Tata Motors Ltd (TTM) 2015 Q2 法說會逐字稿

Ladies and gentlemen, good day and welcome to Tata Motors Limited Q2 FY15 Earnings Conference Call hosted by JP Morgan India Private Limited. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Aditya Makharia from JP Morgan. Thank you and over to you.

Thanks, Mosin. Hello, everybody. We have with us today, the Group CFO of Tata Motors Mr. Ramakrishnan and Mr. Ken Gregor, the CFO of Jaguar Land Rover. Initially, Mr. Somaiya, the Head of Investor Relations will give the investor presentation and then we will give open the floor to question and answers. Over to you, sir.

Thank you, Aditya. Thank you everyone for taking out time to attend the Q2 FY15 investor call. The copy of the presentation is available on our website and you could refer to that.

If we move over to the financial highlights for the Q2 results, starting with the Tata Motors Group consolidated performance, the net revenue in Q2 FY15 was INR60,564 crores, up from INR56,800 crores same period last year, EBITDA at 17% for this quarter compared to 16.3% in the previous year and profit after-tax came in at INR3,291 crores as compared to INR3,542 crores, which is there. The net automotive debt to equity as of September 2014 was 0.10.

I will skip the H1 results and only concentrate on the quarterly result. Moving over to Tata Motors Group India business, Q2 FY15, the net revenue was INR8,750 crores as compared to INR8,868 crores last year. EBITDA was negative INR145 crores as compared to INR178 crores positive last year. EBITDA margin came in at 1.7% as compared to positive 2% last year. And profit after-tax, because of the tax provisions reversal, came in at negative INR1,800 crores as compared to INR800 crores negative last year.

If you look at Jaguar Land Rover's Q2 FY15 presentation, the net revenues came in at GBP4.8 billion, up from GBP4.6 billion last year -- last quarter. EBITDA margins came in at 19.4%, higher than 17.5% last year. And profit after-tax came in at GBP450 million as compared to GBP500 million in the previous year. The net debt to equity as of September 2014 was negative -- minus 0.28.

Moving over to the India business, the positive business sentiment, firm freight rates and extended lower excise duty provided support to the M&HCV industry in India. However, subdued infrastructure and manufacturing activities, lower levels of finance availability and high interest rates continued to impact the demand for commercial vehicle industry, mainly in the LCV segment. For the Company, Tata Motors, the M&HICV segment saw a growth rate of 14.1%, which is much better, which is the first reversal which we have seen in the last 10 quarters.

The new launches, Prima LX and Ultra range continued to lead the improvements in the market and our market share on the commercial vehicle increased by 60 basis points to 54.5 in Q2 FY15. In the passenger car business, the industry showed a growth of 10% in Q2 FY15, on the back of improved GDP and IIP growth. From a Tata Motors perspective, we had launched ZEST and it has received a very strong and encouraging response from the customers and today the demand is higher than what we can supply and we are ramping up the production to meet the customer demand. It has 29 segments -- first 29 segment-leading features ZEST has and that has been very well received from the consumers. Our market share for Q2 in commercial vehicle business stood at 50.3% and in passenger car business stood at 5.1 percentage points.

Moving over to the performance of Jaguar Land Rover, from a volume perspective, the wholesale volumes compared to previous year was up 2% at 104,000 units, while the retail volumes at 110,000 units were 8% higher than last year. EBITDA came in at GBP933 million at a margin of 19.4%, reflecting the volume increase, richer product mix on the back of Range Rover Sport, Range Rover and Jaguar F-TYPE, robust market mix, especially in the emerging markets and which was offset by the foreign exchange and unfavorable foreign exchange realized hedges. Profit before tax came in at GBP609 million, which was offset by unfavorable revaluation foreign currency debt of around GBP85 million in Q2 FY15 as compared to positive GBP87 million previous year and on the back of higher depreciation and amortization.

