Tata Motors Ltd (TTM) 2017 Q2 法說會逐字稿

Good evening, ladies and gentlemen. I'm [Ershad] your moderator for this session. Thank you for standing by and welcome to the Tata Motors Q2 FY17 Earnings Call. For the duration of presentation, all participants' lines will be in the listen-only mode. We will begin a Q&A session after the presentation.

I would like to now hand over the conference to Mr. Kapil Singh. Thank you, and over to you, sir.

Thanks, Ershad. Hi, everyone. Thanks for joining the call. Today we have with us Mr. C Ramakrishnan, Group CFO of Tata Motors; Mr. Ken Gregor, CFO of JLR; Mr. Vijay Somaiya, VP, Head of Treasury and Investor Relations and the IR team of Tata Motors.

Without much delay, I'll hand over to you, sir.

Thank you, Kapil, thank you for hosting the call as well. Welcome to all of you. Good evening, good afternoon, good morning wherever you are. The call -- I'd like to clarify a doubt, it is on our results for second quarter 2016-2017. I would appreciate if your question and answers are restricted to the financial results that are just published.

Coming to the presentation, which is already hosted on the website now. Tata Motors Group consolidated revenue, net revenue for the quarter was about INR66,000 crores, up marginally from INR61,000 crores compared to the same quarter last year. EBITDA margin came a little lower at 10.7% compared to 12% in the same period last year. We'll come back to that in greater detail later. And profit after tax was about INR848 crores compared to a loss of INR1,740 crores in the same quarter last year. We will discuss this profit movement also little later.

As far as the standalone operations are concerned, TATA Motors India net revenue was almost flat or marginally lower at INR10,351 crores compared to INR10,695 crores in the same quarter last year. EBITDA came in at INR376 crores, down from INR874 crores in the previous quarter in the -- in the same quarter in the previous year, resulting in EBITDA margin of 3.6%, down from 8.2% a year ago. Profit after tax was negative at INR631 crores, slightly up from about INR300 crores in the same quarter last year.

Jaguar Land Rover reported a net revenue of GBP5.9 billion compared to GBP4.8 billion in the same quarter last year. Sales and revenue significantly up. EBITDA came in at GBP615 million, up marginally from GBP589 million in the same quarter last year. EBITDA margin came in at 10.3%, down from 12.2% last year. And profit after tax was positive GBP244 million compared to negative of GBP92 million in the same quarter last year.

At TATA Motors standalone level, the net debt to equity ratio was about 0.82% and JLR continues to have net positive cash position. At consolidated level, net automotive debt to equity was 0.26%.

Standalone business performance. TATA Motors India. As I said earlier, the EBITDA margin came in at 3.6%, broadly reflected by significant de-growth in medium and heavy commercial vehicles of 16.5% year-on-year compared to same quarter last year. If you all recall, last year September month in particular and the quarter was particularly strong for medium and heavy commercial vehicles with some element of pre-buying in advance of the October 1 safety and other norms which came in on October 1, last year. So, second quarter and more particularly September was very strong. So we had year-on-year de-growth of 16.5% in medium and heavy commercial vehicle industry. This was, however, partially offset by good growth in light commercial vehicles, about 11% year-on-year, our car segment growth at 26%, and exports growth of about 20%.

Little bit of color on Jaguar Land Rover business performance. As I said, the EBITDA was GBP615 million, margin at 10.3% EBITDA margin. Volume and mix were favorable for Jaguar Land Rover. However, the favorable operating exchange in terms of our sales realizations were offset by the valuation and realized hedges on our hedge book. Unfavorable foreign exchange revaluation of current assets and liabilities and we also had a one-time provision for certain new customer and quality initiatives. Excluding the FX revaluation and one-time provision for this customer quality programs and adjusting the revenue for realized foreign exchange hedge losses, the EBITDA margin in comparable terms was actually at 12.9% even though the reported margin is 10.3%.

