Tata Motors Ltd (TTM) 2013 Q3 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Q3 FY13 earnings conference call of Tata Motors Limited, hosted by HSBC Securities & Capital Markets. As a reminder, all participants' line will be in the listen-only mode and there will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note that this conference is being recorded. I would now like to hand over the conference to Mr. Yogesh Aggarwal. Thank you and over to you, sir.

Thanks, Shama. Hello, everyone, thanks for joining the Tata Motors 3Q FY13 call today. We are glad to have with us Mr. C. Ramakrishnan, CFO, Tata Motors; and his team to discuss the results. Sir, over to you for further proceedings.

Thank you, Yogesh. Good evening or good morning, everybody. To start off the call, I will quickly go through the presentation that we've put together for this -- the earnings announcement and we can follow with question and answers later on.

At the consolidated level for this quarter, Tata Motors consolidated [reporting a] net revenue of INR46,000 crores, up from INR45,000 crores in the same quarter last year and cumulatively for nine-months period, a INR1,32,000 crores, up from INR1,14,000 crores in the same period last year. EBITDA margin for this quarter came in at 13.3%, down from 16% in the same period -- same quarter last year and 13.7% cumulative for the nine-months period this year, compared to 14.4% in the same period last year.

At profit after tax, we report a PAT of INR1,600 crores, compared to INR3,400 crores in the same period last year. And for the nine-months period, INR5,900 crores, down from INR7,200 for the nine-months period last year.

At a consolidated level, the total capital expenditure and product development expenses stood at close to INR14,000 crores, that includes Tata Motors and Jaguar Land Rover. And again, at a consolidated level, net automotive debt to equity stood at 0.37 to 1.00.

Coming to Tata Motors Standalone India operations, we were faced with a very weak operating environment and weak macroeconomic situation in the country, and with the intense competitive pressures and pricing pressure on the products and increasing marketing spend, the medium and heavy commercial vehicles' volumes are affected significantly.

The net revenue was INR10,000 crores for this quarter compared to INR13,000 crores in the same period last year. For the nine-months period, the net revenue was INR34,000 crores compared to INR38,000 crores for the nine months in the previous year. EBITDA margin took a sharp drop at 2.2% compared to 6.7% in the same quarter last year. And for the nine-months period, the EBITDA margin saw a similar drop at 5.2% compared to 7.5% last year.

At profit after tax level, this quarter, we report a loss of INR450 crores compared to a modest INR174 crores profit last year. And for the nine-months period, the profit after tax was INR614 crores this year, compared to INR677 crores in the same nine-months period last year. Just to clarify, this year first nine months INR614 crores PAT includes dividend that we received from Jaguar Land Rover, which was INR1,200 crores in Q2.

In Tata Motors, the product development and capital expenditure for the nine-months period was INR2,000 crores and net debt to equity has gone up slightly and stood at 0.89 to 1.00.

Jaguar Land Rover, while I run through these numbers, just to caution, only the Jaguar Land Rover numbers that I read out now are computed under IFRS reporting. Jaguar Land Rover net revenue stood at GBP3.8 billion for this quarter compared to GBP3.7 billion in the same quarter last year. And cumulatively, GBP10.7 billion for the nine-months period compared to GBP9.3 billion last year.

EBITDA margin came in at 14% this quarter, down from 17% from an exceptionally strong quarter we had last year, this time. For the nine-months period, the margins are more comparable. For the nine-months period, the EBITDA margin for Jaguar Land Rover was 14.4% this year compared to 15.2% in the nine-months period last year. Profit after tax for Jaguar Land Rover, GBP296 million compared to GBP393 million and for the nine-months period, GBP837 million compared GBP785 million last year.

We have cash and liquid funds in Jaguar Land Rover balance sheet, which crossed GBP2 billion at the end of the quarter. And product development expenses and capital expenditures in Jaguar Land Rover for the nine-months period stood at GBP1.5 billion. And for this period, post the capital expenditure spend, we generated positive free cash flow of close to about GBP100 million.

Going a little bit into the India business, medium and heavy commercial vehicles, our market share in the overall commercial vehicle continues to improve sequentially quarter-on-quarter, sequentially. And for Q3, this year, our market share stood at 62.6%. Talking about different segments, the medium and heavy commercial segment was affected quite significantly in terms of overall demand, which affected our sales as well. A low freight availability driven by sluggish economic activity, weak macroeconomic signal -- outlook, and high operating cost of the operators affected the demand quite significantly.

Our growth in volumes in commercial vehicles was mainly driven by ACE and the small commercial vehicle volumes. We are focusing on our network expansion, offering value-added services to our customers, and intelligent vehicles and new product introductions in our commercial vehicle business.