In H1 of this financial year, we have spent GBP1.45 billion on CapEx and product development. And even after spending this amount, we are free cash flow positive to the extent of GBP500 million. Jaguar Land Rover has substantial cash and financial deposits of GBP3.75 billion and they have also undrawn long-term committed lines of GBP1.32 billion. In this quarter, we had showcased the Jaguar XE and the Discovery Sport in the Paris Motor Show, which will go into production in early 2015.

Moving ahead way forward on the India business, with positive investment and business sentiment, reversal of the diesel and petrol prices, lower inflation, which would lead to a lower interest rate, the automotive sales are expected to show improvement from the latter part of H2 FY15. M&HCV has already started showing improvement on a low base. And we expect the improvement should pick up progressively from Q3 FY15. The orders which we have received for JNNURM Phase 2 would help us drive bus volumes.

On the passenger car side, the new products which we have launched, the Nano Twist, the Vista, the all-new Tata Aria and Tata ZEST and the upcoming products, Tata Bolt and Safari Storme facelift will drive volumes on the passenger car business. As has been mentioned earlier, we have a product portfolio plan, which is till 2020 with a very clear defined strategy and we would continue to add vigor to this program.

Way forward on the Jaguar Land Rover side, the strategy is to continue to build the sales momentum of the two brands, successfully launch the new Discovery Sport and the new Jaguar XE, as well as the new Ingenium family of engines; successfully launch and start production at the China JV manufacturing plant, invest in few more products and technologies to meet consumer and regulatory requirements, build manufacturing capacity in UK and internationally for growth, flexibility and matching global demand, generate robust cash flows to support investments in the region of GBP3.5 billion to GBP3.7 billion this year.

With this, I will hand it over for Q&A.

(Operator Instructions) Jinesh Gandhi, Motilal Oswal.

I have couple of questions on standalone business. One is on standalone tax, you indicated there are some prior period reversal, is that correct?

Ramakrishnan here. Yes, that's right. It's credit that we had taken in the past years, it's a reversal of credits, it's an accounting entry and not a cash flow.

Secondly, what was the impact in JLR in EBITDA margins on account of ForEx?

Yes, it is an adverse movement of GBP85 million in valuation.

Sir I meant about EBITDA, below EBITDA it's GBP85 million, if I'm not mistaken.

Above EBITDA -- this is a slightly complicated answer -- above EBITDA, actually the impact of exchange didn't significantly move the EBITDA margin year-on-year, although it is the case that the pounds millions EBITDA did reduce by -- in the region of GBP70 million year-on-year due to foreign exchange and the reason the percentage EBITDA margin didn't move because the revenue also reduced.

But on a QoQ basis, how big impact could be?

Compared to Q1?

Yes, compared to Q1.

Just bear with me for a second and I'll answer that. Compared to Q1, it's less than a point.

Less than a --?

1 point of EBITDA margin.

Less than 1 percentage point?

Yes.

Amin Tharani, Deutsche Bank.

Sir, my question was on the JLR profitability. Obviously you've managed to maintain in the 19% to 20% range through good geography and product mix. But over the next 12 months to 24 months, if we are able to get good volumes of the Jaguar XE, plus if you are going to have local production in China, directionally do you think that profitability would be under pressure, just as directionally? I know you don't give guidance, but directionally could that mean that profitability could be lower?

It's difficult to [favorably] comment here. I had these discussions in the past and I have given the opportunities that we have and also the challenges that we have. The couple of things that you mentioned are quite very valid and right. As we get into smaller products, it's only logical to ascribe that the margins may be not as we have in the Range Rover or Range Rover Sport. Similarly, once the China production starts, there will be some -- one or two quarters where will be the -- there will be some shift in production and that also will have an impact. On the other hand, the new products and the continuing momentum for the current products should also improve the volumes and the operating economics. So I think there are pluses and minus. I am not touching on the foreign exchange. So it's difficult. It will be our endeavor to maintain healthy profit margins. We will continue to do that. There are too many variables, the overall volumes, the volume growth, regional mix, the successful launch of the new products and the operating scale economic that comes in and the modularity and the sharing of components and the platforms in the configurations across models. A lot of this is positive.

