and wheat. Stock control limits on most agri commodities
imposed earlier continued through the year in several States.

A good soya crop in the US and Argentina led to lower prices for soya meal
in the international markets. However, an erratic monsoon in India resulted
in below-normal soya output and consequent higher farm prices. Price
disparity between the global and Indian markets rendered Indian soya meal
uncompetitive, adversely affecting your Company's soya meal exports. In
order to insulate the business from such volatile price cycles, your
Company piloted an agri commodity sourcing services model' which provides
its customers an integrated offer comprising sourcing advantage, credit and
stock and risk management services. This model, apart from being relatively
risk free, is designed to provide consistent returns even in a volatile
market scenario. The model, which was well received by customers, is being
scaled up.

During the year, the business introduced several new products and continued
to acquire new customers in the value-added processed fruits segment. This
strategy helped the business to partially mitigate the impact of recession
in its key export markets. Special focus was initiated on expanding
supplies of value-added products to the domestic market as well. Your
Company continued its initiative of developing a robust supply chain for
production and marketing of organic fruits with farmers across various
States in the country. Farmers are being trained to deploy organic farming
techniques, Good Agriculture Practices' (Global GAP) and product
traceability systems through demonstration plots and extension services
designed to help them obtain international organic certification.

The business continued to source identity preserved specific grades of high
quality wheat through the e-Choupal network for your Company's Branded
Packaged Foods business. Significant cost and quality advantages were
achieved through sourcing across geographies based on price optimisation
and by just-in-time direct procurement at the processing units. In sourcing
chip stock potato for your Company's Bingo!' brand of potato chips, the
business scaled up sourcing of locally grown potatoes (closer to the
manufacturing units) in order to support local farmers and minimise
logistics costs. Significant progress was made on this front during the
year, with over 50% of the potato requirements for the Haridwar plant being
sourced locally. The business also carried out successful trials on new
varieties of potato with longer storage life in Madhya Pradesh and Gujarat
to secure a cost effective alternative to expensive offseason buy.
Synergies with Technico Agri Sciences Ltd, a step-down subsidiary of your
Company, continued to be leveraged in the form of access to high quality
seeds and internationally benchmarked agronomy practices.

Your Company's neem-based organic manures such as Wellgro Soil', Wellgro
Grains' and Wellgro Crops' continue to gain wide acceptance amongst the
farming community and corporate houses engaged in contract farming. These
products were endorsed by Control Union (European agency for certifying
organic status) as organic inputs under stringent quality specifications of
the National Program on Organic Production (NPOP). During the year, the
business introduced a new organic manure - Wellgro Crops' in liquid form
for horticultural crops like chillies, tomato, banana, citrus fruits and
leafy vegetables - which has been well received by the farming community in
Andhra Pradesh and Karnataka. Wellgro Crops' has been empanelled under the
National Horticulture Mission as part of the Organic Farming and Integrated
Nutrient and Pest Management programs. During the year, the business
strengthened its supply chain in Maharashtra, Karnataka, Andhra Pradesh and
Gujarat for improved market reach and service to larger sections of the
farming community. Your Company has tied up with several agricultural
research organisations for taking up field trials on major crops and for
propagating Integrated Nutrient and Pest Management practices. Your Company
has also taken up intensive R&D activities to develop crop and market
specific eco-friendly inputs based on biological and natural products.

With growing concerns relating to food safety and product integrity, there
is an increasing demand for suppliers with end-to-end' capabilities and
complete custody of the supply chain, supported by appropriate technology
and quality, and augmented with traceability management systems to provide
the required product assurance. Your Company seeks to harness this
opportunity by building the business model on the strength of customized
products and services with requisite crop development, state-of-the-art
infrastructure and tailor-made processes to garner an increasing share of
the fast growing domestic and export markets. During the past four years,
apart from providing support to the Aashirvaad' range of spices, the
business has gained considerable market standing amongst large domestic and
export customers as a supplier of assured quality with customized processes
and infrastructure. The business continues to leverage differentiation and
customization for enhanced value capture by targeting sales to large food
and industrial users of spices, medicinal and aromatic plants and their
derivatives.

Despite a very poor monsoon which adversely affected the country's farm
sector credit off-take, your Company actively pursued its initiative of
marketing Kisan Credit Cards on behalf of the State Bank of India. The
quantum of farmer loans facilitated by the channel grew 29% during the
year. Credit camps organised by the business to help farmers improve the
awareness of a seemingly complex product like Kisan Credit Card drew all
round appreciation from farmers and other stakeholders. This increased
awareness and continuous communication at the field level significantly
improved the quality of documentation and helped achieve a substantial
reduction in rejection of applications and improved turnaround times.

In the rural retailing initiative, several innovative activities were
undertaken during the year to enhance engagement with rural consumers
including a sales incentive scheme for village lead farmers (Sanchalaks),
discount coupons and lucky draws for farmer-customers and re-designed store
layouts for improved product visibility. These interventions have resulted
in a positive consumer response with sales of FMCG, Apparel and Grocery
categories increasing by 24% over the previous year.

Distribution of FMCG products in the rural markets through the e-Choupal
network gained traction with throughput during the year recording an
impressive increase of 44%. Plans are on the anvil to expand distribution
reach of this initiative to more than 50,000 villages over the next 12
months.

Following the semi-urbanisation of some of the top-tier villages, rural
youth from these areas now prefer urban jobs to agriculture and farm
employment. Recognising the potential opportunity for the e-Choupal model
in this space, the business, in alliance with Monster India - an online
career and recruitment firm - launched a web portal christened
rozgarduniya.com' during the year. This portal will enable job seekers in
rural areas to apply for jobs through e-Choupals. The launch has met with
very encouraging response and is being scaled up.

Your Company has been selected to be part of a consortium by the UK
Department for International Development (DFID) to work on Poorest States
Inclusive Growth Programme' (PSIG). The programme aims to enable the poor
in the rural areas of identified backward states in India to contribute to
and benefit from economic growth. The programme, which will also be driven
through your Company's e-Choupal network, plans to achieve this objective
by expanding access to markets and finance for poor communities, creating
sustainable small-scale business models, promoting efficient and
sustainable financial intermediation channels and establishing community
owned institutions. The programme, which is currently undergoing a detailed
pre-implementation review, will be rolled out over the next 6 years.

All these initiatives will progressively transform the e-Choupal model into
an all-weather venture - relatively de-risked from regulatory uncertainties
and market volatility - even as it continues to serve as an effective
intervention model for rural development.

NOTES ON SUBSIDIARIES:

The following may be read in conjunction with the Consolidated Financial
Statements enclosed with the Accounts, prepared in accordance with
Accounting Standard 21. Your Company has been exempt from the provisions of
Section 212(1) of the Companies Act, 1956 relating to the attachment of the
accounts of its subsidiaries to its Accounts. Shareholders desirous of
obtaining the annual accounts of your Company's subsidiaries may obtain the
same upon request. The report and accounts of the subsidiary companies will
be kept for inspection at your Company's registered office and those of the
subsidiary companies. Further, the report and accounts of the subsidiary
companies will also be available at the Shareholder Value' section of your
Company's website, www.itcportal.com in a user friendly, downloadable
format.

ITC Global Holdings Pte. Ltd., Singapore (ITC Global'), a subsidiary of
your Company, was under Judicial Management since 8th November, 1996 till
30th November, 2007. On an application of the Judicial Managers of ITC
Global, the High Court of the Republic of Singapore on 30th November, 2007
ordered winding up of ITC Global, appointed a Liquidator and discharged the
Judicial Managers. Consequently, your Company is not in a position to
consolidate the accounts of ITC Global and its subsidiaries for the
financial year ended 31st December, 2009 or to make available copies of the
same for inspection by shareholders.

Surya Nepal Pvt. Ltd.:

During the year under review the political environment in Nepal remained
volatile with changes in the composition of the ruling coalition and rising
tensions within and amongst political parties. The proposed new
Constitution stayed unwritten, and social, economic and political
disruptions continued to take place from time to time. However, in spite of
the political uncertainty, Nepal remained relatively sheltered from the
impact of the global recession, with the economy registering a GDP growth
of 3.8% for the financial year ending mid July 2009. The GDP growth
forecast for 2009-10 stands at 3.5%.

Notwithstanding the challenging socio-political environment, the company's
growth and performance continued on an upward trajectory. In the twelve-
month period ended 13th March 2010, the company's sales grew by 30% to
Nepalese Rupees 1005 crores (net of VAT). Profit After Tax at Nepalese
Rupees 181 crores represents an increase of 25% over the previous year. The
company's sales (net of VAT) accounts for almost 1% of Nepal's GDP, while
its contribution to the Exchequer accounts for about 3% of the total
revenues of the Government of Nepal. The company continues to retain its
status as the single largest private sector contributor to the Exchequer.

The company's cigarette business continued to make good progress and
maintained its leadership position with focus on the premium end of the
market, capturing a larger value share. The Surya' trademark is the
undisputed value leader in the premium segment, capturing consumer
franchise in the face of competing international brands. Khukuri', the
largest selling trademark of the company showed healthy growth. Pilot', a
brand launched two years ago in the regular-size filter segment, continues
to garner significant share. On the manufacturing front, the company
invested in new technology packing lines to sustain superior and consistent
product quality, and made sustainable improvements in supply chain and
inventory management. Energy conservation measures were further reinforced.

Despite the agro-climatic challenges of growing tobacco in Nepal, the
company's continuous guidance to tobacco farmers from the stage of seed
development to crop harvesting and provision of customized extension
services helped enhance productivity and quality. Efforts are underway to
further improve the quality of domestic grades. Encouraged by these
interventions, farmers have increased the acreage under leaf cultivation.

During the year under review, the garments export business was adversely
impacted by increased import taxes in India from July 2009, depreciation of
the US Dollar vis-a-vis the Nepalese Rupee and disruptions in the supply
chain owing to frequent strikes and blockades. However, in spite of these
challenges, the company leveraged its new, state-of-the-art garment
manufacturing facility at Biratnagar to meet export orders for the Wills
Lifestyle' and John Players' range of apparel as well as to support the
company's foray into new export markets, especially in the European Union
(EU) and the United States (US). The recent removal in February 2010, of
Additional Customs Duty of 4% on all garment imports into India, will also
provide further impetus to the business in coming years.