Little bit more color on commercial vehicles in the India business. Overall CV industry witnessed pressure on account of demand pause in the medium and heavy commercial segment in Q2 in particular. If you all recall, it started somewhere towards end of the first quarter, towards June, and that position continued, it is more aggravated in Q2. Domestic CV volumes for the Company de-grew by 2.9% year-on-year in Q2. LCV segment growth at about 11.4%, offset by M&HCV segment de-growth of about 15.5%.

Variable marketing expenses continue to remain high in the industry. We bagged an order for over 5,000 buses from STU's across India. Commercial vehicle exports were up 21.6% year-on-year. Other key lights in the export markets where forays into Bolivia, launch of TATA Super Ace in Vietnam and, launch of new CVs, Commercial Vehicles, in Indonesia.

Passenger vehicle business, the passenger vehicle industry witnessed a growth of about 18% year-on-year in Q2. Domestic volume of Tata Motors and passenger vehicles grew by about 20.5%, slightly better than the industry. Within that, passenger car industry grew by 11.4% and for Tata Motors, the car segment outperformed the industry with a growth of 26.4% compared to industry growth of about 11.4%.

Tiago has received a very strong response and continues to receive the -- continues to have a very strong order book. We also launched the Tiago in Nepal in the quarter.

Jaguar Land Rover wholesale and retail volumes for Q2 stood at 124,000 units and 129,000 units, respectively. And for China JV CJLR wholesale and retail volume stood at about 15,000 and 13,400, respectively. In all regions, retail sales reflect strong sales of F-Pace, XE, EVOQUE, and DISCOVERY SPORT. North America retail sales was up 39%, UK about 28%. China retail, since we are talking retail, this includes the JV, overall retails in China up by about 49% and Europe 39%, and the rest of the overseas up by about 1%.

CapEx in product development spend for the quarter was about GBP784 million for the quarter. Post the CapEx spend, free cash flow was about GBP70 billion. As I said earlier, cash and financial deposits on the balance sheet was about GBP3.8 billion, in addition to the undrawn bank lines of credit of close to about GBP2 billion that we have which remain underdrawn.

Profit before tax was GBP280 million, up from the loss of GBP157 million in Q2, again reflected by the favorable volume and mix offset by one-time provision for the customer quality programs, revaluation of unrealized FX and commodity hedges. And last year, if you recall, which I referred to earlier, we also had GBP245 million, which was an exceptional provision for the Tianjin charge we've taken in that quarter. Share of China JV profits for Q2, our share was about GBP33 million, and China JV in the quarter also declared the first dividend of in equivalent pound terms about GBP0.6 billion, most will be reinvested in JV.

Jaguar Land Rover, we have other developments in the quarter, launch of exciting new products, the all new XF long wheel base in the China market. First, Jaguar is produced of the China JV and retail sales about 600 units in September. All new Discovery was launched, lightweight aluminum construction which is close to about 500 kilograms lighter, CO2 emissions are about 159 grams per kilometer, flexible interior provides for seven full-sized adult seats, wholesales to start in Q4 of this financial year.

Going forward, Tata Motors Group in the standalone business, Company will continue to explore capital optimization through better operating efficiencies in working capital exception and monetization of non-core assets and some of its investments. In commercial vehicles, on the back of infrastructure spending and good monsoon, we expect M&HCV to grow in the second half of fiscal 2017, leading to full year M&HCV growth somewhere in the single [D]. In case of pre-buying before countrywide adoption of BS IV scheduled from April 1, 2017, the overall M&HCV growth this year may be higher.

Similarly, we expect the buses & LCV segment will continue to maintain their positive growth rest of the year. Continue to have a wide and compelling product range with several new launches in FY17, which provides a strong foundation for our growth in prescience of the overall commercial vehicle strategy we have finalized. We have several market and key accounts as service offering initiatives, which we'll aggressively execute. Despite the intense competition, we are geared to further strengthen our market leadership and committed to striking the right balance between sustainable growth and profitable growth.