And sir just on your capacity, post the production alignment that you have done recently, what is your capacity in the UK plants right now and what is the number that you're expecting, say, by the beginning of FY16?

In the beginning of FY16 -- right now -- Ken, correct me if I am wrong. Right now we are operating in about [450,000] plus capacity in UK. For the next two to three years, I would expect --

Amin, I think by end of this fiscal year, it will be more like 500,000 units and clearly we also had in the Chinese joint venture, which we talked about, we have about 130,000 units of capacity. Those are the immediate movements. And looking forward, when you add models, you tend to need to add capacity at the same time. So that's something for subsequent years.

And just lastly, the Jaguar XE will start production by the beginning of next calendar year, or will it start in this year itself?

It will start production in the first quarter of the next calendar year, with retail sales the following quarter. That's our present plan.

Rakesh Jhunjhunwala, Rare Enterprises.

What I wanted to know is that this $85 million loss that you have -- GBP85 million loss that you have had, have you charged it to your interest cost or have you charged the revaluation of loans to the profit loss account? How have you charged the loss?

The revaluation of -- so it's two things. The GBP85 million is -- the two major pieces is, about GBP50 million revaluation of foreign currency loans.

Right.

No, that doesn't go through the interest line. It just goes through a revaluation line and the balance, the largest single item is foreign currency hedge instruments. And again, no, that doesn't go through the interest line. It just goes through a separate line on the income statement.

Therefore it is debited to the profit and loss account?

Yes. Above PBT, but after EBITDA.

After EBITDA. Yes.

After EBITDA but before PBT and it is debited to the profit and loss account?

Yes.

It's not only a balance sheet item, it's a P&L and balance sheet item?

Yes. You are right. Yes.

Another thing I wanted to ask you is, that there have been reports of some fall in volumes because of your product mix and the fact that you are changing the models and you are going to aluminum bodies. When is this going to -- this disruption in production going to end?

Normally, Jhunjhunwala, in any year we do have a month long shutdown in August, which is the vacation, the off-period --

So that's past us now?

That has past us now. Along with that as you prepare yourself for the launch of completely new models like XE, you tend to take advantage of the shutdown period and start enabling the plant to produce newer models.

That is understood, but when will this disruption end, will end in November, December, when will you come to a normal production level?

It's not in that sense a disruption. If at all there is any production constraint, I would say it is more -- within the plant it should be more in the month of August, for which you start preparing in advance and manage the inventory levels.

Another question I have is, how is the demand scenario? You are coming out with cars, which are being [faced] to the sky. At least in India, we cannot get your cars, you have to wait and even world-wide, in most countries they are in waiting list. So how is the demand scenario?

Sorry, the question is about Jaguar Land Rover, India --

Jaguar Land Rover.

It's a hard question to answer with a simple statement. But I think we see solid demand for the products across most of the markets in which we compete. There are some markets that have moved ahead more than others and there are some that have moved backwards. So for example, in the quarter, we see -- I mean, in the first half, we see economic situation in Brazil caused the volumes to be lower. We see the political situation in Russia cause our Russian volumes to be flat. We see South African volumes down year-on-year because of economic situations, by and large, but we see solid demand in the UK, in Germany, in the US. Our China volumes have been up year-on-year. So overall, we see a decent picture in terms of the level of overall demand.

How do you see India? I mean what is the [level], you are using INR1,100 crores in a quarter. So when can we as a company, at what level of volumes can we see that level of breakeven in India? If you are losing a $1 billion, nearly $800 million a year in India, so the Company will have some plan that if my volumes grow by 30%, 20%, 10%, 40% I'll break even and start making money.

That is a wide range of percentages you have given me.

No, but I don't know the percentage sir. The range can be anything. What is your feeling, at what range will you break even?