In the domestic garments market, John Players' and Miss Players' have
become leaders in the branded apparel segment with a strong presence in the
minds of consumers. Springwood', the company's mass market brand
positioned as an alternative to low priced imports from China and South
East Asia, has grown and further consolidated its position in the value
for money' segment.

In the Matches business, which the company entered two years ago, the sales
of its brand Tir' grew 80% and further strengthened its strong consumer
franchise.

The company continued to remain committed to its role as a responsible
corporate citizen and promoted sports and tourism in the country under the
Surya Nepal Khelparyatan' programme. During the year, the company
sponsored the Surya Nepal Masters' which is the country's top professional
golf tournament and the Surya Nepal Golf Tour' which is Nepal's first
professional golf tour.

The company declared a dividend of Nepalese Rupees 98/- per equity share of
Nepalese Rupees 100/- each for the year ended 31st Ashad 2066.

ITC Infotech India Limited:

During the year under review, the global economic downturn continued to
impact IT spends in target markets resulting in reduced budgets, cost
cutting initiatives, longer decision making cycles and pricing pressures
from existing customers. Overall, this meant a relatively low growth rate
for the Indian IT services industry which responded by tightening cost
structures, crafting new, low-cost solutions for customers and seeking new
growth markets. Despite the severe challenges resulting from such adverse
market conditions, the company grew total income for the year by 8% and
significantly improved its profitability. New customer acquisitions and
renewed thrust on scaling up existing engagements in target industry
domains, solution areas and focus technologies were critical to achieving
this performance.

For the year under review:

(a) ITC Infotech India Ltd. registered an Income of Rs. 377.71 crores
(previous year Rs. 349.72 crores) and a Profit After Tax of Rs. 34.01
crores (previous year Rs. 3.04 crores);

(b) ITC Infotech Limited, UK, (I2B) a wholly owned subsidiary of the
company, registered a Turnover of GBP 19.44 million (previous year GBP
20.61 million) and a Net Profit of GBP 0.69 million (previous year GBP 1.02
million).

(c) ITC Infotech (USA), Inc., (I2A) a wholly owned subsidiary of the
company, together with its wholly owned subsidiary Pyxis Solutions LLC,
registered Total Revenues of US$ 30.99 million (previous year US$ 33.05
million) and a Net Profit of US$ 0.08 million (previous year Net Profit US$
1.82 million).

Although, as mentioned earlier, the Industry was adversely impacted by
reduced IT spending in most parts of the world as well as the threat of
protectionism' in some target markets, there was an improvement in
business sentiment towards the end of 2009-10, reflecting in a stronger
sales pipeline for the Indian IT services industry. Most governments view
the IT sector as an important engine of economic growth and many are taking
measures to stimulate sector output as a means of accelerating economic
recovery.

The company leveraged this opportunity to maintain its strong pace of new
customer acquisitions. The company added new marquee customers to its
portfolio across Americas, Europe and India and made significant forays
into Latin America and Western Europe. In line with its strategy of being
closer to the customer, the company, during the year, opened branch offices
in South Africa and the Netherlands.

The company continues to invest in building strong and differentiated
capabilities in its target markets. Some of these capabilities include
customer loyalty solutions for airlines, hospitality and retail industries,
tailored solutions for the chemical, printing and packaging industries
based on the SAP platform and incubating new solutions for the
pharmaceutical industry. Oracle has partnered with ITC Infotech to
establish an Oracle Industry Solution Center of Excellence', a strong
validation of the company's domain and technical capabilities in certain
key industry verticals. The company's strategic relationship with
Parametric Technology Corporation enables it to provide highly specialized
global support to organizations in managing their product lifecycle
processes.

Capitalising on the emerging market for low cost solutions, the company
invested in building technology solutions for its customers on a pay-per-
use mode. The company has also developed significant expertise in open
source solutions that enables its customers to integrate and present
business information from existing disparate sources in a seamless manner,
at relatively lower costs.

The company's focus on building deep and differentiated capabilities is
being increasingly validated and recognized by global analyst firms. The
company has been featured for the fourth year in a row in the Leader's
Category' for the 2010 Global Outsourcing 100 by the International
Association of Outsourcing Professional (IAOP) and has also been recognized
as being amongst the top 20 Industry leaders focused on the consumer goods
and retail industry. The company continues to be featured in the Global
Services 100 list for the fifth year in a row.

The company continues to focus on enhancing its internal systems and
processes in order to continuously improve the quality of its services to
customers and has established a centre of excellence for project
management. The company has been ISO 9001: 2008 certified by DNV.

The company continues to invest in building its talent pool and improving
its delivery and support processes to build resource capabilities and
improve efficiencies. According to a recent NASSCOM industry estimate,
talent shortfall will continue over the next few years leading to
increasing pressure on talent availability. The company continues to
sharpen its focus on growing and nurturing talent internally through
continuous employee engagement and training programs. On the basis of the
company's practice of empowering employees, being aligned to international
human rights norms and national labour laws, the company was certified SA
8000: 2008 by DNV.

With strategies in place to expand to new markets, a portfolio of
differentiated solutions, the ability to provide superior customer care and
excellence in delivery through project management capabilities, knowledge
management, solution accelerators and a robust quality system, the company
is poised to achieve rapid growth.

Russell Credit Ltd.:

During the year, the company registered an income of Rs. 51.81 crores and a
Profit After Tax of Rs. 41.93 crores. Investments aggregating Rs. 387.31
crores held by the company in Agro Tech Foods Limited, VST Industries
Limited, EIH Limited and Hotel Leelaventure Limited were sold to your
Company at their respective book values.

As stated in earlier Reports, a petition was filed by an individual in the
High Court at Calcutta, seeking an injunction against the company's Counter
Offer to the shareholders of VST Industries Ltd., made in accordance with
the Securities and Exchange Board of India (Substantial Acquisition of
Shares & Takeovers) Regulations, 1997, as a competitive bid, pursuant to a
Public Offer made by an Acquirer, which closed on 13th June, 2001. The High
Court at Calcutta, while refusing to grant such an injunction, instructed
that the acquisition of shares pursuant to the Counter Offer by the company
and the other Acquirer would be subject to the final Order of the High
Court, which is still awaited. Similar suits filed by an individual and two
shareholders of VST, in the High Courts of Delhi at New Delhi and Andhra
Pradesh at Hyderabad, had earlier been dismissed by the respective High
Courts.

Wimco Limited:

The company achieved a Turnover of Rs. 216 crores, registering a growth of
19% over the previous year on account of higher unit realization in the
Matches business and an improved performance in the Engineering and Agro
Forestry businesses of the company. However, in spite of the growth in
sales and realizations, the company posted a net loss for the year of Rs.
16.24 crores against a net profit of Rs. 1.12 crores in the previous year,
primarily as a result of steep increases in input costs.

During the year under review, margins in the Matches business were under
pressure due to a very sharp escalation in the prices of raw materials,
primarily wood, splints, paperboard and key chemicals. A contemporary match
manufacturing line was installed at the Kolkata unit during the year for
improved efficiencies and better quality. This technology has been fully
absorbed and is working satisfactorily. Several other measures were also
taken to rationalize costs and improve margins in this highly competitive
category.

The Engineering business of the company registered a growth of 25% over the
previous year as the investment climate improved towards the second half of
the year with customers confirming orders for packaging machines. This
business is poised for further growth through new customer acquisitions,
both in the domestic and overseas markets. The business plans to leverage
new and improved product designs to offer superior packaging solutions to
customers.

Availability of critical raw material like wood at competitive prices is
crucial for the success of this industry. The Agro Forestry business of the
company is taking steps towards this end by supplying high quality poplar
ETPs (Entire Transplant) to farmers in North India. The supply of ETPs
during the year at 4.5 million registered a growth of 28% over the previous
year. This initiative not only creates a long-term sustainable source of
supply of a critical raw material, but also directly creates employment and
livelihood and improves the green cover in the region.

Srinivasa Resorts Limited:

During the financial year ended 31st March, 2010, the company recorded an
income of Rs. 54.57 crores (previous year - Rs. 62.27 crores) and a Profit
Before Tax of Rs. 14.11 crores (previous year - Rs. 18.53 crores). Profit
After Tax stood at Rs. 9.62 crores (previous year - Rs. 12.66 crores) after
providing for income tax of Rs. 4.49 crores (previous year - Rs. 5.87
crores). The financial performance of the company's hotel at Hyderabad, ITC
Kakatiya, was adversely impacted by the continuing economic slowdown and
the political instability in the State resulting from the Telengana
agitation. The hotel initiated various measures to contain costs and
improve profitability without compromising on the quality of superior guest
experience.

Despite the adverse market conditions, the company continues to make
investments in maintaining the contemporariness of its hotel property. The
hotel received the Greentech Environment Excellence Award' from the
Greentech Foundation and the Golden Peacock' Award for its outstanding
achievement in Environment Management. The hotel also received the Times
Food Guide' best restaurant award for Kebabs & Kurries' and Dakshin', and
the best pub award for Dublin'.

The Board of Directors of the company has recommended a dividend of Rs. 2/-
per equity share of Rs. 10/- each for the year ended 31st March, 2010.

Fortune Park Hotels Ltd.:

During the financial year ended 31st March, 2010, the company recorded an
income of Rs. 1492 lakhs (previous year Rs. 1290 lakhs) and earned a Profit
After Tax of Rs. 213 lakhs (previous year Rs. 143 lakhs) after providing
for income tax of Rs. 120 lakhs (previous year Rs. 89 lakhs).

The company, which caters to the mid-market to upscale' segment, forged
new alliances during the year taking the total number of properties under
the Fortune brand to 59, with a total room count of 4817. Of these, 34
properties are operating hotels. Another 4 hotels are slated to be
commissioned during the course of the financial year 2010-11. The remaining
21 hotel projects are under various stages of development. The company
seeks to be a dominant player in the mid market to upscale segment,
providing quality products and services that would position Fortune' as
the premier value' brand in the Indian hospitality sector.