Passenger car saw a quarter of intense competitive pressure. Our overall market share in passenger vehicles stood at 10.1% for the period till December. Our recent product introductions like notably the Safari Stormes have been received quite well and we expect -- based on the early signals, we expect the most recently launched Indica Vista D-90 will also be received quite well.

We have initiated several actions in our passenger vehicle business for transformation of the business to enhance our dealership experience effectiveness. We'll continue to focus on new product and various introductions and enhance sales and service experience for our customers.

During the quarter, we also saw a strong retail sales, which did not reflect in our wholesale, as we went through some inventory correction, both at the dealer end and at our end during this quarter, which affected our wholesale numbers in passenger vehicles a little more than the earlier quarters.

For the India business, exports from India also saw a decline about 17% in this quarter. Export volumes came down to about 11,000 compared to 14,000 in the same period last year and similar drop about 12% for the nine-months period. While we did reasonably well in some of our markets like Nepal, Thailand, South Africa, et cetera, our strong volume markets like Sri Lanka, Bangladesh continued to decline.

Turning to Jaguar Land Rover, we saw an exceptionally good quarter this year. Volumes up about 18% cumulatively for the nine-months period and about 10% for this quarter. Range Rover Evoque and Freelander drove the volume growth mainly. And in terms of regions, China continues to grow quite strongly, with a 50% year-to-date growth.

China today accounts -- in the nine-months period, China accounted for about 23% in terms of our overall global sales volumes, followed by Europe, again about 23%; North America, about 19%; UK, about 15%. The share of China region has further grown from Q3 of last year to Q3 of this year from 17% to about 23%.

Our 2013 model-year products, including the XF Sportbrake, all-wheel drive, smaller engine derivatives of XF and XJ, and the recently launched new Range Rover have been received very well.

Some of the highlights in Jaguar Land Rover, as I said earlier, revenue at GBP3.8 billion, reflecting strong demand for our products; EBITDA margin at 14%, which is in line with the recent quarterly performance, but lower than an exceptionally strong quarter a year ago, mainly influenced by product mix, continuous effect of slowly creeping up marketing cost compared to the levels which were exceptionally low in Q3 of last year.

Cash and bank balances and liquid investments stood at about GBP2.1 billion. In addition, we have unutilized but committed facilities close to about GBP1 billion, aggregating to a very good liquidity pool.

In Jaguar Land Rover, we launched and completed a very successful 10-year bond offering of $500 million, priced at 5.625% per annum. Our work on building the engine plant in UK continues and during this quarter, we laid the foundation for our joint venture in China with Chery.

The entire presentation has been loaded on the website. So, I will skip the slide on -- or just to touch some of the highlights, our vehicle financing subsidiary in India, Tata Motors Finance, reported good earnings. PAT for the quarter improved to about INR84 crores for the quarter in Tata Motors Finance compared to INR71 crores in the same quarter last year.

Our IT and engineering subsidiary company in India, Tata Technologies, again reported a strong performance, PAT coming at INR75 crores compared to INR58 crores in the same quarter last year. Our Korean subsidiary in commercial vehicles, Tata Daewoo Commercial Vehicles, which reported negative performance last year in this quarter, turned and reported marginally positive numbers in this quarter, about 0.59 billion Korean won PAT.

TML Drivelines, which is our axles, heavy axles, and transmission subsidiary in India, reported similar decline in profit in profit after tax, coming in at INR12 crores compared to INR60 crores in the same period last year which is reflective of the lower demand in medium and heavy segment.

Going forward, we continue to see the external environment and the overall economic activity to remain stressed, resulting in overall demand continuing to remain under pressure and this is particularly true for the medium and heavy vehicle segment.

The outlook on small commercial vehicles continues to remain strong and we see growing numbers there. Competitive intensity will increase which will add further pressure to the marketing expenses. From the Company point of view, we will continue to leverage on our strengths in the commercial vehicle business, a very strong understanding of the domestic market requirements, a very wide and compelling product portfolio, strong brand and customer support, widespread distribution networks and large economies of scale in this business. Will continue to upgrade our products, provide value-add services and solutions for our end customers.

In passenger cars, I had shared with you some of the underlying activities that are happening in the business in transforming and turning around our performance in passenger car which has been under pressure for many quarters now. Many initiatives are under aggressive implementation which includes regular product refresh plans which are in pipeline, improving the customer experience and engagements, further expansion of the distribution networks and significantly improving its effectiveness and efficiencies, and managing our cost and quality performance much better than we have in the past.

In commercial vehicle and passenger car business, some of the new products in pipeline for the financial year 2013 includes further variants from our Prima range of trucks, the new light commercial range of trucks, branded the Ultra; variants on the ACE platform, variants of the Nano and refreshed car models which will be across the car portfolio. We will continue to focus on extending our exports potential for the products. On the cost side, we expect material cost and commodity costs to be under control in the coming quarters. For the Company, of course, the cost optimization, cost reduction efforts will be further aggressively pursued.