Without getting into the breakeven, I think in India, as we said earlier, we are beginning to see the growth slowly coming back, although slowly than we would've liked. At this stage, I think we see some growth momentum beginning to happen in medium and heavy commercial vehicles that is big trucks, which is an important lead indicator and it's also the most attractive from the Company's point of view in terms of margins, topline and bottom line. We have seen some handsome growth in this quarter itself at continuing momentum. But of course, I must caution saying that when we talk about growth you're also comparing it with a small base earlier. But having said that, after many, many quarters, we are seeing some growth and increase in numbers in this segment.

No, sir, but my question -- you have done a INR9,000 crore turnover, right from [750] and a EBITDA loss of INR145 crores and in turn, sir, deficient INR900 crores. So at what level of turnover, 12,000, 14,000, 13,000, any ballpark figure within a range will you break even at the PBT level?

It's difficult to give one magic number, because a lot depends on the mix and the range of products that we have. We have products from 40 ton truck plus to Tata Ace and a half a ton truck and we have a range of products in our passenger vehicles as well. Naturally, without specifically talking in terms of the Company, generally in the industry, I would say for a breakeven you should target at least 50% to 60% capacity utilization.

What is your capacity utilization today?

In commercial vehicles, we are almost at that level, about 50% plus, and in passenger vehicles it is much lower, more like 25%, 30%.

Thank you and congratulation on the fine performance. But sir the blood is -- everything at Jaguar will be Indian operation -- it's a big -- see INR1,100 crore loss is a big loss, sir.

Yes, it is. We are indeed concerned and several actions are underway. We have significantly expanded the commercial vehicle range, covering more segments and much more compelling products. The newer products are receiving very good attention and very good demand. We have ensured that they are the best value proposition that we can offer to the customers. As growth comes in, as a business and commercial vehicles, with the range and the ability of the products, I think we are fully prepared to take advantage of the growth as it happens.

Passenger vehicles, just at the beginning, I think you will see more models on the ZEST lines, more excitement, more attractive to the customers hopefully. I think we have made a very good beginning in ZEST after some of the launches which did not meet our expectations. I think it's beginning to happen. Hopefully, the external environment will continue to be positive and we will see more growth momentum in the country as well. But as far as commercial vehicle is concerned, I think we have ensured that we emerge stronger from this downturn than when we entered it. Passenger vehicle, the journey has just begin with ZEST. There is more to follow.

Kapil Singh, Nomura.

Couple of things from my side. Firstly, did we receive any local incentives in this quarter like we did last year same quarter?

You're talking about Jaguar Land Rover?

Yes, that's right.

No. Last year, we did have an incentive from one of the regions in which we operate. This year that is not there.

Is it expected to come through in the future quarters?

Yes it will. It's an annual one and we will take it in our accounts as it happens.

And just to understand this number clearly, above the EBITDA, we have talked about MTM losses on current assets and liabilities. How much was that number for this quarter, MTM of current assets and liabilities?

It's about GBP30 million.

GBP30 million? Okay. And how much was the realized gain on matured FX and commodity hedges?

It's in the region of GBP80 million.

And just wanted your views on the volume, especially in the US market, we have seen some declines in the last few months in retail and also Jaguar volumes have been a bit weak this year. So, some thoughts on that, how we are being affected, because industry growth has been noticed in US even now.

I think on the Jaguar side, it's a little bit of a year of transition for Jaguar, because we're clearly in a phase that we are about to commence really substantial product renewal, starting with an all-new product for Jaguar, the XE which as I mentioned, should start production in the first quarter of the calendar year coming. And thereafter, we've got plans to refresh and replace the Jaguar F-TYPE and we showed a SUV concept for Jaguar at an auto show some time last year and we've got plans for that as well. And so it's a little bit of a year of transition for Jaguar as the products age a little bit. So the US market is -- yes, new XF middle of next year. And as the products age a bit in the marketplace, we did also take some production adjustments on Jaguar at the beginning of the year to make sure we have the right level of stock in the marketplace. That's caused the volume to be a bit flatter this year. So I think for Jaguar it's that year of transition that I think we will seek to build upon with the fresh product next year.