The Board of Directors of the company has recommended a dividend of Rs. 6/-
per equity share of Rs. 10/- each for the year ended 31st March, 2010.

Bay Islands Hotels Limited:

During the year 2009-10, the company earned an income of Rs. 101.08 lakhs
(previous year Rs. 96.75 lakhs) and Profit After Tax of Rs. 67.94 lakhs
(previous year Rs. 63.85 lakhs) after providing for income tax of Rs. 26.69
lakhs (previous year Rs. 26.99 lakhs).

The Board of Directors of the company has recommended a dividend of Rs.
50/- per equity share of Rs. 100/- each for the year ended 31st March,

2010.

Landbase India Limited:

Landbase India Ltd. (Landbase) owns and operates The Classic Golf Resort',
a Jack Nicklaus Signature Course, 45 Kms from Delhi. As reported in the
previous years, golf based resorts present attractive long-term prospects
in view of their growing popularity all over the world. The work towards
creating a destination luxury resort hotel at the Classic Golf Resort is
now at an advanced stage of development. Permissions required for the
commencement of the project are in place and the work is likely to commence
in the ensuing financial year.

During the year, the company increased its Authorised Share Capital from
Rs. 10 crores (One crore equity shares of Rs. 10/- each) to Rs. 200 crores
comprising Equity Share Capital of Rs. 50 crores (Five crore equity shares
of Rs. 10/- each) and Preference Share Capital of Rs. 150 crores (One crore
Fifty lakhs preference shares of Rs. 100/- each). During the year, the
company issued and allotted to ITC Limited, (i)1,01,00,000 Redeemable
Preference Shares of Rs. 100/- each for cash at par, aggregating Rs. 101
crores and (ii) 4,60,00,000 Equity Shares of Rs. 10/- each for cash at par
on Rights Basis' aggregating Rs. 46 crores. The proceeds from the
Preference Share and Rights issues were utilized by the company during the
year to repay to your Company the outstanding loans and advances
aggregating to Rs.145.14 crores.

Technico Pty Limited:

The company continued to focus on the commercialisation of its proprietary
TECHNITUBERr technology and subsequent field multiplication of seed
potatoes through its wholly owned subsidiaries in different geographies.
The company is also engaged in the marketing of TECHNITUBERr seeds to
global customers from the production facilities of its subsidiaries in
India, China and Canada. Operating results of the company and its
subsidiaries as a whole reflect significant improvement over the previous
year.

During the year under review, Technico's leadership in the production of
early generation seed potatoes and strong agronomy skills has been
leveraged by your Company's Branded Packaged Foods business in its chip
stock sourcing operations for the Bingo!' brand of potato chips as well as
by the Agri Commodities business in servicing the seed potato requirements
of its farmer base in key states. The resultant higher sales, together with
improved pricing and margins under conducive market conditions enabled the
Indian subsidiary of the company to double its revenues and grow its
profits fourfold.

For the year under review:

a) Technico Pty Ltd., Australia registered a Turnover of Australian Dollar
(A$) 1.95 million (previous year: Nil) and a Net Profit of A$ 0.71 million
(previous year: loss of A$ 0.39 million). During the year the company
revised its business model and engaged in sale of TECHNITUBERr seeds
produced by its operating subsidiaries in India and China instead of
engaging in fee based marketing of such seeds to its customers. The
consequential improvement in margins together with cost control measures
resulted in superior operating performance. The company has also reversed,
to the extent of A$ 0.51 million, the previous write down of its investment
in its wholly owned subsidiary Technico Asia Holdings Pty Ltd., Australia
consistent with the reversal of previous write downs by the said Australian
company of its investment in its Chinese subsidiary.

b) Technico Asia Holdings Pty Ltd., Australia did not engage in any
activity during the year, other than holding the entire shareholding of
Technico Horticultural (Kunming) Co. Ltd., China. During the year, the
company earned a Net Profit of A$ 0.51 million [2009:Nil] representing a
reversal of the previous write down of its investment in its subsidiary,
Technico Horticultural (Kunming) Co. Ltd., China so as to reflect this
investment at the net book value of the underlying assets of the Chinese
company.

c) Technico ISC Pty Ltd., Australia continued to be dormant during the
year.

d) Technico Technologies Inc., Canada registered a Turnover of Canadian
Dollar (C$) 0.12 million (previous year: C$ 0.16 million) and posted a Net
Loss of C$ 0.11 million (previous year: Net Profit of C$ 0.54 million). It
may be recalled that the previous year's results included a onetime gain of
C$ 0.73 million by way of financial grant provided by the government of the
province of New Brunswick, Canada.

e) Technico Agri Sciences Limited, India registered a Turnover of Rs.54.31
crores (previous year: Rs.27.66 crores) and a Profit After Tax of Rs. 14.02
crores (previous year: Rs. 3.02 crores) driven by the growth in sales
volumes of its high quality early generation seed potatoes from 26,292 tons
to 35,079 tons and higher price realisations and margins.

f) For the year ended 31st December, 2009, Technico Horticultural (Kunming)
Co. Ltd., China registered a Turnover of Chinese Yuan (CNY) 4.26 million
(previous year: CNY 11.68 million) and posted a Net Loss of CNY 1.70
million (previous year: Net Loss of CNY 2.86 million). The results of the
Chinese company for the period 1st April 2009 to 31st March 2010, which is
incorporated in the Consolidated Financial Statements of your Company,
reflect a Turnover of CNY 6.07 million (previous year: CNY 11.63 million)
and a Net Profit of CNY 1.15 million (previous year: Net Loss of CNY 1.66
million). The business continues to focus on export of TECHNITUBERr seeds.

King Maker Marketing Inc.:

King Maker Marketing Inc. (KMM) is a wholly owned subsidiary of your
Company registered in the State of New Jersey, USA. It is engaged in the
distribution of your Company's tobacco products in the US market. It also
provides your Company market research and business development services
related to the US market for Tobacco and other FMCG products.

During the year under review, KMM faced a challenging operating environment
with steep Federal Tobacco Tax increases for cigarettes and Roll Your Own
(RYO) tobaccos taking effect from April 1, 2009 followed by tax increases
in several states. Further, in June 2009, the US Congress granted
jurisdiction to the Food and Drug Administration (FDA) for Tobacco
products.

The sharp increase in taxes not only resulted in a rapid decline in
Cigarette industry volumes but also fueled a significant rise in illicit
sales and drove the majors further into the discount segment in which the
company operates. Consequently, the company's pricing power was adversely
affected. The RYO segment of the Industry was decimated and rendered
irrelevant. As a result, KMM's tobacco business witnessed a muted revenue
growth of 3% over the previous year.

Pressure on margins increased with trade preference for the costlier Low
Ignition Propensity' (LIP) cigarettes, even where State laws did not
mandate it. This, together with the rapid shift in consumer preference to
hard packs from soft packs and the sharp decline in the RYO business, led
to inventory obsolescence. The newly introduced FDA User Fee and further
investments in infrastructure and business development for the garments
operations set up in New York in the previous year added to the cost base.
Consequently Post-tax profits have declined by 92% over the previous year.

The operating environment of the company is likely to remain challenging in
the coming year. The various requirements of the FDA, which trigger
progressively over the next three years, will, in 2010, require the company
to make packaging changes and product ingredient disclosures. The company
will continue to review the regulatory and market environment to craft its
strategies and calibrate its initiatives in the US market.

ITC Global Holdings Pte. Ltd.:

The Judicial Managers had been conducting the affairs of ITC Global
Holdings Pte. Ltd., ('Global') since 8th November, 1996 under the authority
of the High Court of Singapore. Pursuant to the application of the Judicial
Managers, the Singapore Court on 30th November, 2007 ordered the winding up
of Global, appointed a Liquidator and discharged the Judicial Managers.

As stated in the previous years' Reports, the Judicial Managers of Global
had filed a Writ against your Company in November 2002 before the Singapore
High Court claiming approximately USD 18.10 million. Based on legal advice,
your Company filed an appropriate application for setting aside the said
Writ. On 2nd March 2006 the Assistant Registrar of the Singapore High Court
set aside the service of writ of summons on the company and some
individuals. Subsequently in November 2006, your Company received a set of
papers purportedly sent by Global including what appeared to be a copy of
the earlier Writ of Summons. Your Company filed a fresh Motion in the
Singapore High Court praying for setting aside the said Writ of Summons,
which was upheld by the Assistant Registrar of the Singapore Court on 13th
August 2007. Global filed an Appeal against this Order before the High
Court of Singapore, which on 30th January, 2009, set aside the order giving
leave to Global to serve the Writ out of Singapore against the company and
also dismissed the said appeal. Thereafter on 14th December, 2009, your
Company received a binder purportedly sent by Global including what
appeared to be a copy of the same earlier Writ of Summons. Based on legal
advice, your Company has again filed a Motion in the Singapore High Court
praying for setting aside the said Writ of Summons, which is pending.

BFIL Finance Limited:

The company continues to focus its efforts on recoveries through negotiated
settlements including property settlements and pursuit of legal cases
against various defaulters. During the year some negotiated settlements
were concluded and the company effected collections aggregating Rs. 50
lakhs. The company had no external liabilities outside the ITC Group. The
company will examine options for further business opportunities at the
appropriate time.

Gold Flake Corporation Limited, Wills Corporation Limited, Greenacre
Holdings Limited & MRR Trading and Investment Company Limited The issued
and paid-up capital of Greenacre Holdings Limited was increased by Rs. 9
crores, which was subscribed to by the holding company Russell Credit
Limited.

There were no major events to report with respect to the other companies.

NOTES ON JOINT VENTURES:

ITC Filtrona Limited:

ITC Filtrona Limited delivered another year of robust business growth with
Gross Sales at Rs. 135 crores growing by 19% over the previous year.
However, pricing pressure, higher input costs and adverse forex rates
impacted margins. Pre-tax profit for the year at Rs. 15.1 crores represents
a growth of 3% over the previous year. The Board of Directors of the
company recommended a dividend of Rs. 9 per Equity share of Rs. 10/- each
for the year ended 31st December, 2009.