Coming to Jaguar Land Rover, our investment in products and new technologies and product pipeline will continue. Last month, when we made the bond offering, we had given an increased guidance on our capital spend. [You made] a call, we had mentioned earlier our annual capital spend will be in the region of about GBP2 billion, with near opportunities that we see in Jaguar Land Rover and a more aggressive product plans and need to invest in enhancing our capacities, we expect in the coming years our capital spend is likely to be in the region of GBP2.75 billion.

We will continue to focus on profitable volume growth and we will continue to balance productions and sales to keep the inventories and our activities in check.

I'll stop here and throw the line open for questions. Yogesh, back to you.

Yes, Shama, can we start with the Q&A, please?

Sure, sir. (Operator Instructions) Kapil Singh, Nomura.

Sir, good evening. I have a couple of questions. First, on MHCV volumes, we've seen a dip in market share this year compared to last year and in some of the months like Jan., it has been even below 50%. So is it related to inventory correction or is it related to growth or decline in volumes in markets where Tata Motors is stronger, how would you explain that and what is the plan to gain back the share?

I think you have touched on the two factors which are both important. I think there is a play of both. Inventory correction, not so much at our end, our inventories have been under control for -- in the Commercial Vehicle business, but there has been inventory correction in some of our competition and there is a regional play as well. We expect that the market share will maintain and come back to our market share in the coming quarters.

Sir, in retail, you would have around 60% kind of a share?

Yes, I don't have the number right now readily here, but yes, in retail, yes.

Okay. And sir, secondly, as far as profitability is concerned for MHCVs or even for that matter for LCVs, is there an increase in competitive intensity and when the market recovers, do you think we will be able to get back to a historical level of margins that we used to see two or three years back, or do you think that because of higher competition, the margins may be a tad lower than what we were seeing earlier?

It's difficult to predict on the margins given where we are today. In general, I would say, there is a bit of a pressure on the margins for everybody, and definitely in our case, due to the competitive intensity we face, not only in the commercial vehicle, but also the passenger cars in particular. It will tend to increase the marketing cost, particularly the variable marketing expenses. I think it will be a tactical play from quarter to quarter. But in terms of an underlying long-term trend, I think margins will be somewhat under control.

Okay. And sir, finally, have there been any price increases or reduction in discounts that has happened in January or February?

During the quarter, October to December, on an average in commercial vehicles, we'd have taken a price increase of about 1%, but this is October to December quarter.

Right.

And so did we in January as well. So, we have been taking general small doses of price increase from time to time as we have done in the past in the Commercial Vehicle business. Discounts, I'm not seeing any particular reduction in January-February compared to a quarter ago.

Right, sir. Thanks. Thanks a lot.

Remained intense.

Thank you. Hitesh Goel, Kotak Equities.

Thank you, sir, for taking my question. Sir, first, I have the question on the JLR front. Why have the realizations dropped like 6% on Q-on-Q basis? Was it driven mostly by discounts? We know that there is a higher mix of (inaudible) also. But what were the extent of discounts and if you can detail out that? Secondly, there is a -- margins have come up quite well at around 14% despite realizations dropping so much, so if you can give some color on that as well.

Realization is a mix of many things, including regional mix and model mix and variants mix as well as the exchange. I'd focus more on the margins, which as you said, have remained reasonably strong compared to the [sequential] quarters. It's difficult to comment on a net realization mix. It's a function of many things, but not necessarily reflective of any significant increase in discount for variable marketing expenses. They have been on the increase, in general, I would say over the last year, but nothing exceptional or strong in this quarter.

Sir, would we say that this is largely driven by higher Evoque and Freelander volumes?

That's right.

Because the geographical mix for China and all remains the same. So I can only think about product mix.

Yes, it's more a model mix and within the model, maybe the variant mix.

Sir, but then, margin should also have got some impact, but there is no impact on margins front? And also, if you can give some outlook for next quarter per se that would the marketing cost and stuff will be much lower next quarter as compared to third quarter levels and how do you see currency shaping up for fourth quarter?

On currency shaping up for fourth quarter, I would -- maybe I should take an average of predictions from all the analysts in this meeting.

Because the currency has started to move in your favor in January-February. That's why I'm asking that question.

That's true. There will be some play of that in the coming quarters, but generally I would say margins will remain strong at the current level.

But the marketing expenses, will it go down or do you see more marketing expense?

I don't see a significant change either way.

Okay, okay. And finally, sir, if you can throw some light on the tax rate and the depreciation expenses that have gone up in JLR and tax rate in the consolidated has been -- is around 39%, so if you can give some color on that.