And on the Land Rover side, the volumes were flat year-over-year in the quarter and that was primarily then to balancing the available production to other markets, but I think we will be able to address that with some of the capacity actions that we've been taking, those will come to fruition over the next six months or so. So I think we'll be able to address that.

Sir, just one more question on India. We have seen a steep increase in raw material cost as a percentage of sales, so if you could give some color over there as well. What exactly has changed from last quarter to this quarter?

That's impacted by certain amount of model mix as well that you see margins at the level at which we are reporting. Naturally the cost lines as a percentage should turn over and the turnover is reported net of variable marketing expenses and certain other provisions. Therefore, it will look somewhat adverse. There has been no significant movement on the cost side as for the materials are concerned. They have been fairly okay, but it's more the topline effect that is causing this disruption and partly the model mix.

So, model mix is the major reason or have you also seen a change in incentives or discounts as well?

Year-over-year I would say perhaps partly both.

I wanted more color on the truck side, how has the discounting changed from previous quarter or if you've taken any price increases after the end of the quarter or before that?

October -- after the end of the quarter, October, we have taken a price increase, which is in line with the past, approximately about 1% across the different models, on a weighted average basis about 1%. In terms of discounts, yes, we have seen some historic high discount levels in the industry and our discount in variable marketing expense is also going up in the past. My overall comment on that would be, the last couple of quarters I think we have -- I think January, March would have been the highest in terms of general levels. Since then we have seen it either stabilizing or marginally coming off, but too soon to talk very strongly about that. It continues to be high compared to two years ago or three years ago, but on a quarter-to-quarter basis, somewhat slightly better.

Sir, how high would we be to, say, two, three year ago number in terms of percentage of sales or something, if you compare it with that?

Can't give you a sense in terms of percentage to sales. If you take -- I'm talking, first of all, in terms of industry and some anecdotal transactions that we have seen, not necessarily Tata Motors, but generally in terms of the industry. What used to be maybe somewhere between INR25,000 to INR50,000, has gone up to even INR200,000 or INR250,000.

Sonal Gupta, UBS Securities.

So just wanted to understand on the Jaguar Land Rover side, if I adjust for the FX gain -- FX hedging gains, which you realized this quarter, year-on-year we're still seeing the other expenses actually being lower on a year-on-year basis and I would understand that I mean you had certain marketing expenses also this quarter in terms of the showcasing the new Discovery, Sport, as well as the XE. So, just wondering as to how that cost line item is moving. Is there -- I mean what are the factors which are keeping it depressed?

Probably the effect that you're seeing is related to the positive product and market mix that we had in the quarter compared to the same quarter a year ago. So what you're seeing is that driving strong revenue, and then as a percentage of revenue, the material and other costs are a little bit lower, so you get that effect of the numerators changing as well -- or the denominators changing as well as the numerator.

And just on the rollout of the XE, two parts to it. One is that I understand that it will be launched in the US only much later, during the year or probably early in CY16, because you want to introduce an all-wheel drive variant. And the other thing is, will you be launching the XE in China, because you will have a locally produced XF, which will obviously be cheaper. So, will you launch the imported XE in China or will you have -- I mean how does that strategy work for XE rollout and really which countries will you roll it out?

Yes, you're on the right track with most of what you said. But we will launch it in China, but it's too early to comment on the pricing that it will have in China.

Just lastly from my side, any comments that you can make in terms of your inventory levels on the JLR side and specifically for China, what sort of inventory levels are we seeing, because my understanding of the inventory levels for even premium manufacturers are going up?

By and large -- I mean the ebbs and flows, I think that's fair to say, but by and large, inventory levels have been fairly stable for us over the past year or so. They do ebb and flow month by month for various reasons as models age and models run in and models run out. But I don't necessarily have anything specific to say about it.

It will be right to say they'll continue to be at the low end of where we have been operating in the past. Including for the dealers?

Yes, overall.

Yes, including for the dealers.

So we should understand it should be around four weeks or something? Will that be a good range to think about?