The company continued to pursue its quality initiatives during the year and
towards this end upgraded its filter making machine, further consolidating
its market leadership and technological edge over competition.

The company's continuing focus on product and process quality and
innovative product development further strengthened its partnerships with
Indian cigarette manufactures and reinforced its status as their preferred
supplier.

Maharaja Heritage Resorts Limited:

Maharaja Heritage Resorts Limited, a joint venture of your Company with
Jodhana Heritage Resorts Pvt. Ltd., currently operates 54 properties under
the WelcomHeritage' brand and continues to grow with another 13 properties
under development.

RISK MANAGEMENT:

As a diversified enterprise, your Company has always had a system-based
approach to business risk management. Backed by strong internal control
systems, the current risk management framework consists of the following
elements:

- The Corporate Governance Policy clearly lays down the roles and
responsibilities of the various entities in relation to risk management. A
range of responsibilities, from the strategic to the operational, is
specified in the Governance Policy. These role definitions, inter alia,
are aimed at ensuring formulation of appropriate risk management policies
and procedures, their effective implementation and independent monitoring
and reporting by Internal Audit.

- The Corporate Risk Management Cell works with the businesses to identify
and establish the respective risk profiles. The risk profiles include both
strategic risks and operational risks.

- A combination of centrally issued policies and divisionally-evolved
procedures brings robustness to the process of ensuring business risks are
effectively addressed.

- Appropriate structures have been put in place to proactively monitor and
manage the inherent risks in businesses with unique / relatively high risk
profiles.

- A strong and independent Internal Audit Function at the Corporate level
carries out risk focused audits across all businesses, enabling
identification of areas where risk management processes may need to be
improved. The Audit Committee of the board reviews Internal Audit findings,
and provides strategic guidance on internal controls. The Audit Compliance
and Review Committee closely monitors the internal control environment
within the Company and ensures that Internal Audit recommendations are
effectively implemented.

- At the business level, Divisional Auditors continuously verify compliance
with laid down policies and procedures, and help plug control gaps by
assisting operating management in the formulation of control procedures for
new areas of operations.

- A robust and comprehensive framework of strategic planning and
performance management ensures realization of business objectives based on
effective strategy implementation. The annual planning exercise requires
all businesses to clearly identify their top risks and set out a mitigation
plan with agreed timelines and accountability. Businesses have confirmed
that all relevant risks have been identified, assessed, evaluated and
appropriate mitigation systems implemented.

The combination of policies and processes as outlined above adequately
addresses the various risks associated with your Company's businesses. The
senior management of the Company periodically reviews the risk management
framework to maintain its contemporariness so as to effectively address the
emerging challenges in a dynamic business environment.

AUDIT AND SYSTEMS:

Your Company believes that internal control is a necessary concomitant of
the principle of governance that freedom of management should be exercised
within a framework of appropriate checks and balances. Your Company remains
committed to ensuring an effective internal control environment that
provides assurance on the efficiency of operations and security of assets.

Well established and robust internal audit processes, both at business and
corporate levels, continuously monitor the adequacy and effectiveness of
the internal control environment across the Company and the status of
compliance with operating systems, internal policies and regulatory
requirements. In the networked IT environment of your Company, validation
of IT security continues to receive focused attention of the internal audit
team which includes IT specialists.

The Internal Audit function consisting of professionally qualified
accountants, engineers and IT specialists reviews the quality of planning
and execution of all ongoing projects involving significant expenditure to
ensure that project management controls are adequate to yield value for
money'.

Your Company's Internal Audit function is certified as complying to ISO
9001:2008 quality standards in its processes.

The Audit Committee of your Board met nine times during the year. It
reviewed, inter alia, the adequacy and effectiveness of the internal
control environment and monitored implementation of internal audit
recommendations including those relating to strengthening of the Company's
risk management policies and systems. It also engaged in overseeing
financial disclosures.

HUMAN RESOURCE DEVELOPMENT:

Your Company's employees rose to the challenges posed by the rapidly
changing global economic landscape. Strongly aligned with the Company's
Vision, they are committed to sustaining your Company's position as one of
India's most admired and valuable corporations.

Your Company's unique employee value proposition backed by its strong
corporate equity has enabled it to attract and retain quality talent.
During the year under review, your Company made significant investments in
developing talent across the organization, from frontline managers to
business leadership.

Your Company's human resource management systems and processes are geared
towards creating a responsive, customer-centric and market-focused culture
that enhances organizational capability and vitality, so that each business
is internationally competitive and equipped to leverage emerging market
opportunities. The strategy of organisation, particularly its ongoing
emphasis on developing and supporting distributed leadership, has ensured
that each of your Company's businesses are managed by a team of competent,
passionate and inspiring leaders, capable of building an organisation
hinged on a culture of learning, innovation and world-class execution.

Your Company believes that alignment of all employees to a shared vision
and purpose is vital for winning in the market place. It also recognizes
the mutuality of interests with key stakeholders and is committed to
building harmonious employee relations. The collaborative spirit across all
sections of employees has resulted in significant enhancement in quality
and productivity. During the year under review, long-term agreements were
successfully concluded at several of the manufacturing units and hotel
properties. Smooth commencement of operations at greenfield locations were
ensured. In an increasingly competitive environment, the collective
dedication of nearly 24,000 employees is enabling delivery of superior and
sustainable stakeholder value. In its Centenary Year, your Company salutes
the unflinching commitment of its dedicated team of employees, both past
and present.

SUSTAINABILITY - CONTRIBUTION TO THE TRIPLE BOTTOM LINE':

Worldwide there is an increasing realisation that societal challenges
arising out of poverty, environmental degradation and climate change pose
an unprecedented threat to the future sustainability of businesses across
the globe. Your Company draws satisfaction from the fact that, foreseeing
these challenges, it has vigorously pursued for more than a decade now 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. It is indeed a matter of
pride that your Company's Triple Bottom Line' achievements are today
acknowledged globally as exemplars in Sustainability and Corporate
Citizenship.

Your Company continues to sustain its unique position as the only company
in the world of its size to be carbon positive, water positive and solid
waste recycling positive.

The pioneering and farsighted initiatives taken by your Company in these
areas have helped achieve significant cost savings, even as they have
contributed to preserving the environment. They are also in remarkable
alignment with the Government of India's recently issued National Climate
Change Action Plan.

Your Company's 6th Sustainability Report, published during the year in
accordance with the stringent G3 guidelines of the Global Reporting
Initiative, details its steadfast progress across all dimensions of the
Triple Bottom Line'. The 7th Sustainability Report covering the year 2009-
10 is in the process of publication and will continue to be independently
assured by Ernst & Young. Accelerated climate change is already a reality,
evidence of which is clearly noticeable. Your Company, with its pioneering
commitment to combating global warming, has integrated low carbon intensity
practices with business strategies, including energy conservation and
efficiency, increasing use of renewable energy and sequestering carbon
through large-scale forestry projects on wastelands. This resolve to pursue
sustainability objectives is enabling your Company to significantly augment
scarce natural and societal resources. Your Company's Social and Farm
Forestry initiatives have greened over 100,000 hectares and its Integrated
Watershed Programmes contribute to irrigating over 50,000 hectares of
water-stressed land. In the process, your Company has contributed
progressively to creating significant sustainable livelihoods.

Leveraging market-based mechanisms for mitigating the impact of climate
change, your Company has registered 8 projects with the United Nations
Framework Convention on Climate Change under the Clean Development
Mechanism (CDM). These projects have started earning carbon credits. In
addition, several other CDM projects are at various stages of registration.
Your Company is well positioned to take advantage of opportunities that are
expected to emerge in the future as market based mechanisms are introduced
globally to encourage low carbon growth strategies.

Recognising the carbon intensity of fossil fuel based energy, your Company
has progressively made investments in renewable energy. During the year, a
6MW wind power project was commissioned in Maharashtra. This adds to the
renewable energy capacity of the Company augmented earlier with the
commissioning of the 14.1MW wind power project in Tamil Nadu in September
2008. These investments and several other efforts initiated by the
Paperboards, Paper and Packaging Business ensure that 31% of your Company's
total energy requirements are met from renewable sources, thereby
drastically reducing your Company's carbon footprint.

As stated earlier in this report, ITC Royal Gardenia, the recently launched
super deluxe hotel in Bengaluru has been certified by the US Green Building
Council for Leadership in Energy & Environmental Design (USGBC - LEED) as a
Platinum Rated' building. This makes it the largest hotel in the world to

receive such a certification and the first in Asia. The certification
acknowledges conformity to the highest green standards of design,
construction and operations. All buildings of your Company to be
constructed in the future will strive to conform to the green and
sustainability requirements envisaged in the Government of India's National
Mission on Sustainable Habitats comprising the National Action Plan on
Climate Change.

Your Company's WOW - Wealth Out of Waste' programme is creating
considerable awareness among the public on the benefits of the Reduce-
Reuse-Recycle' process. It has received rich accolades from the Government,
NGOs, commercial institutions and the public at large. Winning
international appreciation, this initiative was conferred the Papyrus
Award' by the Bureau of International Recycling (BIR), in recognition of
its services and contribution to the recycling industry. Apart from
creating employment opportunities and heightened civic responsibility, the
WOW' initiative is serving to preserve and protect the environment,
improve civic amenities, public health and hygiene. Your Company benefits
from the generation of sustainable raw material at competitive prices,
while conserving scarce environmental resources.

All businesses of your Company are mandated to achieve 100% solid waste
recycling. The manufacturing and hotel businesses recycled 99.8% of the
solid waste generated. The Paperboard and Specialty Paper business not only
recycled 99.9% of the waste generated by its operations, but also recycled
an additional 125,931 Tons of externally sourced waste paper, thereby
adding to its positive environmental footprint.

Your Company continued with its commitment to ensure a healthy and safe
workplace for its own employees as well as those of the service providers,
including guests and visitors, by maintaining the highest levels of safety
and occupational health standards across all its units. The Environment,
Occupational Health and Safety Management Systems in all manufacturing
units and hotels conform to the requirements of the International Standards
Organisation and are certified by independent, accredited third parties.
Numerous certifications and awards, both national and international, have
endorsed these standards and practices, bearing testimony to your Company's
commitment to augmenting economic, environmental and social capital for the
nation.