JLR, if you recall, last year in March, we brought in the deferred tax accounting and took credit for the future deferred taxes. Therefore, in JLR, we will be fully accounting -- between deferred taxes and current taxes, we will be -- we are fully accounting for the tax as an expense item in our P&L. So there is a difference in tax treatment in JLR, which I think we explained in the last two, three quarters. In addition to that, I recall, during this quarter, JLR also had a tax incidence on the dividend it started getting from various overseas operations, including --

Sir, JLR tax rate is at 27%. I'm more talking about the consolidated tax rate which is at 39% despite a tax credit in the standalone operation. So we are not able to understand that. So if you can --

That's primarily driven by the JLR tax. JLR has tax both in UK, even though the cash payment of tax in UK is low and overseas operations. I think we had explained in one of the earlier calls, JLR in all its NSC operations will have to pay the local income tax on its local assessment, including in China.

Yes. So sir, that should -- that has already been factored in JLR operations, right, but if we look at the consol tax rate, it is like 39% versus JLR tax rate of 27%. There is some INR240 crores difference if you -- even if I translate on our --

Maybe we can send the details to you offline after the call.

Okay, sir. And the depreciation expenses in the JLR front, how should we look at that now if you can explain that?

Depreciation expenses in JLR, depreciation, amortization in general in JLR will keep going up as a line item. As you know, when we acquired and whatever product development and existing expenses have been capitalized in JLR, as the new models get launched and our -- we do have aggressive model and product introduction plan going forward. So you should see this expenditure going up in the coming years -- coming quarters.

So, how should we look -- sir, do a GBP90 million to GBP100 million increase every year? It's difficult to give an estimate, but how should we [amortize] the capitalized R&D expense? Should we do it over a 10-year period? How are you looking at it?

In general, I would say over a five to seven-year period.

Okay. Okay, sir. Thank you.

Thank you. Pramod Amthe, CIMB Securities.

Hi, sir. Currency has seen a lot of fluctuation. Would you like to reveal what are your hedges and at what levels, for JLR especially?

In terms of currency hedges, I can give you a general directional comment in terms of the hedging policy or principles that we follow. For the -- in any particular quarter, the immediately coming quarter, we would remain mostly hedged upwards of 80%, 90% and successfully lower percentage in terms of our hedge position for the succeeding quarters. So -- and we normally go up to two years to three years with lower and lower percentages.

So is it fair to say then that the benefit which you've seen in the last couple of weeks on the currency will not immediately flow through and it will be more back-ended?

It will be more gradual over a period of time.

Okay, sure. Thanks and all the best.

Thank you. (Operator Instructions) Vijay Nara, Fortune Financial Services.

This is Mahantesh here. I just thought I'll ask you this question. One, on the tax guidance on JLR, I understand the corporate tax rates are coming down year-over-year by one percentage points. So what would your tax rate be in FY14 as far as JLR is concerned?

I can't give you an answer offline. But Mahantesh, I can let you know later on.

Corporate tax rate in UK has been reduced, can you confirm that at least? Between FY12 to FY13 and it will reduce further in FY14 again. They also follow for tax purposes, the April to March calendar year. Can you confirm that or --?

That's right, it has come down, but in JLR accounting terms, between deferred tax and cash tax, you will be almost at the marginal rate.

Okay. And related to that same tax question, you happened to mention that the various JLR subsidiaries are giving dividends to the parent in UK. So it will receive dividend income tax-free in -- to itself, right, so that --?

In UK?

Yes.

Yes. That's right.

That would mean the overall tax rates in JLR should actually come down also on account of this?

No, but there will be tax correspondingly in the NSCs on their income, right.

But that's a dividend distribution tax, that would be typically a lower rate than the corporate tax rate?

Dividend distribution tax or the income tax on their profit, whichever is applicable in that country.

Right, right. Just wanted to understand a bit more on the marketing spends that you have mentioned as being higher, the launch expenses, especially for the new Range Rover. So can you quantify how much is that for the quarter?

It's difficult to quantify for a quarter the discounts on the marketing expenses. I've been giving a directional listing. If you take the last one year, particularly compared to Q3 of last year to Q3 of this year, you are talking about a very exceptional strong quarter last year, October to December, compared to this. In these two time periods, I would say the marketing expenses have in general been on the increase.

I'm referring to the launch expenses that have been talked off?

Overall, in terms of marketing expenses, I would say it would have increased by about a percentage point.

Right, right. I think that answers my queries. Thank you very much.

Thank you. [Sanjeev Dhingra, Mujahid Asset Management].

Yes, thank you. Mr. Ramakrishnan, can you reconcile Indian GAAP with IFRS as far as JLR is concerned?

That's a tough one in this call, but we will be able to help you separately, because earlier, I've noticed when we report Indian GAAP for Jaguar Land Rover, people used to find it difficult, because Jaguar Land Rover was reporting separately IFRS. I would also reconcile the other way around. Then, we said, as far as JLR is concerned, we will report consistently everywhere and share with you the IFRS results, so I don't want to start the story all over again this time the other way around, but if you are keen, we can have it exchanged with you separately.