Typically for the business as a whole, inventory at dealers has been between one and two months on a global basis. And, yes, we've been at the lower end of that range for much of the time.

And it would be similar in China, right?

China has tended to be at the lower end of that range.

Robin Zhu, Bernstein.

My first question is on -- just wanted to clarify something that was said earlier about FX. Did you say the GBP80 million was a negative realized FX in this quarter? And so like if on the old EBITDA basis, the difference between the new and the old EBITDA would be minus GBP80 million, is that correct?

Yes. So on a recognized (inaudible) and all the numbers, you have the potential to compute. If I go year-to-year from Q2 last year to Q2 this year, there is a net negative effect in EBITDA in the region of, I think I said, GBP70 million in EBITDA and that year-to-year effect is the net effect of the operating exchange rates being modestly less favorable, offset by the gain on hedging instruments in the quarter. Those things netting out to a net negative effect of about GBP70 million in EBITDA year-on-year. What I also said was that that actually didn't move the EBITDA percentage very much, because the revenue came down as a result of the FX rates being less favorable for most of the quarter. And then the final thing I said was that there was a revaluation of foreign currency debt and other hedging instruments in the quarter of minus GBP85 million, that's between EBITDA and PBT.

So on the old EBITDA basis, EBITDA this quarter has been what exactly, would have been GBP933 million plus GBP70 million. Is that correct?

I'm struggling to understand your question about the old EBITDA basis.

On the EBITDA definition last year where it was -- where you recorded realized FX underneath -- below EBITDA --

Yes, if nothing else happened on the exchange rate compared to the same period last year, this year EBITDA would have been higher by about that GBP87 million to GBP90 million.

About GBP87 million to GBP90 million. Okay, versus last quarter when you guided GBP78 million plus.

Last quarter or last year?

In Q1.

We have been talking about in comparison to the last year's same quarter.

So just on -- what I should say is that if the figures for the prior quarter in the presentation have been all adjusted to reflect the present treatment of hedging gains above the line in EBITDA that previously they were below the line, so in prior periods, but we've adjusted all the comparables for that effect. As I said, the hedge gain in the quarter was in the region of GBP80 million. So therefore, if we didn't have that up in EBITDA, EBITDA would have been GBP80 million lower.

Lower? So okay sir, it would have been lower than (inaudible)?

Yeah. And I think we said the same thing in the prior quarter. But what I would say is, we -- one of the reasons -- I mean, going back a few quarters now, when we made this change, one of the reasons we decided this was appropriate was because in comparison to other companies -- other of our premium automotive comparators, we believe they adopt this treatment and of course the hedge gains -- the hedging instruments are there to -- as a hedge against movements in the operating exchange rate, which obviously also happen in EBITDA. So we think it's actually more correct to have the hedge gains in EBITDA, because they go with the operating effect.

So that works more on a year-on-year basis then, given that the pound actually fell in the last -- I mean, quarter-on-quarter the pound fell. So year on year --

So if you take what happened in the quarter, the pound started the quarter roundabout $1.70 to the pound and then finished the quarter roundabout $1.63 to the pound. So you're right. The pound fell during quarter. But for the majority of the quarter, it was at the upper end of that range. And that upper end of that range, compared to the same quarter a year ago -- the same quarter year ago, the pound rose from $1.53 to $1.61 and it's in the middle of that range for most of the quarter. So year-to-year, effective exchange rates in the quarter was less favorable, although by the end of --

(multiple speakers) positive hedging.

Yes. By the end of the quarter, the pound was $1.63. Yes.

And the second question very quickly, in China, I mean, there was the government investigations in China and then there was this issue of China legalizing parallel imports, where you can ship a car, anyone could buy a car in the US, they ship with the China and sell it themselves. Has that -- do you think that's had an impact on your China pricing yet? The Chinese government is making all kind of noises saying they encourage this now.

