Tata Motors Ltd (TTM) 2017 Q3 法說會逐字稿

Ladies and gentlemen, good day and welcome to Tata Motors Q3 FY17 Conference Call. As a reminder, all participant lines will be in the listen-only mode and 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. Yogesh Aggarwal. Thank you, and over to you, sir.

Thanks, Dan. Hello, everyone, good evening. Welcome to the Tata Motors 3Q 2017 analyst conference call. We are very glad to have with us the management of Tata Motors represented by Mr. C. Ramakrishnan, Group CFO of Tata Motors; Mr. Ken Gregor, CFO of JLR; and Mr. Vijay Somaiya, VP and Head of Treasury and Investor Relations, plus all the other members of the IR team.

I'll now hand over the call to Mr. C.R. for opening remarks and presentation. Over to you, sir.

Thank you, Yogesh, and thanks HSBC for hosting this call and good evening, good morning, good afternoon to everyone wherever you may be and thanks for coming on this call. Before I quickly run through the presentation that we have put together, the outset it has been -- from a financial performance point of view, it has been a disappointing quarter for variety of reasons with headwinds and some unexpected macro events in the domestic business, as well as certain headwinds and timing events in Jaguar Land Rover.

As you'll see, as I go through the presentations, there are action specific in addressing in many of these areas and we hope to improve from here in the next quarter and in the coming quarters. There are number of initiatives underway in Tata Motors, transformational and strategic initiatives, which our MD has advised from time to time, you must have picked up those in the media. Hopefully, this will help us significantly improve our performance as we go forward.

Quickly going through the presentation, the consolidated turnover, net revenue was about INR67,000 crores, down marginally from INR70,000 crores in the previous year, same quarter. EBITDA percentage dropped to 8.9% from 13.8% and the Q3 profit PAT was about INR112 crores, compared to INR2,900 crores in the same period last year. I will not go through all the detailed numbers including the quarter and nine months, et cetera, because the presentation will be available to you on the website anyway shortly after this call. Sorry, it's already on the website.

Tata Motors standalone operations and just to remind you all, the standalone in the last two, three quarters includes effect of joint operations, namely the JVs that we have in India. Including joint operations, the net revenue was flat at about INR10,100 crores, compared to [INR10,000] more or less the same number in the same quarter last year. EBITDA percentage dropped significantly to 1.5% from 6% in the same period last year, and a result PAT was about INR1,000 crores loss, compared to INR100 crores loss in the same period -- same quarter last year.

Jaguar Land Rover, these are in pounds. Net revenue was about GBP6.5 billion, an increase from GBP5.8 billion in the same quarter last year. EBITDA percentage however came low in at 9.3%, down from 14.4%, and PAT was about to GBP167 million compared to GBP440 million in the same period last year. In terms of overall balance sheet, Jaguar Land Rover continues to have a net cash positive position. We'll will see some details of it in the subsequent slides. Therefore, debt equity ratio leverage doesn't really apply to Jaguar Land Rover being net cash positive. In Tata Motors, standalone automotive operations, the net debt equity touched about 0.93% to 1% at the end of the quarter. In terms of the operating profit performance for this quarter, as I said, the EBITDA margin for the standalone business was about 1.5% mainly impacted by a degrowth of about 9% in the medium and heavy commercial vehicles. LCVs are flat with growth of hardly about 0.2% year-on-year. Car segment, however grew for us well at 31% and we had good exports growth of about 34%. The degrowth in M&HCV at 9% in volume terms affected significantly the margins along with the discounts and other factors that play in the marketplace. Jaguar Land Rover, on the EBITDA which was GBP611 million at 9.3% mainly reflects the lower wholesale volumes in the quarter compared to a year ago, less favorable product mix and partially not fully, partially offset by favorable market mix. The effect of this market wholesale volumes and product mix and market mix it was almost 2% including the run-out cost of the Discovery. Marketing expenses continue to increase and affected the margins by about 1.7%. New model launch costs and pay negotiation settlement payments also impacted the margin both together by about 0.7%. If you had to re-look at the EBITDA margin differently, the realized losses if you had to add into the revenue -- remove it from the revenue, the equivalent EBITDA margin would have been about 10.1% instead of 9.3%. Standalone business commercial vehicles, the industry witnessed a significant demand shrinkage in the months of November and December following the demonetization that came into effect in the early part of November. Domestic CV volumes of the Company declined by about 4.1% in all within which M&HCV segment as I mentioned before declined by about 9% in this quarter. However, strangely within the M&HCV, the construct and buses segment witnessed strong growth upwards of 30% respectively. As mentioned earlier, variable marketing expenses continue to remain high in the industry somewhat even more accentuated following in November and December. More recently, we see some trend in material cost increases and we have also taken some price increases towards the end of the quarter to mitigate. Passenger vehicle business in India from an operational point of view, it was a good quarter for us. The industry -- passenger vehicle industry posted a growth of about 1.9% in Q3. For Tata Motors, we saw the passenger vehicle business grew by about 25%. Within this, passenger car segment for the industry degrew by 2.4%. In our case, the car part of our portfolio grew by about 31% supported by the strong performance of Tata Tiago. Tiago also won several awards, I believe it has run into double digits now. We have collectively got about 13 awards. I need to check whether this is something of a landmark.