The 'CII-ITC Centre of Excellence for Sustainable Development' continues to
make useful contributions to business and industry across the country. Set
up by your Company and the apex national chamber CII in 2006 it has
enhanced its operations to meet the core objectives of creating awareness,
promoting thought leadership and building capacity amongst Indian
enterprises in their quest for sustainable solutions. The 'CII-ITC
Sustainability Awards' instituted to honour excellence in sustainability
performance have recognized a large number of leading Indian companies and
provided encouragement to many others. It is heartening that the number of
aspirants for the Award is steadily increasing year on year.

The CII-ITC Centre's flagship annual event Sustainability Summit: Asia',
convened to stimulate dialogue, share experiences, and engage with experts
and policy makers, continues to attract delegates and dignitaries from all
over Asia. The CII-ITC Centre has been designated as a learning service
partner for Global Reporting Initiative (GRI) in India and has been
accredited by them to offer advanced training programmes on the GRI
framework. In its overall role to build capacity for sustainable
performance, a number of projects have been initiated including the
International Register of Certificated Auditors, accredited Certified
Sustainability Assurance Practitioner' training course and facilitation of
voluntary disclosure of greenhouse gas emissions under the Carbon
Disclosure Project, London.

Your Company continued to enlarge its footprint during the year in the
social sector by expanding and deepening its coverage in the project areas.
It stayed with its proven strategy of concentrating on three main areas of
interventions under Mission Sunehra Kal: (a) natural resource management,
which includes wasteland, watershed and agriculture development; (b)
sustainable livelihoods, comprising women's economic empowerment and
genetic improvement in livestock; and (c) community development, with focus
on primary education and health and sanitation. Your Company is currently
running social development projects in 51 districts spread over the States
of Andhra Pradesh, Kerala, Karnataka, Tamil Nadu, Orissa, West Bengal,
Bihar, Uttar Pradesh, Maharashtra, Madhya Pradesh and Rajasthan.

Your Company's pioneering initiative of wasteland development through the
Social Forestry Programme has so far promoted plantations over 16,442
hectares in 480 villages, covering 19,376 poor households. The households
covered under the Social Forestry Programme continue to reap the benefits
derived from cut plantations. The total income gained to date is nearly Rs.
12 crores from 2,700 hectares. Not only have their earnings per acre
improved significantly as a result of the sale of plantations, but most
beneficiaries have also ensured that the contribution to the Village
Development Fund continues apace, which has grown to nearly Rs. 94 lakhs.
In addition, their own incomes have been invested wisely into productive
assets to ensure a long-term virtuous cycle of development.

The Soil and Moisture conservation programme, designed to assist farmers in
identified moisture-stressed districts, witnessed a further increase in its
coverage during the year. 278 water-bodies were created during the year
taking the total to 2,813 water-harvesting structures. These structures
provide critical irrigation security to about 22,993 hectares. In addition,
28,301 hectares of land has also been treated for erosion resulting in
preservation of precious topsoil for agriculture. In total, the watershed
development programme today covers 51,294 hectares. In addition to several
collaborations finalised with NABARD last year, your Company also signed
public-private-partnership MoUs with the Governments of Rajasthan and
Maharashtra for implementation of watershed programmes. As a result of
these fresh MoUs, the total area targeted under various partnerships
increased to 83,000 hectares.

Active participation of the stakeholders has ensured sustainable long-term
maintenance of these structures. Direct employment created on such physical
activities for the landless and marginal farmers is around 13.79 lakh
person days of work till date. Presently 1,153 active Water User Groups
with more than 28,000 members play an important role in ensuring water
distribution and collection of charges. This has been further facilitated
by the creation of a corpus fund for maintenance.

In continuation of its policy to provide an integrated solution for
promoting sustainable water management, your Company has focused on
interventions that ensure efficient usage of water aimed at improving farm
productivity, promoting group irrigation projects and demonstrating the use
of agricultural implements including sprinkler sets. During 2009-10, 79
group irrigation projects covering 298 farmers were installed.

Sustainable Agricultural Practices were continued with the promotion of 230
organic fertiliser units through vermi-composting and NADEP technologies
during the year. Several varieties of paddy, gram and wheat have been
tested in 474 field demonstrations leading to participative selection of
higher productive strains by farmers.

The Sustainable Livelihoods initiative of your Company strives to create
alternative employment for surplus labour and decrease pressure on arable
land by promoting non-farm incomes. Among many such activities, the
programme for genetic improvements of cattle through artificial
insemination to produce high-yielding crossbred progenies has been given
special emphasis because it reaches out to the most impoverished and has
the potential to pull them out of poverty. Forty cattle development centres
were established during the year taking the cumulative total to 161
covering more than 2,400 villages and providing 1.31 lakhs artificial
inseminations during the year. Integrated animal husbandry services,
provided to more than 38,600 milch animals during the year, included
addressing needs of problem breeders, vaccines, feed additives and
awareness drives.

The initiative towards Economic Empowerment of Women also continued apace:
to date, 14,278 women have been organised under 1,035 self-help groups
(SHG) with total savings of Rs. 179 lakhs. Overall, more than 29,000 women
were gainfully employed either through micro-enterprises or encouraged to
be self-employed though income generation loans.

The advances made towards contributing to India's sustainable development
goals have been possible, in large measure, to your Company's partnerships
with several globally renowned NGOs like BAIF Development Research
Foundation, Dhan, FES, MYRADA, Pratham, SEWA, SRIJAN and WOTR. These
partnerships, which synergise the best-in-class management practices of
your Company with the development experience and mobilisation skills of the
NGOs, will continue to bring innovative grass-roots solutions to some of
India's most challenging problems of development.

R&D, QUALITY AND PRODUCT DEVELOPMENT:

Innovation across every element of the business value chain through a
sustained process of Research and Development (R&D) is a key imperative in
today's competitive context. This assumes critical significance for your
Company since its competitive landscape is marked with world-class
companies with strong R&D focus. Your Company's R&D strategy is anchored on
the development and speedy commercialisation of globally competitive
products, processes and technologies through best-in-class research
interventions backed by world-class infrastructure.

Over the past few years, your Company has assembled a pool of world-class
scientists focused on plant breeding and genetics, agronomy, biotechnology,
molecular biology and silviculture.

During the year under review, the Biosciences R&D hub identified key
research areas to develop new concepts of product development for your
Company's Branded Packaged Foods and Personal Care businesses. Discipline-
wise core competency teams were formed to enable delivery of comprehensive
results to your Company's businesses.

The Agrisciences R&D hub continues to evaluate and introduce several
germplasm lines of tobacco and eucalyptus that are targeted at increasing
the genetic and trait diversities in these crops. These germplasm lines
will in turn strengthen the research programmes for developing new
varieties with higher yields and better quality. Your Company's R&D
continues to collaborate with several world-class organisations and
currently leverages expertise from University of Agricultural Science,
Bangalore; Indian Institute of Science, Bangalore; CSIRO, Australia and
CSIR, South Africa. These collaborations, which cover both tobacco and
eucalyptus, are designed to provide fundamental insights into several
technical aspects of plant breeding and genetics of these species. Similar
world-class collaborations in respect of the Biosciences hub are also being
identified.

During the year, the Hotels business incorporated Lean' practices in its
business processes in addition to the continuing implementation of the Six
Sigma Quality Process' supported by trained teams of black / green belts.
The attempt is to create superior customer value through a service

excellence framework. The Paperboards, Paper & Packaging businesses have
implemented the Total Productive Maintenance' (TPM) techniques in all
their units, resulting in substantial cost savings and productivity
improvements.

All manufacturing units of your Company have ISO quality certification.
Almost all contract manufacturing units in the Foods business and all large
hotels have food safety and quality systems certified by the accredited
third party' in accordance with Hazard Analysis Critical Control Points'
(HACCP) standards. Additionally, the quality of all FMCG products of your
Company is regularly monitored through Product Quality Ratings Systems'
(PQRS).

EXCISE:

As mentioned in the previous year's Report of the Directors, the demand for
Rs. 27.58 crores made by Central Excise Department, Bangalore, in respect
of a period prior to March 1983, was set aside by the Commissioner
(Appeals), Bangalore, by his Order dated 22nd November, 1999, which order
was confirmed by the CEGAT, Chennai vide its order dated 18th December,
2003. The Department has filed an appeal before Supreme Court, which is
pending.

As mentioned in the Report of the Directors for 1987 and thereafter, the
Excise Department, during 1987 and 1988, re-opened some of the issues
already settled, by issuing fresh Show Cause Notices in respect of the
period upto 28th February, 1983. As already reported, the proceedings
relating to the Bangalore, Kidderpore, Parel and Munger Show Cause Notices
stand concluded in favour of your Company. As regards the Show Cause Notice
in respect of the Saharanpur factory, the Delhi High Court, by an order
dated 30th October, 2009 quashed the Show Cause Notice.

With respect to the Munger factory, proceedings for finalisation of
assessments for the period prior to March 1983 resulted in the Deputy
Commissioner's Orders dated 29th August, 2002 and 8th October, 2002
demanding Rs. 13.09 crores and Rs. 1.73 crores for clearances of cigarettes
and smoking mixtures respectively which were confirmed by the Commissioner
(Appeals), Patna vide his orders dated 22nd December, 2004, against which
your Company has preferred appeals before CESTAT, Kolkata, which are
pending. Your Company has made pre-deposits of Rs. 2 crores and Rs. 0.55
crores against the aforesaid demands at the stage when its appeals were
pending before Commissioner (Appeals), Patna.