Yes it's difficult to say, I think is the honest answer. And I think as and when we sort of understand that situation better, then one could say more about it. I mean we did adjust the pricing of three of our models in this -- sort of working in collaboration with the NDRC, but have made no further adjustment since. But it's difficult to give a -- I'm not trying to be evasive, it's just difficult to give a precise answer to your question.

And you must track your retail pricing, has that seen any decline sequentially?

Retail prices do vary over time. They do ebb and flow and we do watch those. But I don't really have anything to add.

Yashesh Mukhi, Morgan Stanley.

This is [Vinay] from MS. Congratulations for a good set of numbers. I have two questions. Firstly, could you talk a little bit about the demand for Range Rover and Range Rover Sport, both in terms of -- is there any order backlog still? And secondly, what kind of derivates are you selling, like have you moved to lower derivates already on these margins? The second question is on currency. We've seen currency move favorably. We understand you guys hedge. So when do we start seeing benefits of currency? Or if you could give us a blended average rate of pound to dollar for this quarter, just to get an idea about your hedges?

I didn't get all of the questions, but I think you asked about demand for Range Rover and Range Rover Sport.

And which type of variants --

Which type of variants? That's quite a hard answer to be honest. We introduced a long wheel base derivative of Range Rover beginning of the year and we've seen good demand for that. I think that's helped move our sales forward. And on Range Rover Sport, we've got a full range engine lineups and we see similar demand -- it's quite difficult to give a precise answer to that. So demand levels (multiple speakers) for Range Rover and Range Rover Sport. You asked about --

Is the demand now broadly in line with supply?

Sorry. I don't know if you're on the speaker phone. Your voice is coming with a bit of an echo in the background. Can you speak a little louder?

We've been taking acting actions, as I alluded to earlier, to address some capacity bottlenecks at Solihull in order for us to have freer level of supply and address the available demand. So, we will find out going forward as to what the exact balance between supply and demand is. But I think it'll be in better balance going forward with the capacity actions we've taken.

And on the FX, again, it's hard to answer your question, because -- but in general, we've got a hedging policy, which hedges different proportions of our expected revenue one year out, two years out, three years out. And as a result, the rates at which we hedge are determined by the rates that existed in the market at the time that we hedged and therefore it varies.

I was just trying to get a sense that when do we start seeing some benefits from the pound weakness.

Well, it depends clearly at what rates that we trade that through the quarter. So, if it sustains at its present lower level, then we would, all other things being equal, expect to see a favorable effect in Q3 compared to Q2 from foreign exchange rates. But the important thing I just said, with all other things being equal, because it depends. We trade on a whole basket of currencies, pound against the dollar, pound against the Chinese renminbi, also against the euro, also against the Brazilian real, the ruble which has been very weak, so that's a negative effect, South African rand is weak. So there is a basketed effects, but all other things being equal -- and then it's a question of we're in (technical difficulty) it depends at what rates (technical difficulty) through the remainder of the quarter, the remainder of the fiscal year as to what the effect will be. But I'm happier with it at [1.60] than (technical difficulty).

Just the last question, in the coming quarter, we are going through a bit of construction, you know, you are starting your engine facility, you are starting production in China, there's a lot of rescheduling happening at existing facilities. Do you expect any kind of one-off ramping up costs in the coming quarters because of that?

Yes. I think that's a facts of life in the car businesses when you launch a new facility or a new model, you get launch costs as those facilities ramp up and as you've got the people there learning how to build engines or the new cars, and so you do have proportionately higher costs for the period during rampup than you do when you get into the period of full run rate production. So I think that probably is something to look forward to at some level over the next couple of quarters.

Thank you. Ladies and gentlemen, due to time constraints that was our last question. I now hand the conference back to Mr. Aditya -- Aditya Makharia. Over to you. Please go ahead.

Yes. Once again, we would like to thank Mr. Ramakrishnan and the team for taking the call and thank you to the investors for dialing in this late in the hour. Thanks and have a good day.

Thank you very much everybody. Aditya, thank you very much.

Thank you. On behalf of J.P. Morgan India Private Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.