Tata Hexa was unveiled in the quarter with strong responses and high acclaim from all stakeholders including media, auto critics and auto enthusiasts based on its features, design and technology.

Jaguar Land Rover, wholesale volumes stood at about 130,000 units and retail was about 129,000 almost the same. In China, the China JV, the wholesale and retail volumes came in at around 21,000 and about 19,000 respectively. In terms of retail sales, we saw our North American market grow by about 20%. China, since I'm talking retail, this includes the JV sales into the retail. China as a whole the retails went up by about 38%, Europe 7%, but however UK saw a decline of about 3% and overseas even more so at about 21%.

For the quarter, the capital expenditure and product development spend was about a little over GBP900 million, part of the annual indication we had given upwards of GBP3.5 million. After this investment in the quarter of GBP926 million on CapEx and product development, the free cash flow for the quarter was about GBP54 million positive.

I mentioned about the strong cash and liquidity position on the balance sheet. In cash and liquid investments, we have about GBP3.8 billion and further we have another almost GBP2 billion of undrawn unutilized committed bank lines. Little more color on the profit before tax, which came in at GBP255 million for JLR for the quarter, it is down from GBPP499 million in the same quarter last year, broadly impacted by the lower EBITDA, which I talked about earlier. Higher depreciation and amortization charge of about GBP52 million, which is a trend we have seen in the earlier many quarters. Unfavorable, unrealized FX and commodity hedges and revaluation, as well as US dollar debt revaluation about GBP42 million, offset somewhat by higher China JV profits, compared to year-ago about GBP13 million and lower net finance cost about GBP5 million. We also recovered further recoveries related to Tianjin fire loss of about GBP55 million. Just to add a comment, with this recovery in this quarter, for Tianjin almost whole of the loss that we had once provision for when the accident -- when the incident took place more or less have been fully recovered with something more to come shortly. Share of China JV profits for the quarter was about GBP35 million. The next couple of slides are mostly car pictures, I can't begin to describe them over this call, so I will skip that, you can have a look at them a little later. Going forward, as I mentioned earlier in Tata Motors, we are focusing on six strategic initiatives and a transformational journey, which touches upon every aspect of the business and fundamentally reshaping the business to be ready for the future, centering around intense topline focus, agility in our cost management, structural improvements, customer focus and centricity, new business models and new technology, and a lean and accountable organization structure. These six themes have been rolled out in several projects and major initiative internally under the head, impact, improvement by action impact projects and many -- all these projects are significantly underway rethinking and rechanging as it is executed, the way we do our business. We have also made several announcements touching upon each of these, the new business models, new technologies. We have announced the -- a sub-brand called TAMO, which will incubate new technologies for introduction in the future. Lean and accountable organization, we are going through a major organizational realignment initiative and our organizational effectiveness program to rethink the number of levels of hierarchy in the management headcount and the way we are organized in terms of accountability and responsibility more focused on greater accountability and empowerment in the business units with a strong control functions in terms of central services. I can keep on talking about many of these initiatives, I will stop here. In terms of business outlook going forward in commercial vehicles, we expect infrastructure spending and pre-buying before the adoption of BS IV in April will result in improved medium and heavy commercials in particular, demand for the Q4, and we believe compared to the decline we had seen in one or two quarters in the current year, we will end the year at least on a flat basis compared to the previous year in terms of medium and heavy commercial vehicles, which in turn would translate to hopefully a much stronger fourth quarter. Within M&HCV, buses and construct segment, which I mentioned earlier, I think we will continue to maintain the positive growth momentum, which also augurs well for the performance going forward. And we expect this growth momentum to pick up in FY18, even though post introduction of BS IV, the first couple of months, may be somewhat muted.