Okay, no problem. Okay, thank you.

Thank you. Ritesh Gupta, JPMorgan.

Yes. Hi, sir. This is Aditya here. Just on the Indian Commercial Vehicle business, are you expecting the demand in the northern markets to pick up? Because I believe that's where currently we've seen some sort of weakness.

Frankly, the Commercial Vehicle business and that's not only true for Tata Motors, I think overall from a market point of view, the signals are quite weak and it is linked so much to the external economic environment, economic activity, infrastructure investment, capacity creation in the country, the industrial capacity creation in the country, et cetera, all of which are under somewhat of a pressure or a lack of activity at this point of time.

Rather than giving a time-related answer, I would say if the government starts some of the revival programs or start taking some major decisions, actions to tone up or revive the economy, even then, I would think it will take at least a quarter or two to work its way through the system and start reflecting in medium and heavy truck demand.

Okay. Fine, thank you.

Thank you. Rajasa K., Jefferies.

Hi, sir, Govind here. I had a couple of questions. The first one was can you talk about trends in variable marketing expenses in JLR? I mean you had mentioned that discounts are creeping up. Now, I guess that is part to do with a model -- the Range Rover change, but it's also to do with discounting across the entire portfolio. Could you just speak about how the variable marketing expenses have changed?

That's true. I think it's a play of both. You will find it as the model -- as the new model comes in, the old model tends to be run out a little faster, particularly at the dealer end. It does not necessarily mean the model run-out expenses. Many times, it may be at the dealer end and may not flow back to the manufacturers. Rather than quarter-to-quarter, I would say year-on-year compared to this -- of course, we must keep in mind that last year, October to December was a particularly strong quarter where we saw historically low levels of some of these expenses. Compared to that, if I take a 12-months span, I would say overall increase of about 1% in our total marketing spend and at a rough guess, I would say equally distributed between variable marketing and fixed marketing.

Okay. So it's a combination of -- okay, and when you say a fixed marketing, the general assumption is that there are one-time costs because of Range Rover launch. Would that be a fair assumption to make?

It would be a fair assumption, except considering our aggressive product plan in the past year or in the coming quarters. I don't know how much comfort to say that it is a one-time. It will be a one-time every quarter [maybe arrangements].

Okay. Just the reason will be different?

What triggers that in each quarter may be different. But given the product program which we have said with all of you for Jaguar Land Rover in the coming periods, I don't know if there is too much comfort in saying it's one-time.

See, the other confusion that I have, and I don't know if other analysts have this, is your reported percentage margin is a mirage, I mean it's a derived arithmetic number, but if I look at your profit per car, this is the -- from the time you started reporting quarterly numbers, it's probably the second lowest, or at least since first quarter -- the IFRS numbers at least, it's the second lowest. Now, there was a comment by JLR's CFO that margins will be at 14%. Now, that 14% has relevance only if you know what the realization is going to be and which is a mix of a million things. So how should we think about this? I mean should we think about profit per car remaining where it is for the next few quarters as he's guided or is it 14% of an unknown number?

Or is it -- [fairly] the last part, or is it 14% on --?

14% of an unknown number.

It's convenient for me to say it will be 14% of an unknown number. First of all, I think what maybe the press might have reported and what was said was, the question that was put across a short while ago was, in the same period last year, you had almost 17% margins and this time, you are talking more about a 14%. There is a question on the sharp drop and will you get back to 17%, et cetera. To that, Ken had responded saying that 17% was an exceptionally strong quarter and it's not appropriate to compare or target that as a steady margins. Margins will be more steady state in this region. I don't think he picked the number and said, margins will be at 14%. I think directionally, in terms of a range, I think we are at the current range which is more realistic rather than a 17% which is a combination of several things last year. There is a context in which the response was given.

Back to your other question, which is profit per car, I can't on this call contest whether it was the second lowest in recent history, because I don't have the numbers right in front of me. You see, I'm finding it a bit difficult to explain margins and predict margins every 90 days. It's a combination of far too many things.

Sure.

If you take the next few years, as our product launches happen and we have many, many more models in the marketplace than we have had historically and in the same time, we have lesser platforms, the per-platform extraction of value in our entire product strategy improved significantly, that has the major play on the margin. In this business, you will have a very positive influence on account of operating leverage as our volumes increase.

Then, there are regional factors like China and other more attractive regions growing much sharper than other regions, then of course, there is a currency. So there are number of things in which margins can be improved in a business like Jaguar Land Rover, apart from operating efficiencies, material cost reduction and internal efficiencies. A lot of this can also be affected on the negative side with marketing spend, launch costs, marketing discounts which are more a function of how the market is behaving at a particular point of time. So every quarter, it's becoming difficult to have this margin discussion in detail. But generally, I would say, the 17% was more of an exception; where we are today, we would hope to improve on it, but I can't give a guarantee that it will be always upwards.