M&HCV in particular, we will see the expansion of Prima LX and new Signa Range across tonnages and applications. We aim to get back deposition of more than 60% market share over the next two years in 16 tons and above segment from the current level of 55% to 56%. LCV and ICV, as I said earlier, expansion of the new Ultra Range across different tonnages and applications, small commercial vehicles and pickups, refreshes in variants to further complement and strengthen the ACE and Super ACE family. Exports growth in FY17 is expected to be in the range of 20%, 25%. And over time, or the next couple of years, we aim to take the export contribution to the total CV revenue to about 25%. Company continues to have a good pipeline of defense orders, both which have been received as well as expected.

As far as passenger cars India business is concerned, we'll continue to launch new products. The launch of new TATA Hexa will be in January of 2017. It has received very positive reviews and accolades from the auto media journalist and enthusiasts. Launch of product code named Kite 5 and Nexon will follow. The focus on dealer network expansion and customer centricity will be continuously aimed for, which was also reflected in the significantly improved ranking as a third name in the recent JD Power CSI, second rank but just a third name.

Coming to Jaguar Land Rover, our investments will continue to drive profitable growth. JLR's strategy continues to be to invest in new products, technology and manufacturing capacity to grow profitably. Investment spending in the current year is likely to be somewhat lower than the prior indication, which was GBP3.75 billion; we expect it may come a little lower. We continue to build on recent successful product launches with continued sales ramp up of the Jaguar F-PACE, XF long wheel base in China, Evoque Convertible and future new models, including the all new Land Rover Discovery and others to be announced. Increasing sales of these new products and planned start of Discovery wholesale are expect to drive profitable growth and support the solid second half in this fiscal year. We continue to have a balanced sales profile and will continue to closely monitor and assess market conditions in key regions.

We'll stop here with the presentation and may be throw it open for Q&A.

(Operator Instructions) Pramod, CIMB.

Two questions. One, with regard to the quality and new customer acquisition programs that you talked about, what's the cost involved in the quarter? How much of them are historic ones and related to the quarter?

Sorry, you're talking about Jaguar Land Rover?

JLR quality and customer acquisition programs?

Overall, the impact on the EBITDA would have been slightly less than 1%.

Are they historical or all are lumpy in 2Q itself?

It's a one-time provision, including second capture.

And what's the LR year till date has been on a very weak brigade with a very slow single-digit growth or even declining. What do you attribute the reason for the same, excluding the Discovery run down? And what are the plans to recover and when do you see that to come back to a double-digit growth phase?

As I said earlier, these ups and downs in the quarters would also coincide with ramp up of volumes of products recently launched and the launch of the all New Discovery. So we expect to get back to the growth to the full availability of both the markets. It's more timing issue.

Chirag, Edelweiss.

Sir, I have question on these margins on the ForEx. Can you explain us what were the QonQ sequential movement on the ForEx?

Just give me a minute.

The realized FX hedges as well as current assets and liabilities?

Q1 to Q2, the realized FX for Q2 was close about GBP280 million, negative. And Q1 was about GBP123 million, which is an increase of about GBP153 million in the current quarter compared to the immediately preceding quarter. Rest of it is insignificant.

So around [GBP150 million] sequential negative impact?

GBP150 million.

GBP150 million, right?

Yes, approximately.

And second is, if I try to reconcile with the (technical difficulty) to indicate.

Sorry, to reconcile with --

The reported EBITDA margin was 10.3% for JLR and you have indicated it is 12.9% ex-FX revaluation and one-time customer acquisition. So, the differential between (inaudible) completely attributable to one-time customer acquisition, right, because FX you have indicated GBP58 million?

No, FX I said --

[GBP58 million].

So the difference is completely attributable to this one time -- and can you explain what exactly are these programs like, what do you mean by customer enhancement program.

Yes.

So the difference is completely attributable to this one-time program. And can you explain what exactly are these programs like, what do you mean by customer enhancement programs?

This is a closest customer reach program which is an comprehensive and full-time customer engagement in terms of the car that come for servicing. It's a much more rigorous and a more comprehensive program that we have undertaken across our models and across markets. The EBITDA margin explanation I give you is partly consisting of the FX impact and partly the provision for this program.

And this is a reoccurring program, right? So it will keep on reoccurring in subsequent quarters also.

