Tata Motors Ltd (TTM) 2014 Q1 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Tata Motors Q1 FY14 earnings conference call hosted by Standard Chartered Securities. As a reminder, for the duration of this conference, all participant lines will be in the listen-only mode. 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 the conference over to Mr. Aniket Mhatre from Standard Chartered Securities. Thank you and over to you, sir.

Thank you, Mohseen. Good evening, everyone. Welcome to the post results conference call of Tata Motors. To discuss the results today, we have with us Mr. C. Ramakrishnan, the CFO of Tata Motors; and the Investors Relations team. I would now request Mr. Ramakrishnan to begin with his initial remarks on the results and then we can begin the question-and-answer session. Over to you, sir.

Thank you, Aniket. Good morning, good afternoon, good evening, whatever to all of you. Sorry for the delay in starting the call as we were coming for the call from different places, we were stuck in different parts, my apologies for the delay. I'm going to make the opening remarks very, very brief and maybe leave more time for the Q&A to follow.

We announced a short while ago the first quarter April to June results for financial year '13-'14. On a consolidated basis, Tata Motors net revenue stood at INR46,785 crores, up from INR43,000 crores in the same quarter last year. On a consolidated basis, EBITDA margin came in at 14.4%, same level as last year; and profit after tax of INR1,700 crores. A good part of the performance and the results at the consolidated level was driven by a one more successful financial performance and results by Jaguar Land Rover. Tata Motors standalone, the net revenue was down at INR9,100 crores compared to INR10,500 crores in the same period last year. EBITDA margin further dipped to 2.3% EBITDA margin compared to 7.3% a year ago. Profit after tax came in for this quarter at INR700 crores, but that is after considering dividend from subsidiaries particularly Jaguar Land Rover of over INR1,500 crores.

A weak macroeconomic environment in India affecting the overall demand for both CV and PV businesses, competitive pressures, and lower net realization affected our margins and performance significantly in this quarter. Jaguar Land Rover under IFRS accounting, the net revenue was at GBP4 billion, up from GBP3.6 billion same quarter last year. EBITDA margin came strong at 16.5% for this quarter compared to 14.5% a year ago. And profit after tax was GBP304 million compared to GBP236 million last year's first quarter. Higher volumes in Jaguar Land Rover, richer product mix, and favorable exchange rate resulted in very strong both operating performance and financial margins. Overall at a consolidated level, our net automotive debt-to-equity stood at 0.31%. Tata Motors was higher at 0.81% and Jaguar Land Rover net debt was negative offset by strong cash on the balance sheet.

We continue to invest in both the businesses in product capital expenditure and product development, both in the India business. We had given guidance of about INR3,000 crores on an average annually, that continues to hold. We'll continue to invest in our newer products variants both in commercial vehicle and passenger vehicles. In passenger vehicles, number of actions have been initiated for enriching the product profile going forward. We launched HORIZONEXT, a branded program in Tata Motors for improving the product presence in the marketplace, better customer experience, manufacturing processes, and after sale service. In Jaguar Land Rover, again we had given indication of GBP2.75 billion annually in terms of product development CapEx. That will continue as we focus on newer product introductions. The newer products we introduced last year; the new Range Rover, Jaguar XF Sportbrake, Jaguar F-TYPE are doing well, well received in the market; and Range Rover Sport will be launched shortly.

I'll stop here and maybe give more time for question and answers. I'll throw the line open for questions now.

Thank you very much, sir. (Operator Instructions) Yashesh Mukhi, Morgan Stanley.

Hello, sir. This is Binay from Morgan Stanley.

Hi.

I had two questions on JLR. Firstly, there has been a lot of news flow on inventory piling up in China, could you throw some light on that? Continuing with the same, how are you seeing discount trends in Jaguar portfolio specifically across regions? How do you see the reception of the new Jaguars across regions? And lastly, we do note that the FCF profile of Jaguar has slightly slipped on a quarter-on-quarter basis, could you throw some light as to what drove that?