As I've shared with you all before, a wide and compelling product range with several new launches in the coming months and in this year, in all segments, medium and heavy commercial vehicles expansion of the new Signa Range across various tonnages. On the product side, we are very well prepared for the BS IV launches shortly, happening in Q4 partly and in April. And it will be our aim and strong commitment to get back to the position of more than 60% market share over the next two years in the M&HCV segment from the current level of about 55%, 56%. Similarly in light commercial vehicles and intermediate vehicles, we will see an expansion of the product range, Ultra across different tonnages and applications, including introduction of new high performance, 3 litres and 5 litres common rail engines. Same with small commercial vehicles and pickups, we will ramp up the production of Xenon Yodha which we launched recently, and strengthen the ACE platform across different applications and tonnages.

We expect export growth to continue in the range of about 30%. It will continue to grow at this rate into the next year and will steadily increase the share of our international business in commercial vehicles, within the overall commercial vehicle portfolio. We have launched Prima and Ultra in many of the international markets. We also have a good pipeline of defense orders, which I've shared with you earlier, both received and being executed, as well as expected.

Passenger vehicles, we launched the Tata Hexa in January 2007. It has received -- as I mentioned received very, very positive reviews and strong accolades from the auto media journalists and enthusiasts. The strong response have been so positive, it's also reflected in the strong order book of more than two months, even before the launch of the Hexa in January. Tata Tigor and Nexon will follow later in this year, in this calendar year. Other areas of focus like dealer network expansion and customer focus and customer service improvements will continue to be emphasized. As a result, we have also improved our ranking to the third rank in the recent JD Power CSI study. We also launched as I mentioned earlier, a sub-brand TAMO, which is for incubating -- it's an incubating vertical to drive innovation and future mobility solutions, demonstrating our technology capability. As far as Jaguar Land Rover is concerned, looking forward, we will continue to invest to drive profitable growth. Our strategy continues to be to invest in new products, technology, capacities, all of which aim to grow profitability.

We will continue to build on recent successful product launches, which continue to have a very strong demand pull in the marketplace. And sales ramp-up of the Jaguar F-PACE, XF long wheelbase in China, and the all new Discovery and other products to be announced later this year. More particularly on the current quarter that is the fourth quarter, the start of sale of new Discovery wholesales, the annual March peak season sales in UK and other seasonal factors, we expect would support a solid final quarter. We continues to have a balanced sales profile and we will continue to closely monitor and assess market conditions in key markets.

Before I end, just a couple of comments on some of the balance sheet related corrections, particularly in India. Following the introduction of Ind AS accounting standards, which mirror mainly the IFRS with certain carve out and exemptions. We have done fair valuation of some of our assets, notably land to the extent of about over INR4,000 crores, including certain restatement of foreign exchange loans, et cetera as required by the standard. We have also taken this opportunity to fair value some of the assets and product development and other engineering expenses in some of the programs, which may not continue to be relevant in the future, as well as incremental provisions of some of the finance receivables, which continue to perform, not according to the expectations but lower than expectations.

Net-net taking into account all these adjustments, in terms of Ind AS, we also have the effect of equity method of accounting for certain joint ventures, combined and all this at a standalone level, we see net of the fair valuation upward and downward, we see a net impact positive in the equity of about [INR500 crores, INR600 crores] in the standalone, sorry, INR900 crores in the standalone. You will see more details of it in the presentation as it is available on the website, standalone about INR990 crores. I will stop here with my presentation and a brief context in terms of the performance of the quarter. As I said in the beginning, surely a disappointing quarter, but series of headwinds and somewhat crowding of some of the one-time and peaking of some expenses as well as the domestic economy disturbance in terms of demand fluctuations arising from some of the legislations. We hope and expect that there will be a recovery in the fourth quarter and in the periods to come with all the actions that are being initiated. I will stop here gentlemen and open it up for your question and answer.

Thank you very much. We will now begin with the question and answer session. (Operator Instructions). Amyn Pirani, Deutsche Bank.

Good evening, sir. Thanks for the opportunity. So my first question is an accounting question on the results. If I look at the JLR reduction in EBITDA on a YOY basis is around GBP20 million, which is around INR1,900 crores, similarly in the standalone, it is around INR450 crores of EBITDA decline, but on a consolidated basis, it's close to a INR4,000 crore of EBITDA decline from INR9,700 crore to INR5,900 crore. So, is it just a accounting difference or is there any other businesses in which the losses have expended if you can just clarify on that?

One factor, you need to take into account in the consolidated is when you translate the JLR profit into the consolidated.