Maybe to a lesser extent, because this also includes certain catch up provisions.

Robin, Bernstein.

Just three questions, please. First of all, if we look at the move in the pounds, and I think last quarter the management said that the margins would benefit from the larger (inaudible). So far we've not seen that. Even if we add back the realized FX hedges, the underlying margin seems to be roughly the same level as Q1. I just wanted to understand how much of this is because of product startup costs from the Discovery, or if you could quantify just how much the quality provisions actually were during the quarter.

Secondly, slightly longer-term, I mean we've seen in the news that Nissan seems to have committed to building some new models in the UK on a basis that they've gotten some assurances, I think that's the word that was used. Do you have any understanding of what those assurances were in nature and yet could we expect similar impacts for JLR -- benefits for JLR, if we do get a Brexit scenario, that's its affecting the auto industry. Thank you.

I'll maybe request Ken to take up the second question, particularly on the Nissan assurances may be better for Ken to answer, but in the meantime on the first question, the question was about two, three smaller questions put together. As we had explained to you in the past, in terms of our hedging strategy, for more nearer quarters, the immediately next quarter, the second, the third quarters at any given point of time, our hedge book runs at 75%, 80%, 70% and so on and so forth in a declining percentage. So by the time you see the full benefit of the weaker pound on our operating margins, it will play out over a period of time and it is bound to happen, but it's going to play out over a period of time.

The effectiveness of the hedge is in terms of stabilizing the foreign exchange exposure of the Company. And compared to the losses that I've indicated, the underlying realizations also have started improving, but that is somewhat offset by the losses that you incur on the hedge book. A year from now at any point of time, fourth quarter or the fifth quarter, the hedge ratios will be much lower that's when it will start benefiting from more up to date exchange rates given the current exchange rate position.

So it's definitely benefit since Jaguar Land Rover costs are substantially in pounds and realizations are substantially in dollars and other currencies, but because the hedge book is basically an insurance for the Company to stabilize its earnings, the benefit of the weaker exchange will definitely happen overtime. If I had to quantify, approximately if I say the ten point and odd reported margin versus the 12.9% which I mentioned earlier, it will be more or less equally distributed between 1% each between the revaluation of current assets, liabilities of foreign exchange and the one-time provision.

In addition, there's also a statistical difference of about half or 0.6% which is because of netting out the adjusting the realization in the revenue itself instead of showing it as an expenditure, that's more a statistical one. The real impact is almost equally distributed at 1% each between the one-time provision for the year, quality initiative and the revaluation of current assets and liabilities in foreign currency.

I'll stop here for a moment. Maybe Ken can answer the second question about the Nissan program and the assurances you talked about. Ken, you're on the call. Would you be able to take it up?

Yes, CR. I mean, I think I'd say that we're not party to any discussions or assurances that may or may not have been given to Nissan. On our part, what I can say is, we are actively engaging with the UK Government on reinforcing what we wish to see the UK achieve following a Brexit and specifically the importance of tariff free trade between Britain and the EU, the preservation of present labor rules that enable cross-border movement of labor.

And then also continuation of the present European-wide framework of industry regulations and the associated customs union. So we've been very clear that we believe those interests and the best interest of our customers and Jaguar Land Rover and the automotive industry, not just in the UK, but also in Europe. So we've been very clear about that. But I'm not party of any discussions that have taken place with Nissan.

Sorry, just on -- as I explained -- if I may follow-up briefly, if I take your 10.3% EBITDA margin, I add back the one-time (inaudible) and on the mark-to-market FX. And then if I add back the realized FX losses either, we'll have FX hedging losses, I get to a margin of something around 16%, that quarter-on-quarter is about the same level as Q1. Given the trajectory of the pound from Q1 to Q2, shouldn't we expect the pre-hedging gross margins have gone up somewhat, and given the ARPU has gone up, and [realization is about time].

Ken, maybe since you're on the line, you can as well take this, either you or Ben. If you add back the realized hedge losses, yes, the margin would look at 17. some percentage.