Okay. The first question was on the inventories pile up in China as you called it, we haven't seen that trend in our business. It's not a correct statement as far as JLR is concerned. Many of our product line continues to be on a pull mode overall and in China. Without referring specifically to the discounts that you mentioned in the second question, I would say or if you take -- I'm not commenting particularly with specific reference to the quarter. But in general in the last year, year-and-a-half, I think the variable marketing expenses in total have been going up, but we have not seen any alarming or significant increase there or bloating there in any of the markets. But generally the trend has been on the increase since the low levels we saw maybe about six quarters ago. If I got correctly, your last question was on free cash flow, was it?

Yes.

Jaguar Land Rover, as I said earlier, is spending and investing a lot in the product development and capital expenditure. The free cash flow for FY13 was [GBP33.41 million] after CapEx and product development spend and negative working capital.

How has been the working capital trend in Q1? Like I don't have the data, but how has been the working capital for JLR in Q1?

The working capital, it's difficult to comment on a quarter-to-quarter basis, but in the first quarter you will generally see an increase in the working capital requirements, that's no different in this year.

Right. So it's more to do with seasonality rather than anything?

That's right.

Right. Great, sir. Thank you so much. I'll revert with more questions. Thanks.

Kapil Singh, Nomura.

Good evening, sir. Just wanted to check a couple of things. Firstly on the raw material cost for Tata Motors standalone, we've seen a decline in raw material cost to sales so just wanted to understand is it related to a lower discounting or is it because of a genuine decline in RM costs that you have seen?

It's surely not lower discounting, that will be an incorrect statement. The discount levels and overall net realizations have been relatively weak and have continued to remain relatively weak compared to earlier periods that we have seen in the past. While we are moderating our variable marketing support and also making price increases here and there, overall the market trend has been quite severe in this regard. The raw material turnover ratio, while it is difficult to give the break up on a each quarter basis, in general I think it's contributed more by a combination of model mix as well as richer model mix can go to your result and overall lower percentage. Also the second factor that you mentioned, we have seen a relative steadiness in the commodity prices and we have also been undertaking significant cost reduction programs within the business. So I would say a fairly steady commodity price or softer commodity prices, material cost reduction, and value engineering efforts, and model mix.

Sir, does the weakness in rupee put a pressure on costs going forward or you see raw material costs holding at these levels?

I think we should relatively be okay on the rupee front on our business. Our exports tend to be generally higher than our imports. The import content of vehicle per se is relatively less, but there may be some consequential impact that we may see particularly if the material prices shoot up to align for exchange effect. That we'll have to see, but we have not seen this phenomenon in this quarter.

Sir, secondly just on the inventory levels, especially for heavy trucks for both Tata Motors and the industry, if you have any thoughts; where are we and have we done any further inventory reduction even in the first quarter or the retails and wholesales were largely in line?

Generally partly on account of seasonality, et cetera, towards 31st March, the inventory levels in the pipeline as well as the Company tends to be at a low point and it starts building up in the first quarter and second quarter for the busier period in the later part of the year. Since you asked specifically about commercial vehicles, our inventories are very much under control whether it is in the Company or with the dealers. The inventories will be, I would say, on the lower end of the range that we normally operate between 20 and 30 days. That tends to be more towards the lower end.

This is for the Company and dealers put together?

Yes, I'm talking about inventories being in control in the total chain.

So that's about 30 days with the dealers or with the Company and dealers put together?

I would think it's about three to four weeks -- it can vary from product line to product line. It will be between three to four weeks for the dealers, but at the Company it will be much smaller.

Okay, sir. That's all, sir. And for the industry as a whole, do we see higher levels or there they would be around similar levels?

I think we would be operating relatively at the low-end in terms of an industry phenomenon.

Okay, right. Thank you, sir. Thanks.

Sonal Gupta, UBS Securities.

Hi. Good evening, sir. Thanks for taking my questions. Just to start with, one, I just wanted to get a sense of on the India passenger vehicle side given that we continue to see a very sharp decline on a year-on-year basis in terms of volume. I mean in terms of your action plan, I just want to get a sense in qualitative terms if you see the losses in this business sort of continuing to widen or do you think your losses in this business have peaked and you shouldn't really see an acceleration in losses from here? I mean any sort of qualitative sense that you can give on this business?