Yes.

On a YOY basis, there is a exchange translation impact also that comes in.

Okay.

Year-on-year last year, the pound rupee parity was different in Q3 of last year compared to Q3 of this year. That alone would account for major portion of the difference that you're talking about.

Okay. So there are no like expanding losses, any of the other businesses, that's not --

No, no, it's substantially -- in fact almost all of it is the translation of JLR profit in rupees in the consolidated accounts between Q3 of last year and Q3 of this year.

Okay. So that's helpful. Sir, my second question is on the hedging losses in JLR. Now, obviously difficult to pinpoint which quarter the losses will come off, but at least we would have expected that in 3Q, the losses would have more or less been stable compared to 2Q, but they've actually expanded. So directionally based on the hedging that you have done in the last four to five quarters, I mean, I know, you can't get the quantum, but which quarter could see a slight reversal or at least a stabilization in the loss quantum of the losses?

I will just offer couple of comments and maybe request Ken, who is also on this call to supplement. As we have said before, JLR runs fairly large hedge book -- extending into almost four to five years. Arguably the fifth year out or fourth year out, the percentage covered will be much less. And over the next one or two quarters, the hedging ratio amounts to almost 80%, 85% 90%, and then keeps coming down to 70%, 60% and so on. So I would expect the hedge -- and we continue to hedge and maintain this cover, because as it turns out, we believe that's the right strategy to derisk the business, business for which substantial amount of production and costs are in pound sterling and almost 80% of the revenue is in other currencies. It's necessary to derisk the business at firm rates on the exchange front. So if the currencies remain constant from today, it's very difficult to predict, to comment based on currency movement. Into the future, if currencies remain constant as they're today, I would expect over the next four to five quarters, you will see a diminishing -- more and more diminishing impact of the foreign exchange hedge factor coming into the revenue line -- into the P&L line. I don't know, Ken, in case you want to supplement anything further.

No, I think you captured the essence of it, C.R, thanks. Probably with what should, maybe just two additions. I mean, one would be remember that the hedges are being offset every quarter by more favorable operating foreign exchange than was expected at the time when we took the hedges out. So for example, in this quarter we have, if you look year-to-year, we have over [GBP440 million] good [use] of operational exchange that's being offset by the nearly GBP400 million of year-to-year incremental hedge losses. So net FX is actually a good thing for the business, but it's undeniable we have these hedges losses around us. And yes, I'd expect them to be over the next four quarters or so to run at a similar level and then start to reduce thereafter.

Okay, fair enough. Thanks for the opportunity.

Thank you.

Thank you. Pramod Kumar, Goldman Sachs Asset Management.

Yes. Thanks a lot for the opportunity. My first question pertains to the consolidated cash flow for the quarter. So if you can just throw some light, you highlighted the JLR cash flow bits, but if you can kindly highlight what has been the consolidated position on cash flows this quarter and how much of the CapEx is the kind of run rate, what we're looking at in the standalone business?

I'll take the second question, first. In the standalone business, I think we had mentioned before, the CapEx will range between INR3,500 crores to INR4,000 crores on an average in a year, for the current year and for the next few years. It could be slightly higher in the coming years depending on the timing of certain expenses and incurrence and commitment. This year, we expect that the CapEx will level off at around INR3,500 crores, even though, we had indicated earlier it could be higher at INR4,000 crores, I think will come off a little lower at about INR3,500 crores. That is for the entire business in India, both commercial vehicles and passenger vehicles and if I may add the passenger vehicle share of the capital expenditure this year and going forward will be more like 60%, 65% and about 35%, 40% in commercial vehicles. In terms of cash flows, as already mentioned to you about the free cash flow marginal positive about [GBP45 million to GBP60 million] in Jaguar Land Rover. The domestic business for couple of reasons, both in terms of the EBITDA performance and in terms of CapEx, the free cash flow has been negative and borrowings have increased in the domestic business.

In addition, without expecting the demonetization, but planning for a step-up in volume off takes in advance of BS IV introduction in April, we were anticipating a much stronger third quarter and possibly a fourth quarter. So the working capital impact has also been negative in domestic business. So it's free cash flow negative, and has increased the borrowings in the domestic standalone business. To give you a certain color as of December, the net automotive debt to equity in standalone business was about [0.93%], which is up from about [0.8%] or so, if I remember -- in just in the preceding quarter. In terms of net-debt in the standalone business, yet about INR20,000 crores, which is also up from about [INR18,000 crores] or so, if I remember right as of September 30.