Although your Company in a spirit of settlement, paid the differential
Excise Duty that arose out of an Order of the Director General dated 10th
April, 1986, as early as in March 1987, and although the Excise
Department's aforesaid Demands had either been quashed or stayed, the
Collectorates in Meerut, Patna and Bangalore, during the year 1995, filed
criminal complaints in the Special Court for Economic Offences at Kanpur,
Patna and Bangalore, charging your Company and some of its Directors and
employees who were employed with your Company during the period 1975 to
1983 with offences under the Central Excises & Salt Act, 1944, purportedly
on the basis of the Order of the Director General dated 10th April, 1986.
Your Directors are advised that no prosecution would lie on the basis of
the aforesaid Order of the Director General dated 10th April, 1986. As
earlier reported, the criminal case in respect of the Bangalore factory was
quashed by the Court and in the proceedings relating to Saharanpur factory,
the Special Court in Kanpur, on applications filed by the individuals
concerned, discharged them. In Patna, upon applications filed by the
individuals against dismissal of similar petitions by the Special Court in
Patna, the High Court has stayed all further proceedings before the Special
Court.

In all the above instances, your Directors are of the view that your
Company has a strong case and the Demands and the Complaints are not
sustainable.

Since your Company is contesting the above cases and contending that the
Show Cause, the Demand Notices and the Complaints are not sustainable, it
does not accept any liability in this behalf. Your attention is drawn to
the Note 19 (iv) in the Schedules to the Accounts and Note 19 (iii) in the
Schedules to the Consolidated Financial Statements.

LUXURY TAX:

As mentioned in earlier years, the Hon'ble Supreme Court declared the
various State luxury tax levies on cigarettes and other goods as
unconstitutional. The Court further directed that if any party, after
obtaining a stay order from the Court, had collected any amount towards
luxury tax from its customers / consumers, such amounts should be paid to
the respective State governments. Since your Company had not charged or
collected any amounts towards luxury tax during the relevant period, there
is no liability on the Company in this regard. However, the State of Andhra
Pradesh has filed a contempt petition in the Supreme Court claiming a sum
of about Rs. 323.25 crores towards luxury tax, and a further sum of about
Rs. 261.97 crores towards interest, on the allegation that your Company had
charged and collected luxury tax from its customers, but in view of a stay
order passed by the Court on 1st April, 1999, did not pay the tax to the
Government. The State's contention is baseless, contrary to facts and is
also contrary to the assessment orders passed by the State luxury tax
authorities consistently holding that the Company, right from 1st March,
1997, did not charge or collect any amount towards luxury tax from its
customers. Accordingly, the State's petition is being contested.

RECOVERY OF DUES FROM THE CHITALIAS AND PROCEEDINGS INITIATED BY THE
ENFORCEMENT DIRECTORATE:

You are aware that your Company had secured from the District Court of New
Jersey, U.S.A, a decree for USD 12.19 million together with interest and
costs against Suresh and Devang Chitalia of U.S.A. and their companies, and
that the Chitalias had filed Bankruptcy Petitions before the Bankruptcy
Court, Orlando, Florida, which are yet to be determined.

As explained in the previous reports of the Directors, though the Company
has written off the export dues in foreign exchange from the Chitalias with
the approval of the Reserve Bank of India, your Company continues with its
recovery efforts in the Indian suit against the Chitalia associates. The
suit is in progress.

In the proceedings initiated by the Enforcement Directorate, the return of
non-relied documents in possession of the Enforcement Directorate, pursuant
to the request of your Company, is in progress. In respect of some of the
show cause memoranda issued by the Directorate, after hearing arguments on
behalf of the Company, the appropriate authority has passed orders in
favour of the Company, and dropped those memoranda.

Meanwhile, the prosecutions launched by the Enforcement Directorate are
pending.

TREASURY OPERATIONS:

During the year, your Company's treasury operations continued to remain
focused on proactive management of temporary surplus liquidity and foreign
exchange exposures within a well-defined risk management framework.

The year under review was characterised by low interest rates and high
liquidity in the monetary system with intermittent volatility due to
elections and concerns around a sub-normal monsoon. Despite low interest
rates, your Company continued to improve its treasury performance within
the ambit of strong risk management processes.

The deployment of temporary surplus liquidity during the year remained
guided by the twin objectives of capital protection and return
optimisation. The timely investments in bank fixed deposits and long-dated
fixed maturity plans at the beginning of the year coupled with purchase of
tax-free bonds and deep discount bonds issued by high quality Public
Financial Institutions helped enhance yield. The portfolio mix during the
year was continuously rebalanced in line with the changing risk / return
scenario. Your Company's risk management processes ensured that all
deployments were made with proper evaluation of underlying risk while
remaining focused on capturing market opportunities.

In the foreign exchange market, the Indian Rupee appreciated gradually
during the year, on the strength of FII inflows. In a scenario where the US
Dollar was under continuous pressure, your Company adopted an appropriate
forex management strategy, including use of plain vanilla options to manage
volatility. However, it refrained from entering into any exotic derivative
structures.

As in earlier years, commensurate with the large size of the temporary
surplus liquidity under management, treasury operations continue to be
supported by appropriate control mechanisms, including an independent check
of 100% of transactions by your Company's Internal Audit function.

TAXATION:

As mentioned in the Report of the Directors of earlier years, the Company
had obtained Stay Orders from the Hon'ble Calcutta High Court in respect of
the Income Tax notices for re-opening the past assessments for the period
1st July, 1983 to 30th June, 1986. This status remains unchanged.

As stated in the Report of the Directors of earlier years, in respect of
similar Income Tax notices for re-opening the past assessments for the
period 1st April, 1990 to 31st March, 1993, the Honourable Calcutta High
Court had admitted the Writ Petitions and ordered that no final assessment
orders be passed without the leave of the Court. This status also remains
unchanged.

PUBLIC DEPOSITS:

Your Company's Public Deposit Scheme closed in the year 2000. As at 31st
March, 2010, 5 deposit holders had not claimed fixed deposits amounting to
Rs. 0.55 lakhs. Reminders have been sent to these deposit holders by the
Fixed Deposit Service Centre of your Company.

There was no failure to make repayments of Fixed Deposits on maturity and
the interest due thereon in terms of the conditions of your Company's
erstwhile Schemes.

INVESTOR SERVICE CENTRE:

The Investor Service Centre (ISC) of your Company continues to provide
best-in-class investor services to meet the increasing expectations of the
investors. During the year, the ISO Quality Management System Certification
for ISC for investor servicing was upgraded from ISO 9001:2000 to ISO
9001:2008. Messrs. Det Norske Veritas accorded ISC a Level 5 rating, the
highest possible level, for its systems and processes. These accreditations
stand testimony to the effective systems your Company has in place for
investor servicing, complaint redressal and regulatory compliance. In the
Shareholder Satisfaction Survey conducted during the year, investors
expressed a high degree of satisfaction with the services provided by ISC.

DIRECTORS:

Mr. Anup Singh, Wholetime Director, retired from the Company after 42 years
of service, with effect from close of business on 21st March, 2010 on
completion of his term. The Board of Directors (the Board') at its meeting
held on 19th March, 2010, appointed Mr. Singh as Additional Wholetime
Director of your Company with effect from 22nd March, 2010 till the date of
the ensuing Annual General Meeting (AGM'). This has given the Company the
opportunity to continue to draw upon Mr. Singh's knowledge and experience
during the period of his appointment and will also enable him to
participate in the landmark AGM ushering completion of 100 years of your
Company. Your Directors would like to record their appreciation of the
services rendered by Mr. Singh. Mr. Kurush Noshir Grant was appointed by
the Board as Additional Wholetime Director of your Company with effect from
20th March, 2010.

Mr. Anil Baijal, who represented the Specified Undertaking of the Unit
Trust of India (SUUTI') and Dr. Ravinder Kumar Kaul, who represented the
General Insurers' (Public Sector) Association of India (GIPSA'), ceased to
be Non- Executive Directors of your Company with effect from 27th August,
2009 and 19th March, 2010, respectively, consequent upon withdrawal of
their representation by the respective Institutions. Your Directors would
also like to record their appreciation of the services rendered by Mr.
Baijal and Dr. Kaul. Mr. Anil Baijal was appointed by the Board as
Additional Non-Executive Director of your Company with effect from 22nd
January, 2010. Mr. Shilabhadra Banerjee and Mr. Angara Venkata Girija Kumar
were also appointed by the Board as Additional Non-Executive Directors of
your Company with effect from 4th February, 2010 and 19th March, 2010, as
representative of SUUTI and GIPSA, respectively.

By virtue of the provisions of Article 96 of the Articles of Association of
the Company and Section 260 of the Companies Act, 1956, Messrs. Singh,
Grant, Baijal, Banerjee and Girija Kumar will vacate office at the ensuing
AGM of your Company.

Your Board at its meeting held on 19th March, 2010 recommended for the
approval of the Members the appointment of Mr. Grant as Wholetime Director
of your Company, liable to retire by rotation, with effect from 20th March,
2010 for a period of three years. Your Board at its meeting held on 21st
May, 2010 also recommended for the approval of the Members the appointment
of Messrs. Baijal, Banerjee and Girija Kumar as Non-Executive Directors of
your Company, liable to retire by rotation, with effect from the date of
the ensuing AGM of the Company.

Notices have been received from Members of the Company under Section 257 of
the Companies Act, 1956 for the appointment of Messrs. Grant, Baijal,
Banerjee and Girija Kumar as Directors, who have filed their consents to
act as such Directors of the Company, if appointed.

Appropriate resolutions seeking your approval to the appointments of
Messrs. Singh, Grant, Baijal, Banerjee and Girija Kumar are appearing in
the Notice convening the 99th AGM of the Company.

In accordance with the provisions of Article 91 of the Articles of
Association of the Company, Mr. Dinesh Kumar Mehrotra, Mr. Sunil Behari
Mathur and Mr. Pillappakkam Bahukutumbi Ramanujam will retire by rotation
at the ensuing AGM of the Company and, being eligible, offer themselves for
re-election. The Board has recommended their re-election.

AUDITORS:

The Company's Auditors, Messrs. Deloitte Haskins & Sells, retire at the
ensuing AGM and, being eligible, offer themselves for re-appointment. Since
not less than 25% of the subscribed Share Capital of your Company is held
collectively by Public Financial Institutions, the re-appointment of
Auditors is being proposed as a Special Resolution in accordance with
Section 224A of the Companies Act, 1956.