I think we have discussed about it in the past in different occasions both in calls or interactions like this as well as in many other interactions with the business leadership. We are launching a number of actions within the passenger vehicle business. Number one, there is of course a factor of the market being very competitive, the overall volumes being down for everybody, and the pressure on pricing; that's a general phenomenon. But more than a general phenomenon, I think in many areas I think we also need to step up our actions which is what we are focusing on. I talked about a number of model launches recently. Was it in June? Yes, in June. Almost eight variants and newer models across the product range, something which one has not seen in this country before. We need to work much better on our manufacturing process. We are also focusing on the sales effectiveness and the customer experience while buying a vehicle as well as in the post sales experience. A number of initiatives have been launched.

While it has taken off well and there is momentum and there is commitment to make it work and emerge successfully, it's early days, I may not have the statistics to share with you at this stage. I think it will take a couple of quarters for results to show. As far as the financial performance is concerned, it's a very competitive market and in terms of our overall volumes, we are operating at relatively lower levels of capacity utilization. But we hope with the actions that we are launching not only in terms of sales and commercial area, but also in terms of cost control and cost rationalization. I think on other calls I mentioned earlier, within the Company the focus on material costs and managing of our supply chain and materials has become much, much more sharper with the constitution of an integrated centralized purchasing function between our commercial vehicles and passenger businesses, hope to draw a lot of synergy there. There are a number of other actions. So I think we need to focus both on the cost side, on the product side, on our manufacturing processes, as well as in the commercial areas.

Sir, my second question is on the JLR side we have seen an improvement in terms of the average selling price on a quarter-on-quarter basis. So will it be possible for you to segregate this into currency effect versus product mix effect? And the other thing was if you could just give us like you gave for the MHCV's inventory number, would you have a similar number for inventories in China for JLR?

No. First of all, this is not your second question, this is the 10th or 12th question. But on the inventories number of days in China, I don't think I'll be able to give a specific comment in terms of market inventories at different regions. But that's no different in China compared to other markets. In general, the inventories overall would be between 30 to 40 days or 45 days in JLR for different markets. Some of the outer markets or markets away from home base will be slightly longer in terms of lead time and reaching out. So I would tend to think that we are operating within this band. It may vary from product line to product line, but generally in that range.

Right. And sir, on the ASP, is it possible to give --?

It's difficult to segregate it exactly the way you have put because it's a function of exchange, number one; it's a function of model mix, it's a function of regional mix after all JLR sells in 100-plus countries with roundabout 20% coming from each of the regions; China, Europe, UK, US, et cetera. So it will be difficult to segregate that, but yes, the effect is a combination of all those.

Okay. Fine, sir. Thank you so much.

Jamshed Dadabhoy, Citigroup.

Yes. Thank you for the opportunity. Just one question actually. We've been noticing that Evoque volumes have been flat lining while Freelander volumes are up about 7% on a year-on-year basis?

Sorry. Can you please repeat the question?

Yes, sure. Hello, can you hear me?.

Yes.

Yes. Evoque volumes are flat YoY, but Freelander volumes are up about 7% on a YoY basis. Can you explain the difference in the market dynamics in these two product lines?

It's partly the capacity management also as they share many of the common production lines. It may vary from quarter-to-quarter, but it's partly an effect of rationalizing capacities in different quarters between different product lines. It may correct it or you're correct there.

Okay. Second question, has the new Range Rover been rolled out across all markets?

Yes. You're not talking about the Range Rover Sport, you're talking about the new Range Rover?

New Range Rover, yes.

Yes.

Okay. Thank you very much.

Govind Chellappa, Jefferies.

Yes, hi. Good evening, sir. I have three questions. One, we noticed that in the domestic business your EBITDA is barely able to cover the interest cost, in fact it's lower than the interest outgo every quarter and this has been the case for the last four quarters. Now given that you are continuing to invest in CapEx, INR3,000 crores a year that you have spoken about and the gross debt is about INR18,000 crores; at what point do you take a call on whether you need to do an equity issuance or not? That's number one. Second, the Ace segment which was holding up very well till last quarter, that also seems to have slowed down now. What's your view on that segment? That's a segment that we have been quite positive on for a while and this is probably the first time we are seeing a slowdown in that segment so if you could just talk about what's happening in that market? And lastly, would it be possible to quantify the indirect import content like other companies like Maruti and Hero have spoken about 9% to 12%, 13% of indirect imports that is coming through their vendors, would you have a number similar to that for yourself?