And C.R, just clarification, this 0.93x is after all the changes what you've done on the balance sheet, because of the Ind AS, right?

Yes. The net impact as I said in terms of equity correction in the Ind AS is about INR900 plus crores in equity, which is an improvement. This 0.93 is after correcting that. So if we didn't do the net impact of the valuation then debt equity ratio will be slightly higher, more line 1:1.

And my second question pertains to JLR. And this is a bit out in the future in the sense, it's not very certain as to what will be the outcome, but what are your initial thoughts on the border tax proposition, and whether independent of that, we are already kind of looking at a US plant from a slightly medium term perspective, given that it's a major market and probably one of the biggest market, which can see potential growth as well going forward, given whatever is going to happen in that economy in terms of job creation. So how are you guys thinking about the US plant?

We have looked at expanding manufacturing capacities beyond UK from time to time and there have been some specific initiatives undertaken. We went into Europe, in Slovakia. We have set up an assembly plant in [Brazil]. And there was a time also when we looked at a possible manufacturing footprint in Saudi Arabia, which we did not go through with further. And we have a large capacity which we're set up and growing and growing well profitably in China. Further manufacturing capacity expansions, I think will be a function of the potential market, sustainable volumes. The volume also should be sustainable in terms of investments on the ground for the range of products and the high end product the Jaguar Land Rover has, you need to have sufficient volume and depth in manufacturing and therefore heavy investments. This has to be a balanced decision. We look at these opportunities from time to time, but as and when we focus on something, it has to be justified by the opportunities in that market and in that region. This is a general comment without specifically talking about the US plant.

Coming to the border tax potential risk and any consequential action, my response would be, I think, it's a little premature to jump into any scenario painting and premature even more so to be jumping into specific investments or alternative plans or mitigation plans at this stage in a business, which is mostly centered in UK and now expanded into China with 80% revenues coming from all over the world. Taxes and duties like this will definitely have an impact on the business, but we need to wait and see how it pans out and what we could do about it. Right now, I can't comment. It's very premature to comment and what could happen, and even more premature to comment and what could be the mitigation actions.

C.R in that case, is that right to assume that there is no new big greenfield assembly plant capacity, which [isn't] factored in your CapEx guidance for the foreseeable future?

For the near to short-term future, no. We are investing quite heavily, even the quarter -- this quarter investment and this year investment, bulk of it has gone in the manufacturing capacity setup in Europe. We are not looking beyond that. There will be some expansion of facilities here in India where more product lines are getting added, but beyond that, in the immediate future or a short-term future, we are not looking at any major investments of this nature. Ken, if there's anything else you would like to add or otherwise, we can move on to the next question.

No, I think you capture well. I do feel this quite amount of water to flow under the bridge on the border tax before we would be able to really assess what it meant for us or indeed what mitigation took place. And yes, also on the manufacturing capacity, our sights are very clearly set on continuing to build in Slovakia, which we commenced last year. So that's the focus we have right now.

Thanks a lot, best of luck for the future. Thank you.

(Operator Instructions) Rakesh Jhunjhunwala, Rare Enterprises.

Sir, my question is, as you -- will you hedge about 80% for the [year end] quarter, I mean in general. So then when the pound declined in June, you did hedge 80% for the September quarter, 70% for the December quarter. Am I right? That's how you, in general, that's how you do it?

Yes, your basic premise is correct.

Right. So sir that means because there were an [act of] fall in the pound, you did hedge for the next [eight] quarters on a sliding basis at a rate around [140 or 160] whatever. The pound was between [140 and 160] primarily, right and sir as -- so as the quarters come off in the second quarter about 60% would have been hedge at the higher rate, now in the current quarter 50% will be at the higher rate, am I right?

Yes, but it is also a continuous hedge program, right?

Yes, it's a continuous hedge program. So obviously, until for the June quarters [you would have been] hedge 80% for the September quarter -- 80% for September, 60% for -- 70% for December and 60% for January. So obviously your hedges which start from July will be at a such lower rate? Am I right?

Yes, that's right, that's the sliding scale I was talking about, if currency rates remain where they are today as we go into the future.

So therefore every quarter your hedge, first of all your realization of the [tonnage] amount is at a lower value of the pound as compared to the previous value, previous year.

That's correct.

Secondly, your amount of pound hedged at the rate around above [140, or above 130].

Yes.

Would be also lower, so every quarter where your realized hedges should go down, [your realized hedges losses].

I am sorry, I am not sure, I understood the question, but Ken, I think, I hear you stepping in, please do that.