EMPLOYEE STOCK OPTION SCHEME:

Under the Company's Employee Stock Option Schemes, 4,37,77,230 Ordinary
Shares of Re. 1/- each, were issued and allotted during the year upon
exercise of 43,77,723 Options; such shares rank pari passu with the
existing Ordinary Shares of your Company. Consequently, the Issued and
Subscribed Share Capital of your Company as at 31st March, 2010 stands
increased to Rs. 3,81,81,76,790/- divided into 3,81,81,76,790 Ordinary
Shares of Re. 1/- each. Details of the Options granted up to 31st March,
2010, and other disclosures as required under Clause 12 of the Securities
and Exchange Board of India (Employee Stock Option Scheme and Employee
Stock Purchase Scheme) Guidelines, 1999 (the SEBI Guidelines') are set out
in the Annexure to this Report.

The Company's Auditors, Messrs. Deloitte Haskins & Sells, have certified
that the Company's Employee Stock Option Schemes have been implemented in
accordance with the SEBI Guidelines and the resolutions passed by the
Members in this regard.

DIRECTORS' RESPONSIBILITY STATEMENT:

As required under Section 217 (2AA) of the Companies Act, 1956, your
Directors confirm having:

a) followed in the preparation of the Annual Accounts, the applicable
accounting standards with proper explanation relating to material
departures if any;

b) selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a
true and fair view of the state of affairs of your Company at the end of
the financial year and of the profit of your Company for that period;

c) taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of the Companies Act,
1956 for safeguarding the assets of your Company and for preventing and
detecting fraud and other irregularities; and

d) prepared the Annual Accounts on a going concern basis.

CONSOLIDATED FINANCIAL STATEMENTS:

In accordance with Accounting Standard 21 - Consolidated Financial
Statements, ITC Group Accounts form part of this Report & Accounts. These
Group Accounts also incorporate the Accounting Standard 23 - Accounting for
Investments in Associates in Consolidated Financial Statements and
Accounting Standard 27 - Financial Reporting of Interests in Joint Ventures
as notified under the Companies (Accounting Standards) Rules, 2006. These
Group accounts have been prepared on the basis of audited financial
statements received from Subsidiary, Associate and Joint Venture Companies,
as approved by their respective Boards.

OTHER INFORMATION:

The total number of employees as on 31st March, 2010 stood at 23,473.

The certificate of the Auditors, Messrs. Deloitte Haskins & Sells
confirming compliance of conditions of Corporate Governance as stipulated
under Clause 49 of the Listing Agreement with the Stock Exchanges in India,
is annexed. There were no changes to the Company's significant Accounting
Policies.

Particulars as required under Section 217(1)(e) of the Companies Act, 1956
relating to Conservation of Energy and Technology Absorption are also
provided in the Annexure to this Report.

There were 349 employees who were employed throughout the year and were in
receipt of remuneration aggregating Rs. 24 lakhs or more or were employed
for part of the year and were in receipt of remuneration aggregating Rs. 2
lakhs per month or more during the financial year ended 31st March, 2010.
The information required under Section 217(2A) of the Companies Act, 1956
and the Rules thereunder, in respect of the aforesaid employees, is
provided in the Annexure forming part of this Report. In terms of Section
219(1)(b)(iv) of the Act, the Report and Accounts are being sent to the
Members excluding the aforesaid Annexure. The Annexure is available for
inspection by Members at the Registered Office of the Company between 11.00
a.m. and 1.00 p.m. on working days up to the date of the ensuing AGM, and
if any Member is interested in obtaining a copy thereof such Member may
write to the Company Secretary whereupon a copy would be sent.

FORWARD-LOOKING STATEMENTS:

This Report contains forward-looking statements that involve risks and
uncertainties. When used in this Report, the words 'anticipate', 'believe',
'estimate', 'expect', 'intend', 'will' and other similar expressions as
they relate to the Company and/or its businesses are intended to identify
such forward-looking statements. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise. Actual results,
performances or achievements could differ materially from those expressed
or implied in such forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements that speak only as
of their dates. This Report should be read in conjunction with the
financial statements included herein and the notes thereto.

CONCLUSION:

Your Company's Board and employees are inspired by their Vision of
sustaining ITC's position as one of India's most admired and valuable
companies through world-class performance, creating enduring value for all
stakeholders, including the shareholders and the Indian society. Each
business within the portfolio is continuously engaged in upgrading
strategic capability to effectively address the challenge of growth in an
increasingly competitive market scenario. Effective management of diversity
enhances your Company's adaptive capability and provides the intrinsic
ability to effectively manage business risk. The vision of enlarging your
Company's contribution to the Indian economy is manifest in the creation of
unique business models that foster international competitiveness of not
only its businesses but also of the entire value chain of which it is a
part.

In the Centenary Year of your Company, your Directors and employees
continue to be inspired by this Vision. Driven by Values and powered by
internal Vitality, the entire ITC family stands committed to creating an
even brighter future for all stakeholders.

On behalf of the Board

21st May, 2010
Virginia House
37 J L Nehru Road
Kolkata 700071
India Y. C. DEVESHWAR Chairman
K. VAIDYANATH Director

Annexure to the Report of the Directors

Statement as at 31st March, 2010, pursuant to Clause 12 (Disclosure in the
Directors' Report) of the Securities and Exchange Board of India (Employee
Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

a) Total number of Options granted / allocated*:

ITC Employee Stock Option Scheme

2001 2002 2003 2004 2005 2006 Total

3,39,119 6,27,070 11,82,616 11,43,195 14,48,071 60,95,625 1,08,35,696

ITC Employee Stock Option Scheme - 2006

2007 2008 2009

55,77,343 59,69,437 43,46,161 1,58,92,941

Total 2,67,28,637

b) (i) Pricing Formula :

The Pricing Formula, as approved by the Shareholders of the Company, shall
be such price which is no lower than the closing price of the Company's
Share on the National Stock Exchange of India Limited (the NSE') on the
date of grant, or the average price of the Company's Share in the six
months preceding the date of grant based on the daily closing price on the
NSE, or the Market Price' as defined from time to time under the
Securities and Exchange Board of India (Employee Stock Option Scheme and
Employee Stock Purchase Scheme) Guidelines, 1999, as determined by the
Compensation Committee.

(ii) Exercise Price / Adjusted Exercise Price per Option, as applicable
(Rs.) (Each Option represents 10 Ordinary Shares of Re.1/- each)**

ITC Employee Stock Option Scheme
2001 2002 2003 2004 2005 2006

779.95 617.90 679.90 / 880.45 / 1,531.65 / 1,814.00
453.27 586.97 1,021.10

ITC Employee Stock Option Scheme - 2006
2007 2008 2009
1661.00 1896.00 2180.00

c) Total number of Options vested :

ITC Employee Stock ITC Employee Stock Total
Option Scheme Option Scheme - 2006
(i) (ii) (i) + (ii)

98,63,675 45,97,217 1,44,60,892

d) Total number of Options exercised :

ITC Employee Stock ITC Employee Stock Total
Option Scheme Option Scheme - 2006
(i) (ii) (i) + (ii)

72,57,893 6,63,924 79,21,817

e) Total number of Ordinary Shares of Re.1/- each arising as a result of
exercise of Options:

ITC Employee Stock ITC Employee Stock Total
Option Scheme Option Scheme - 2006
(i) (ii) (i) + (ii)

7,25,78,930 66,39,240 7,92,18,170

f) Total number of Options lapsed :

ITC Employee Stock ITC Employee Stock Total
Option Scheme Option Scheme - 2006
(i) (ii) (i) + (ii)

13,02,726 14,94,299 27,97,025

g) Variation of terms of Options :

ITC Employee Stock ITC Employee Stock Total
Option Scheme Option Scheme - 2006
(i) (ii) (i) + (ii)

Nil

h) Money realised by exercise of Options :

ITC Employee Stock ITC Employee Stock Total
Option Scheme Option Scheme - 2006
(i) (ii) (i) + (ii)

854.04 112.93 966.97

i) Total number of Options in force :

ITC Employee Stock ITC Employee Stock Total
Option Scheme Option Scheme - 2006
(i) (ii) (i) + (ii)

22,75,077 1,37,34,718 1,60,09,795

j) Details of Options granted to (i) Senior managerial personnel :

As provided below:

Name No. of Options granted
during the financial year
Y. C. Deveshwar 1,35,000
K. N. Grant 28,125
A. Singh 67,500
K. Vaidyanath 67,500
S. H. Khan 10,000
S. B. Mathur 10,000
P. B. Ramanujam 10,000
H. G. Powell 10,000
A. Ruys 10,000
B. Sen 6,146
B. Vijayaraghavan 6,146
S. M. Ahmad 12,000
N. Anand 20,250
P. Banerjea 9,000
S. Basu 12,000
M. S. Bhatnagar 9,775
S. Chandrasekhar 12,000
A. Chand 8,500
B. B. Chatterjee 13,800
C. Dar 13,800
C. S. Das 9,775
P. V. Dhobale 20,250
D. Haksar 13,800
S. Kaul 9,775
U. Lall 12,000
A. K. Mukerji 13,800
A. Nayak 20,250
A. R. Noronha 13,800
H. Malik 9,775
R. Parasuram 13,800
A. Pathak 9,775
S. Puri 13,800
A. Rajput 13,800
T. V. Ramaswamy 20,250
R. Rai 13,800
S. Rangrass 9,775
S. Janardhana Reddy 13,800
S. K. Singh 13,800
S. Sivakumar 20,250
R. Sridhar 8,500
R. Srinivasan 28,125
B. Sumant 9,775
K. S. Suresh 13,800
R. Tandon 13,800
P. K. Verma 12,000

(ii) Any other employee who received a grant in any one year of Options
amounting to 5% or more of the Options granted during that year:

None

(iii) Identified employees who were granted Options during any one year,
equal to or exceeding 1% of the issued capital (excluding outstanding
warrants and conversions) of the Company at the time of grant:

None

k) Diluted Earnings Per Share pursuant to issue of Ordinary Shares on
exercise of Options calculated in accordance with Accounting Standard (AS)
20 Earnings Per Share'.