Okay. Maybe I'll respond to the questions in the reverse order. I don't have a ready number in terms of the indirect import percentage content. I would tend to think it will be in single digits between 5% and 10%, but I need to -- that indirect import content. This does not include some of the consequential impact you may see on exchange front. What I mean is with the rupee/dollar parity, sometimes you also get over time some impact on the steel prices which are normally linked to the international prices. Excluding that, in terms of indirect import by our vendors, I would tend to think it will be in single digits between 5% and 10%. The second question you had was on Ace segment. Yes, it is true that segment had softened this quarter, which is a phenomenon we had not seen in the earlier period. It's also partly to do with some tentativeness on the part of the financing lending agencies, banks and NBFCs, that we have seen in terms of willingness to lend to first-time users in this particular category of borrowers. It may be a reflection of the overall sentiment in the market perhaps, one hopes it will get corrected over time.

I think the underlying potential for the product continues to have positive momentum and people do want to buy it, but I think this will go undergo some adjustment as we go along. But it is true that we have seen some softness in that overall segment mainly contributed by some tentativeness on the financing side. First question, which was on what point of time would you decide on equity? Obviously, would not be in a position to answer that one way or the other. Even in the India business, while you talked about overall debt numbers and interests, our net debt-to-equity ratio continues to be relatively okay while it is higher than the range which I had mentioned between 0.5 to 0.75, we are right now we are on 0.81. It's also a reflection of the current market dynamic that we have seen, hopefully with the improved financial performance, some of this will get corrected. Beyond that, I would not able to give a specific answer to that question.

Sir, that's the difficulty that we are facing. I mean you have a very good consolidated balance sheet even the standalone balance sheet is not very stretched, but just from a cash flow perspective that for the last three, four quarters that the cash flows aren't really great. So I was just trying to figure out what would the decision be based on. I'm not asking for a timing or anything. What would the decision be based on? If you take a call today that for the next one year the market remains weak, would you then start thinking about an equity issuance or are there other alternatives that you have in terms of sale of any assets that you have? I mean there's a constant speculation about listing JLR so are all these under consideration or --?

Whatever is under consideration, obviously you would not expect me to give you an outline of our fundraising plans at this point of time. We will definitely take into account the market situation, the trade cycles, and the current trend one expects to see in the marketplace. It will be a balanced decision taken by the Board at the appropriate time. I can't give an advance indication on this at this point of time.

Understand, sir. Thank you.

Sanjay Doshi, Reliance Mutual Fund.

Good evening, sir, and thanks for the opportunity. Sir, just one question from my side. We have made a charge on the reserve side for the pension liabilities in this quarter. Can you please update us on what is the gap and what contributions are required annually for that, cash contributions?

The accounting in the results for this quarter is more the IFRS accounting treatment in terms of the actuarial assumptions for the pension fund.

Yes, sir, understood.

I think your question is more on the overall budget pension deficit as agreed with the trustees and the cash contribution annually.

Yes, sir.

I would think the cash contribution ranges between GBP50 million or GBP75 million to GBP100 million over seven or eight year period, but in that range.

Okay. So it is closer to that GBP75 million a year?

Yes.

So the gap has not widened from a last analysis that we would have done, is that the case?

No, it has widened. I don't know what you mean by last analysis. I think the last agreement with the trustees was almost three years ago, but it has widened since then. All the underlying actuarial assumptions have caused the widening. It has widened. As I recall the numbers, I think it has widened from GBP300 million to about GBP400 million to about GBP600 million.

GBP390 million to GBP400 million.

The overall deficit.

When is the next due, sir, with the labor unions? I mean the talks for any further changes in contribution?

No. It's not with the labor union, it's with the pension trustees. You're talking about the pension, right?

Yes, yes, sorry.

It's with the pension trustees, it would be another three years from now.

Okay, sir. That was my question. Thank you.

Yogesh Aggarwal, HSBC Securities.

Yes. Hi, sir. I just have one question if I may. Just going back to the cash flows for the quarter, you said it's seasonal increase, but can you just provide a little more color on that because in the past few years there has been an increase, but this time it's quite severe? And secondly, even the retail sales have been better versus wholesale this quarter so what are the seasonal factors there? And then just related to that, from a full-year basis, do you still expect the operating cash flows to fund the entire CapEx?