Sure. A follow-up question --

Very long-winded answer to your short question.

The other question I had was, in Jan., when you guided for the margins and higher CapEx, there was also this statement that you expect free cash flow to be probably be negative next year. Now, I just wanted broad assumptions that go into that statement, because I'm assuming that when management made the statement, you are fairly aware of the strong growth that we saw in Jan. in the retail volumes of -- and wholesale volume of JLR and probably had expected a similar run rate for the next year as well. So you have a very strong volume run rate, you have a fairly rapidly improving mix, both in terms of product portfolio as well as geographic portfolio and you still expect a GBP2.75 billion of CapEx and R&D, free cash flow to be probably negative. So I am just a little confused there.

No, I think our guidance is also to some extent based on the fact that we are increasing our spend from GBP2 billion to GBP2.75 billion, which is the other broad assumption you need to keep in mind. While there are a lot of positive factors that you talked about in terms of volumes or mix and region growth and a strong January outlook that we had at that point of time, but to base next 12, 15 months' cash forecast based on one 15 days or 20 days trend in January would have been somewhat inappropriate. Secondly, it could also be affected due to pressure on margins. We have to -- we operate in several different geographies. I think ours is a balanced one, that there is a probability that free cash flow could be negative, particularly because the capital spend is increasing quite sharply year-to-year.

And lastly, was there any assumption of a working capital change, because I think for the first time in many quarters, we've seen some deterioration in working capital in JLR?

Working capital did play a role in this quarter, but I don't think that plays a very major role in the negative free cash flow for next year. It is almost remaining flat.

Okay, fine. Fine. Thanks, sir.

Thank you. Sanjay Doshi, Reliance Mutual Fund.

Good evening, sir.

Good evening.

Sir, my first question is on the domestic Passenger Vehicle business. We were looking at targeted dealerships for particular products and maybe the UV segment. So how are we moving on those plans? How many dealerships have we added in those categories?

You are talking about the exclusive dealerships, Nano exclusive and UV exclusive?

Yes, sir.

I'm quoting some numbers off my memory.

Right, sir.

We have over 100, nearly 150-plus in terms of Nano exclusive dealership across the country.

Right.

And about 30, 40 UV dealerships.

And how do we plan to take it forward from here, sir?

What we wanted to achieve was to see if we can provide a more focused experience in these dealerships for the particular product line, particularly in localities and regions where the attraction is for that particular product, for example, Nano in more interiors, et cetera.

Sure.

I think we have to see the experience and the business model in each of these dealerships.

Okay.

And see how we can take it forward. We would like to take it forward further, but we also need to see how and what type of experience, both from a business point of view and from the customer point of view.

Right.

How it takes shape. It has proved to be quite positive and there is a chance we will improve on it further.

Right. And sir, on the Passenger Car business in particular, is there any market share target that we have in our mind, maybe for the next say three years' time period from the current 10-odd-percent? Have we set a --

Passenger Car, not very long ago, if I take two, three years ago, I think we had gone up to 16%, 17% market share.

Right.

There is no reason why we should not reach there or go beyond.

And slide 19 doesn't mention any new model launches. It's mentioned about refreshes. So is the Passenger Car segment not working on any new models?

This slide is more meant for the near term.

Okay, sir. Okay. Okay. And last, on the JLR side, just wanted to understand from you what is the current manned capacity, I mean the kind of production that can we expect on an annual basis now and what can it be there for the next year?

I'm not going to respond on the next year potential capacity.

Okay, sir.

Current year, if you take, for example, about the last quarter of last financial year, I think we did close to about 90,000, 95,000 vehicles for the quarter.

Right.

And if you take it -- that on an annualized basis, the capacity would have been about 360,000, 370,000 for this fiscal year, and we have been investing further in expanding and creating further production capabilities across our plants. And I think you may have heard the reports Ken mentioned in a short while ago, that --

Right.

In three of our facilities -- across the three factories, we are running nearly three-shift or two-shift operations across all the three facilities.

Right.

So we are running practically full-up on capacity.

Okay.

And at the run rate of last quarter.

Right.

360,000, 370,000 is thereabouts where we are today. But, of course, we are working on increasing it on an ongoing basis.

Okay, sir. Okay. Thank you very much, sir.

Thank you. Vishal Saraf, SBI Mutual Fund.

Hi, sir. Sir, just wanted to understand more sense on the CV business. Last time we saw such a sharp down cycle was in FY09 where we saw for two quarters similar kind of decline in MHCV segment. But at the same time, at that point of time, we saw significant price increases led by Tata Motors and margins [bonded] sharply from around 2% level to -- 1% to 2% to back to 10% in just two quarters. This time, again, margins have slipped down to below 2%. So when do you think we can see volumes come back and pricing come back for us and that translating to better margins?