Rs. 10.62

l) (i) Method of calculation of employee compensation cost:

The employee compensation cost has been calculated using the intrinsic
value method of accounting for Options issued under the Company's Employee
Stock Option Schemes. The employee compensation cost as per the intrinsic
value method for the financial year 2009-10 is Nil.

(ii) Difference between the employee compensation cost so computed at (i)
above and the employee compensation cost that shall have been recognised if
it had used the fair value of the Options:

Rs. 314.24 crores

(iii) The impact of this difference on profits and on Earnings Per Share of
the Company.

The effect on the profits and earnings per share, had the fair value method
been adopted, is presented below:

Profit After Tax Rs. in Crores

As reported 4,061.00
Add: Intrinsic Value Compensation Cost Nil
Less: Fair Value Compensation Cost 314.24
(Black Scholes model)
Adjusted Profit 3,746.76

Earnings Per Share Basic (Rs.) Diluted (Rs.)

As reported 10.73 10.62
As adjusted 9.90 9.79

m) Weighted average exercise prices and weighted average fair values of
Options granted for Options whose exercise price either equals or exceeds
or is less than the market price of the stock.

Weighted average exercise price per Option : Rs. 2,180.00
Weighted average fair value per Option : Rs. 817.97

n) A description of the method and significant assumptions used during the
year to estimate the fair values of Options.

The fair value of each Option is estimated using the Black Scholes Option
Pricing model after applying the following key assumptions on a weighted
average basis:

(i) Risk-free interest rate 6.29%

(ii) Expected life 4.6 years

(iii) Expected volatility 35.66%

(iv) Expected dividends 1.90%

(v) The price of the underlying Rs. 2,297.50
shares in market at the time of
Option grant

* Bonus Options were allocated during 2005-06 on unvested Options in the
same ratio as Bonus Shares (i.e. in the ratio of 1 Bonus Share for every 2
Ordinary Shares), in accordance with the ITC Employee Stock Option Scheme
read with the Securities and Exchange Board of India (Employee Stock Option
Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.

** As adjusted on allocation of Bonus Options.

On behalf of the Board
Y.C. DEVESHWAR Chairman
K. VAIDYANATH Director

Place: Kolkata,
Date : 21st May, 2010.

Annexure to the Report of the Directors

CONSERVATION OF ENERGY:

INFORMATION UNDER SECTION 217(1)(e) OF THE COMPANIES ACT, 1956 READ WITH
COMPANIES (DISCLOSURE OF PARTICULARS IN THE REPORT OF BOARD OF DIRECTORS)
RULES, 1988 AND FORMING PART OF THE DIRECTORS' REPORT

a) Energy conservation measures taken:

All business units continued their efforts to improve energy usage
efficiency. Various key parameters such as specific energy consumption
(energy consumed per unit of production) and specific energy costs were
constantly tracked to monitor efforts made. Some of the measures adopted by
the Company were:

I. Optimisation of energy required for cooling through load reduction,
installation of green' chillers and implementation of advanced heat load
management systems.

II. Reduction in fuel consumption at various production plants by
optimisation of production batches, recovery of waste heat and reduction of
pipeline losses in steam circuits.

III. Improvement in heat load management through mixer redesign and
modification to chill water circuits.

IV. Installation of Wind Turbine generators, harnessing solar energy using
solar paraboloid and parabolic concentrators and green' boiler using bio-
mass residue in place of fossil fuel.

V. Installation of Advanced Process Controllers for process optimization in
boilers, turbo-generators and fibre-lines.

b) Additional investments and proposals, if any, being implemented for
reduction of consumption of energy:

I. Wind power projects.

II. Replacement of existing air-cooled with water-cooled chiller.

III. Use of renewable energy for furnace oil pre-heating, thermo-compressor
for driers, improved burner for boiler and energy efficient compressor.

IV. Installation of energy saving transformer for lighting circuit, closed
loop control for HVAC system and demand based control through variable
frequency drives for Dust Recovery and Chiller systems.

V. Installation of solar photovoltaic cell, translucent roofing sheets and
solar concentrators.

VI. Installation of Intelligent Flow Controllers for optimization of
compressed air system.

VII. Installation of online oxygen control systems to reduce excess air in
flue gas for improved efficiency of boilers.

c) Impact of measures of (a) and (b) above for reduction of energy
consumption and consequent impact on the cost of production of goods:

The continued focus on energy conservation measures across the Company has
resulted in significant savings in energy costs and reduction of the
Company's carbon footprint. The Company has 8 registered CDM projects.
Efforts to generate further Certified Emission Reductions (CERs) under the
Kyoto Protocol's Clean Development Mechanism (CDM) continue and several
other CDM projects are expected to be registered soon with the UNFCCC
(United Nations Framework Convention on Climate Change).

A) POWER AND FUEL CONSUMPTION

Relating to Paperboards & Paper

For the For the
Year ended Year ended
31st March, 31st March,
2010 2009
1. Electricity (Excluding
Consumption in Colony)

a) Purchased Units (KwH in Lakhs) 254 399
Total Amount (Rs. in Lakhs) 1459 1965
Rate / Unit (Rs.) 5.74 4.92
b) Own Generation
i) Through Diesel Generator 17 9
Units (KwH in Lakhs)
Units / Litre of Diesel Oil 2.98 2.99
Cost / Unit (Rs.) 10.91 11.74
ii) Through Steam Turbine / 3899 3469
Generator Units
(KwH in Lakhs)
Units / Kg. of Coal 1.62 1.25
Cost / Unit (Rs.) 2.57 2.98
{considering all fuel types}

For the Year ended For the Year ended
31st March, 2010 31st March, 2009
Process Power Total Process Power Total

2. Coal (Specify
Quantity &
Where Used)
B/C/D/E/F
Grades Coal
Used Coal
Quantity (MT) 365811 240950 606761 260625 277646 538272
Total Cost (Rs. in Lakhs) 11539 12221
Average Rate 1901.66 2270.36
(Rs. per MT)
3. Furnace Oil
Quantity (KL) 16049 13607
Total Amount
(Rs. in Lakhs) 4228 3455
Average Rate (Rs. / KL) 26344.76 25393.46
4. Others/Internal
Generation
De Oiled Bran &
Saw Dust etc.
Quantity (MT) 96784 89969
Total (Rs. in Lakhs) 2079 1680
Rate / Unit (Rs.) 2148.49 1867.21
LP Gas
Quantity (MT) 1112 1029
Total (Rs. in Lakhs) 452 480
Rate / Unit (Rs.) 40613.60 46580.18

B) CONSUMPTION PER UNIT OF PRODUCTION

For the Year ended For the Year ended
31st March, 2010 31st March, 2009
Products (Paper in MT) 587624 506734
Electricity (KwH) 1024 1087
Coal C/F Grade (MT) 0.67 0.51
Furnace Oil (Litre) 34 27
Others - De Oiled Rice Bran / 0.101 0.104
Saw Dust / Raw Lignite /
LP Gas, etc. (MT)

TECHNOLOGY ABSORPTION:

INFORMATION UNDER SECTION 217(1)(e) OF THE COMPANIES ACT, 1956 READ WITH
COMPANIES (DISCLOSURE OF PARTICULARS IN THE REPORT OF BOARD OF DIRECTORS)
RULES, 1988 AND FORMING PART OF THE DIRECTORS' REPORT.

Research & Development:

1. Specific areas in which R&D was carried out by the Company:

I. Research projects on taste and flavour enhancement, meeting regulatory
requirements, enhancing analytical capabilities, new product development
and cost management.

II. Development of food grade paper, premium printing papers and coated
papers and paperboards with high strength and better aesthetics.

III. Development of site specific and disease resistant clones of
Eucalyptus, Casuarina and Subabul trees.

IV. Control of eucalyptus gall insect (leptocybe invasa) in association
with the National Bureau of Agriculturally Important Insects (NBAII, ICAR),
Bangalore.

V. Development of new grades of decorative laminates and modification of
existing products benchmarked to global standards.

VI. Development of liquid organic formulations utilizing plant based
components compatible with the Integrated Pest Management' strategies of
field and commercial crops.

2. Benefits derived as a result of the above R&D:

a) Cost reduction, import substitution, safer environment and strategic
resource management.

b) Meeting the statutory requirements of US EPA and FDA in respect of food
grade paper.

c) High survival and growth of clonal plantations of Eucalyptus, Casuarina
and Subabul resulting in increased productivity of wood biomass and higher
returns to farmers.

d) Development and evaluation of a new botanical formulation with neem
based active ingredients for use against stored product pests.

3. Future Plan of Action:

I. Design of secondary packaging automation for creams and cookies to
improve throughputs.

II. Continuing research on improvement of pulp yield of Eucalyptus,
Casuarina, Subabul and other pulp wood trees.

III. Development of eucalyptus gall wasp management protocol and breeding
of wasp insect resistant eucalyptus trees.

IV. Design and development of modified curing methods, optimal use of solar
energy and evaluation of alternative fuel options for curing tobacco.

V. Evaluation of potential Biorational combinations for control of crop
specific pests.

For the year ended
31st March, 2010
4. Expenditure on R&D : (Rs. in Lakhs)
i) Capital 874.98
ii) Recurring 7708.34
iii) Total 8783.32
iv) Total R&D Expenditure as a % of
- Gross Turnover 0.33%
- Net Turnover 0.47%

Technology Absorption, Adoption and Innovation

I. Induction of contemporary making and packing technologies across
multiple speed platforms for Cigarette business.

II. Establishment of wind farms in Karnataka and Maharashtra.

III. Continuous improvement projects towards reducing cycle time and
enhancing manufacturing productivity.

IV. Innovations in manufacturing and engineering technologies through
indigenous interventions.

V. Establishment of remote command and control centre through installation
of IP based security surveillance system in the Hotels Business.

VI. Installation of Vapour Explosive Detectors and X-ray baggage machines
in all Hotels.

Benefits Derived:

I. World-class quality and differentiated products.

II. Improved productivity.

III. Conservation of fuel and reduced emissions.

IV. Enhanced guest security.

V. Reduction in carbon foot print.


On behalf of the Board
Y.C. DEVESHWAR Chairman
K. VAIDYANATH Director

Place: Kolkata
Date : 21st May, 2010.