Our objective has been to see in a year the operating cash flow generation is able to meet with the product development and capital expenditure. Since we have stepped up the CapEx this year significantly from a range of around GBP2 billion to about GBP2.75 billion, we have also built up sufficient cash resources in the Company. As I said earlier, JLR today has cash in the balance sheet, cash and liquid fund investments well over GBP2 billion. In addition, we have also increased the committed lines of credit three to five years, mostly between three and five years, which was earlier at about GBP800 million. We have increased it to about GBP1.2 billion and this facility is completely undrawn as of today. So really speaking in terms of access to funds, own funds and cash of about GBP2.2 billion plus drawable credit lines of about GBP1.2 billion. That is the liquidity that JLR is sitting on right now. So if there is a marginal shortfall between operating cash flow generation and CapEx, I'm sure the Company will be able to comfortably meet with that without an issue.

Okay. And anything on the quarterly phenomenon?

As I said earlier, when you -- how do I put it? Let me come at it differently. The second and fourth quarters of a year for JLR tend to be relatively stronger and you would see inventory bottoming out at the end of that quarter, let's say 31 March and 30 September and there will be a ramp up. And in the second quarter you also ramp up to make up for the shutdown in August in terms of production and for new product launches where you start building inventory, particularly the Range Rover Sport in this particular year. So you would see all this phenomenon happening in that quarter. It's nothing unseasonal or exceptional, it's as per plan.

Got it, sir. Thank you, sir.

Akshay Saxena, Credit Suisse.

Hi. This is Jatin. Can you hear me?

Yes.

Okay. My question is on your JLR margin guidance. You have been guiding for a margin of between 14% to 15%, but in what has traditionally been a weak quarter 1Q, we have margins of more than 16% and from here on we would see the new Range Rover Sport coming in and as well as volumes pick up. So are you thinking about revising the margin guidance?

For this year, can we revise it at the end of the year?

Sir, generally because this is typical year --.

It has been a good quarter. There have been earlier quarters where we have achieved margins over 15%, but as you said, they have been not in the first quarter, but in different parts of the year. Yes, it has been a very good and satisfying and good performance. It's exactly a 200% improvement in margin compared to the same Q1 of last year partly contributed by the growing China volumes, superior product mix, as well as the currency has been in our favor. I don't want to comment about the guidance or --.

And in your business review, we see that the inventory in JLR at year-end has increased. Is that a function of you having produced some Range Rover Sport and hence that is getting reflected there?

You are quite right.

Okay. Thanks.

Martin Baumann, Pemco.

Good evening. I have two questions. One, just going back to the pension deficit number, I didn't catch what the latest deficit number was, I think you mentioned it was GBP390 million previously and it increased to a new level.

To round it off, it was around GBP400 million earlier and has gone up to GBP600 million now.

Okay. And what annual contribution will that involve?

In terms of annual contribution for the deficit, it will be between GBP50 million to GBP75 million for the next seven or eight years.

Okay. And my second question, thank you very much, was you capitalize a large percentage of our product development costs at JLR, I think it's around 80%, which is sort of far higher than the norm for the industry. Can you just explain why you use that accounting treatment and whether that will continue at that level going forward?

There is no intention to change the accounting treatment which is in line with the IFRS guidance and principles and accounting GAAP. I think I tried to explain this in many of the earlier interactions. JLR is practically a new business starting from 2008 when we acquired the company, all the product development and whatever technologies and whatever they had have been paid for as part of the acquisition and the business started spending on fresh product development and expenditure from 2008 onwards under our Group. As it happens, JLR also has substantially increased its investment and is much more focused. I would tend to think the JLR investments in newer products, variants, et cetera is much more accelerated now than ever before. I think that's another phenomenon that's happening here. There is no intention to plan to change this accounting treatment, but over a period of time over the next three, four, five years; I think this percentage will tend to gradually fall.

Okay. Thank you very much.

Pramod Kumar, IDFC.

Thanks a lot for the opportunity, sir. My first question pertains to the depreciation number in JLR. I think even with new products coming onstream, we have seen the depreciation number coming down in absolute terms on a sequential basis of course. So just want to understand how should one read or look at depreciation for the rest of the year? Is it like fair to assume that it should see a sharp improvement going forward or is it the kind of levels one should expect?