I mean, I can see the maths that you're doing and the arithmetic you're doing. So, yes I can and I have done those same sort of adjustments myself. I think, what I would say about the year is, we don't run the business quarter-to-quarter, we manage it over the course of a full year. And as we look forward, we've got the product launches which CR mentioned, we've got continuing ramp up of the F-PACE, we've got the launch of the all new Land Rover Discovery and other products that are coming, that I think in the fullness of time will give us the opportunity to grow. And clearly, we're very focused on driving the profitability of the business as well as the volume of the business. And I'm therefore cautiously optimistic about that as we look forward but yes, I see your maths as of Q2.

So, can I understand the fact that the underlying margin hasn't gone up, is essentially because of startup costs related to new class, new cars and Discovery and so on. Is that basically why?

Is not basically why? All I'd say is certainly contributing factors that we are in a phase of transition for the Jaguar Land Rover business, which is a positive phase because we're launching new products quarter-by-quarter. This quarter, we've been going through the launch of the -- early phase of the launch of the Land Rover Discovery. So, I think these costs will continue for a number of quarters, but we're very focused on delivering the promise of the investment that we've made in the business. So I do look forward over the coming quarters and years to seeing that profitable, sustainable growth.

Just a supplement, the interest of -- just a supplement in the interest of full and fair disclosure, the start-up costs and the launch related costs, I wouldn't care to cull it out specially for this quarter, it has been there in the earlier quarters or the previous quarters, and we'll continue to do. So I'm not very sure that I can cull it out as the special impact for this Q2.

Yes, I think that's true.

Jatin Chawla, Credit Suisse.

Just continuing on the previous question, is there any significant rise in incentives on a QoQ basis which has kind of canceled the ForEx improvement that one would have normally seen?

You said incentives?

Yes.

No.

And on the JLR presentation, you've called out that the favorable volume and mix was offset by manufacturing and certain one-time costs. So is there any one-time costs on the manufacturing side as well apart from this customer acquisition thing?

No, I didn't say manufacturing, I said -- manufacturing, at best, you can say some of the launch related but I'm not sure that I can specifically cull out a significant one for the current quarter. But apart from this quality initiative that we have launched, I don't care to cull out anything specifically in terms of the costs.

I just checked, because it was mentioned on the JLR presentation. Thanks. That's all.

Suraj, UBS Securities.

This may have to be the last question, gentleman, since we have another call following this.

This is Sonal Gupta from UBS. So just on again on the same question, basically where I'm coming from, if I look at your Jaguar Land Rover raw material cost to sales on a quarter-on-quarter basis, it's actually gone up 10 bps or whatever or roughly flat. While ideally, I mean I understand that the costs and FX losses, et cetera, coming in the other expense line item. But even despite the very favorable FX impact, we haven't really seen any improvement in the gross margin, so to speak. So are there any costs related to FX, which are coming in gross margin also or I mean are there any other factors which are pushing up this gross margin, is the a mix effect. I mean, could you just shed some light on that?

I can request Ken to reconfirm. On the cost side, I don't recall or need to cull out any exceptional impact on account of foreign exchange. Some of these material costs and other costs to revenue is also impacted by several factors such as region, volume mix, et cetera. It may be difficult to explain it quarter-to-quarter. But trend wise, I think our cost structure compared to our revenue should improve over a period of time. I'm not sure I'll be able to comment specifically on such percentages from quarter-to-quarter just influenced by number of factors.

Ken, I don't know whether you care to elaborate further on this. Please feel free to --

No, I think you've captured the essence, CR.

Thank you very much, sir. I'll hand over the floor back to you for final remarks.

First of all, my apologies for the rescheduling this call a couple of times and causing inconvenience to everybody. But still thank you very much for joining and your questions. And I also apologize at of the end for bring the duration from 45 minutes to 30 minutes since we are running short of time. And we have one more call to follow, so my apologies. But I'm sure we will have opportunities for continuous engagement as we always do from our IR team and myself over a period of time. Thank you very much for joining today.

Thank you very much panelists, that you very much attendees. That does concludes the conference for today. Thank you for participating. You may all disconnect now. Thank you.

Thank you, Kapil.