I have tried to answer this in many different ways. If you're talking particularly in terms of medium and heavy commercial vehicles, it's not that from Tata Motors, we can -- we have a magic wand and our volumes go up. It's extremely dependent on external macroeconomic conditions, the industrial output in the country, the capacity creation in the country, the infrastructure, mining activity and so on. Current quarter is looking no different. It's continuing to be somewhat damp in terms of overall demand at the industry level for medium and heavy commercial vehicles. I think a lot would depend on the tone and outlook externally, how it changes and once we see some actions and specific projects and steps and policies and this thing falling in place, given a couple of quarters, I would expect the volume should start to improve, the overall demand to improve. I'm afraid I can't give you a more --

And [as we enter] volume, our volumes will be difficult to predict, but how do you see a scenario on the pricing and margin side, because that is where being the leader, possibly Tata Motors will be the one to take the call first?

Pricing, in terms of product pricing, we have been on an average increasing the price across our range by about 1% each quarter, that trend will continue. But given the market situation and the volume and the overall demand situation, I think the competitive pressure and the variable marketing and that discount levels are running quite high today. So I think the net margins will continue to be under pressure for some time.

And you don't see a scenario where the discounts reduce going ahead? If the volumes remain at these levels?

At least we haven't seen it so far in January and February.

Okay. And sir, in [an initial] question, you were mentioning about retail market share being at 60% against below 50% for wholesale, can you just elaborate more on that point and how do you -- has that actually happened because of dealer inventory reduction or if you could throw some more light on that?

Our dealer inventories have been under control steadily for the last few quarters. We haven't seen dealer inventory going up in the past nor is there any sharp reduction currently taking place, so our dealer inventories and therefore our wholesale and retail mix has been fairly balanced consistently in our Commercial Vehicle business. But if you're talking about market share, we're talking about relative performance in reference to the market and competition. There has been some mismatch and the inventory correction [here].

No, sir. For assets, there is no inventory correction, so the market share will be [there] only if there is huge, huge buildup in our dealer inventory by competition. So do you think that's what has been happening?

To some extent, yes.

Okay, sir. That's all from my side, sir. Thanks a lot.

Thank you. Amit Kasat, Standard Chartered.

Yes. Thanks for the opportunity. Most of the questions are answered, but CR, if you can give us the capacity utilization for the domestic business for the different segments, that will be very helpful.

If I start on the commercial vehicle side, we continue to remain quite high in terms of small commercial vehicle rate in terms of capacity utilization.

Right.

In fact, I think I had mentioned in one of the earlier calls, we are investing in expanding the capacity further on the ACE and its family. So the capacity utilization is very high in that part of the business.

Okay.

Medium and heavy commercial vehicles, where our capacity utilization was at about 70% plus earlier, has fallen to more like 50%, 55% now.

Right.

If you take on the current run rate.

Right.

In passenger car vehicle -- passenger and utility vehicles, it remains on average at around 50%.

50%, right? And is it possible for you to give the consideration for the Nano plant?

Nano will be somewhat lower. We created capacity on an average about 25,000 per month. You know our current run rate.

Yes.

It's lower than the average that I talked about for the Passenger Vehicle business.

Sir, I'm just extrapolating about the M&HCV plant. Right now, in the third quarter, our utilization was 50%, 55%. And if the fourth quarter happens to be the similar or a disaster, that's what the outlook is, any sense you can give what's a breakeven for that plant?

That's not very difficult to -- that's not very easy to define in terms of breakeven point for a particular segment of the business.

Okay.

I would stay away from that.

Okay. Thank you, sir.

Thank you. Pramod Kumar, IDFC Securities.

Good evening. Thanks a lot for the opportunity, sir. Sir, my first question was a clarification on your treatment of incentives and commissions at JLR. Just want to understand are they set off from the net sales for respective models or are they part of the other expenditure line?

The variable marketing expenses, incentives, commissions, et cetera, are reduced from the top line.

Reduced from the top line. And the fixed marketing spend will be in the other expenditure?

That's right.

That's right. And sir, just the outlook on your standalone CapEx, because you did mention that you have the aspirations of getting back to a 16% market share in PV and also a need to prepare for increasing competition at M&HCV. So just want to understand is there any upsizing of CapEx of standalone entity as well?

No. My earlier indication was on an average, we would spend about INR3,000 crores in the domestic business on new product investment, technologies and CapEx. My guidance would remain broadly the same. Year-to-year, it may vary between INR2,500 crores to INR3,000 crores, but it will be in that range.

Okay. And sir, on China, just wanted to understand, what is the current dealership count what we have on JLR and what is the target for this by this year-end in terms of the number of touch points?

In terms of touch points, in terms of number of dealerships, it will be well over 100 today, about 120, 130. But if you talk about touch points, a dealership may have more than one locational operation I think to be much more closer to both.