In general, I would say again in the same time period, next three, four, five years as the products get introduced and the amortization and depreciation meter starts on the newer introductions; the depreciation, amortization lines will tend to increase sharply in JLR. For the particular quarter in question, if you want, I can send some clarifications and reconciliation separately to you. But directionally, yes, it will tend to increase rather sharply.

Okay. And sir, how should one look at the consolidated free cash flow? Because as you said, JLR you aim to have operating cash flow which can match CapEx and then there is a dividend payout as well to the parent entity and standalone, I think you are not changing your CapEx guidance of INR3,000 crores for the next two, three years. So how should one look at as in the consolidated cash flow for the Company and whether the shortfall will be more funded through debt in the near term or is there equity issuance in the near term possible?

I think the free cash flow even at a consolidated level will tend to have some gap over the next couple of years. A lot would depend on the turnaround in the India business and how the business here starts generating positive cash flow. Without trying to make a prediction on this, we will look at opportunities for funding this gap. In response to one of the earlier calls, we had some comments about selling some of the investments or raising debt or I think it's a combination one has to look at from time to time depending on the prolonged nature of the current cycle that we are going through, but no specific plan at this time.

And sir, final question on capitalization as in capitalization has seen some sharp improvement as in I think which you are guiding for. But how should the trend continue going forward because you have already S-Type coming into the market, probably Range Rover Sport will be going to sales this quarter? So is it like end of first half, is that more like a stable level for capitalization or it will continue to be going up in line with the CapEx guidance rather?

Let me put it -- I presume capitalization, you mean capitalization part of the product development and --?

Yes, which goes through the other expenditure line as in other EBITDA level.

We need to remember JLR also has been on a significantly upward curve in terms of the annual spend. Three years ago the annual spend was about GBP1 billion, GBP1.5 billion; two years ago the spend was about GBP2 billion; or maybe three, four years ago it was even lower than that. As you go through this type of steep increase in product development outlay, the total spend started increasing much sharply, GBP1 billion to GBP1.5 billion, GBP1.5 billion to GBP2 billion, GBP2 billion to GBP2.75 billion. As the new investment is increasing at such a sharp rate, the percentage will always look very odd because the new expenditure which is on product development tends to get capitalized and you don't see a much of an impact because the base is increasing quite sharply. As the annual development stabilizes, let's say around GBP2.5 billion or GBP3 billion; as the stability reaches in terms of what we are spending, the percentage will look slightly different.

So is it fair to look at the margin ex of capitalization so that's going to be much more stable vis-a-vis because the capitalization rate as a percentage of revenue will be much more higher in a quarter like this. So I think is it fair to look at margins or track margins on ex of capitalization basis?

I wouldn't know what to say is fair for you to look at. One of the questions earlier was when compared to benchmarks in the industry, your capitalization is much higher. It is a phenomenon of the growth curve that we are going through. In three years' time we have almost doubled our capital expenditure spend from GBP1.5 billion to close to GBP3 billion. So hopefully, the one way is to look at it as an expenditure, the other way is to look at it as the investment of the product and hopefully it will result in better topline and bottom line going forward, better volumes than what you're looking at it.

No sir, my question pertained to more from the perspective that the margin what you have report is ex of capitalization. So for example, capitalization this quarter is 5.9% of revenue versus 3.9% in March quarter so that's a 200 bps addition. So we are trying to come more from that perspective because that affects the margin in a big way.

Yes. It does. I have no dispute with that, but I can't tell you because it depends on the purpose for which you are looking at. If you are doing a comparison with industry, you could look at general levels of capitalization, which tends to range between around 40%, 50% for the industry. You could do it that way also instead of removing the entire thing.

Fair enough. And thanks a lot and best of luck, sir.

Thank you. Ladies and gentlemen, due to time constraints, no further questions can be taken. I would now like to hand the floor over back to Mr. Aniket Mhatre. Over to you.

Thank you, Mohseen. On behalf of Standard Chartered Securities, I would like to thank the management team of Tata Motors for giving us an opportunity to host the call. Thank you very much, sir. Thank you to all the participants for being there on the call. Thank you and have a nice day.

Thank you.

Thank you. On behalf of Standard Chartered Securities, that concludes this conference. Thank you for joining us and you may now disconnect your lines.