Okay. And in that case, what will be the year-end dealership target, sir? The current 120 to 130, or what is the target you have for the year-end? I just want to understand how much of the market is yet to be tapped in terms of interior China?

Sorry, I don't know that I have a number readily for you to give in terms of target before the end of the year for number of dealerships in China.

But we continue to look at expansion, right, in terms of number of --?

Of course.

Okay, okay. Fair enough, sir. Fair enough. And final question on the group consolidated cash flows. How would you see them for the next couple of years, considering the CapEx upsizing in JLR and the current slump in the domestic business?

I think cash flows will remain somewhat under pressure and I think we have already said that with the increase in CapEx in JLR, JLR business could see some possibly negative free cash flow. The domestic business, I am -- I expect the business will turn around at some point of time with the external economic improvement. We remain fairly okay in terms of overall balance sheet, leverage and borrowing. We are under one in terms of debt-to-equity ratio. In the consolidated level, we are at --

0.37.

0.37. And in domestic business, we are at about 0.8, which is slightly higher than where I would have liked to see it. But in terms of overall leverage and liquidity, we are fairly okay.

Okay. Fair enough, sir. Thanks a lot and best of luck.

Thank you. Aashish Poddar, Edelweiss Securities.

Good evening. Thanks for the opportunity. This is Aashiesh Agarwaal here. Sir, my question is, first, with respect to some news article that we had seen, saying that, since you are cutting the production, the vendor health -- vendor financial health is underbid with some of our production and there could be some support program that we may run for them. Could you throw some light on this, sir?

You are obviously talking about the domestic India business.

Absolutely, sir.

In India, our vendor base has been there with us for some time, many of them are completely reliant or significantly reliant on us for their business and it's a relationship that has remained strong over a period of time; in ups and downs in the business, we have worked together. So when the whole market is down and everybody is under pressure, if there is any specific support or help required at the vendor level, we will definitely extend that. It does not necessarily mean that a financial package is being put together or whatever. In many cases, we work with the vendors to help them to reduce cost or help them improve quality or help them improve their operating efficiencies, et cetera, and such help and collaborative working with the vendors will always be there.

Sure. So it's not a financial package. Even it will be more in terms of process improvement?

It will be -- it may take different shapes on a case-to-case basis, there is no major announcement I have to make, it'll depend on a case-to-case basis. We are faced with an extraordinary situation, the external environment, the whole industry is severely affected, and our Medium and Heavy business is affected. In Passenger Car, we see a competitive intensity and low volume and across the board for most manufacturers, relatively low levels of capacity utilization. Naturally, in terms of the backward process, the supply chain is affected. I think all manufacturers including Tata Motors will have to see how we can find more and more ways of working together with our vendor base.

Sure, thanks. My next question is with respect to JLR, I see that raw material cost per vehicle has declined by about 5.1% during the quarter, sequentially. Would this also be because of mix of models and variants?

Mix of models, I would slightly expand that is partly a model mix and the thing. It could also be a regional decision because we are taking a percentage to top line, so it can be a function of --

I am deducting my raw material cost with the number of vehicles sold.

Yes. So it can again be influenced by any of these factors.

Sure.

So if you sell one product in the UK versus the same product in China, the percentage could look different.

Okay. Got it. Thanks. My last question is if you could just throw some light on the emission requirements with respect to US. So across the fleet, where would we be on the weighted-average emissions and efficiency as compared to where we are? If you could just throw some light on that, sir.

Sorry, I don't think I have off-the-cuff answer; I want to be correct in responding to you. I'm afraid you may have to drop us a mail or something, so that I can respond separately.

Okay. Second, sir, in terms of from what I understand is that there is a gap in terms of what is required vis-a-vis where we are. This is across the board. Then, there are some credits that we may have to purchase, which can be accumulated or the debits may be accumulated. So how do we account for these emission debits that we may be generating, if at all?

The question of accounting for it at present doesn't arise, because across the different regions, I don't see a situation where we are buying debits or credits in any significant way to be expecting any accounting impact of this and we are fairly okay in terms of the emission norms in the near term. The hesitation for me to answer your question is, when you ask specifically about US going forward over the next five years, six years, I can't answer that readily, but we don't have a concern of not meeting the norms or paying penalties at this point of time or in the near term.

Sure, sir. Much appreciated. Thank you so much.

Thank you. Participants, that was the last question. I would now like to hand the floor back to Mr. Yogesh Aggarwal for closing comments. Over to you, sir.

Yes. Thanks for your time today and thanks, everyone, for joining the call. Have a good evening.

Thank you very much, Yogesh. Thanks.

Thank you. Ladies and gentlemen, on behalf of HSBC Securities & Capital Markets, that concludes this conference call. Thank you for joining us. You may now disconnect your lines. Thank you.