Maybe what I'd say is in principle, I think what you're describing is correct, but maybe the differences. Just to provide a little bit more texture, we are hedging -- our hedge program doesn't just hedge one year out. We hedge one year out at up to 80%, two years out at up to 60%, three years out at up to 45%, four years out at up to 25% and (multiple speakers).

Sir, whatever is hedged for the quarter January to March, 2017, some part of it is hedged after June 2016, when the pound collapsed.

Some parts of it, but because of the nature of the process of averaging in over time then, only a small parts of the quarter. If you take the quarter for January to March, 2017, let's take the quarter that we're in right now. Only a small part of that, a very small part would have been hedged since June of last year.

Not sir, June, it will be post June.

Yes, that's what I meant. Post June, only a small part of the quarter that we're in now has been hedged.

As time progresses more and more of the hedging would have been post June, for the next quarter, the hedging post June will be greater.

Yes, for the next quarter, the hedging post June will be greater, but because of the fact that we are hedging in gradually over time, 80% one year out, 60% to [43%] then it takes time. Then we're only talking about a relatively short period of time since June. So for the quarter that we're in, I would say it's probably a very small proportion that's being hedged since June.

One thing is very clear, because you have hedged beyond [1.25], you're always going to have hedging loss.

Certainly for -- yes.

Right. Only thing is that those losses will come -- see your actual realization [is where you] profit, if you're not hedged, you don't want GBP450 million. Am I right?

That is the nature of hedging. We hedged in order to protect the business against --

So, I think, I would take this offline, it won't be -- very difficult. I will take it offline, sir, again.

Kapil Singh, Nomura Securities.

Just a small clarification, in terms of the hedging losses, should we expect NIM to taper down as the quarters progress or you're saying that for the next one year, they should be in the same range of GBP450 million? I think that's what we are trying to get at.

Yes and no. First of all, in the question there is a fundamental assumption, it is the next one year, what will be the going-forward market exchange rate? That will be difficult to predict. I don't think your question was addressed from that point of you. If the rates remain where they are today, the hedging losses over a period of time, next four to six quarters and thereafter should start tapering down. No doubt about it.

Okay but can you at least give a sense that whether this quarter is the peak assuming rates don't change or we can't say that right now.

It will be difficult to say, I'm not able to comment on it right now, unless Ken has any comment. If rates remain same suddenly at the end of a quarter, I suppose, that quarter would be the peak anyway, theoretically, because you are [booking] the valuation also. That will be the highest quarter any case in terms of coverage.

I don't think this quarter is necessarily a peak, but I don't think that the hedging levels change materially in an absolute sense over the next couple of quarters.

Secondly, if you could just help us understand in terms of we've called out certain items for JLR business performance. So if you could help us understand what are sort of non-recurring type of items which in your opinion should see some sort of reversal. For example, product mix and what is different in terms of variable marketing spend this year compared to what we usually have -- that some color on that and same thing for pay negotiation, what is different this year which may be non-recurring?

I would be hesitant to call most of them as non-recurring because these are in the ordinary course of business. Number one, you will see some wholesale market volumes fluctuate from quarter-to-quarter. So obviously it can't be recurring. Similarly, market impact like product mix, et cetera are also something we have to live with in the course of our business. Unfavorable market, variable marketing expenses, which I think, I have been cautioning for more than a year now. I have always been saying that we expect variable marketing expenses to keep going up, and we have seen this trend for quite some time. Again not recurring, but in general, what I would say about this quarter is I think a combination of these factors have all occurred in one quarter. Sometimes, where the variable marketing expenses go up, you do see offset by higher -- better product mix or it may be a quarter where there may not be particularly any significant launch cost et cetera. When I talked about headwinds or whatever you want to call it in the JLR business, I think it's a combination of all this happening in the one quarter tends to exaggerate the impact of that in a quarter P&L. This is something variable marketing expenses going up, you would expect to recover through wholesale volumes, richer product mix, regional mix, et cetera, but if all these are unfavorable in a particular quarter, the impact can be quite significant, which is one of the reasons why I said Q4, we expect many of these trend to reverse. We do expect a strong Q4 and smart recovery from what you we've seen in Q3. The wholesale volumes are expected to be stronger and with the launch and ramp-up cost behind us, the launch of the new product also should give us in terms of the margin performance. So some of these, we will definitely expect to see unwind in the next quarter and hopefully in the quarters thereafter. It's the combination that is more hurting.

Okay and just one more question on the domestic business as well. We've given some roadmap in terms of improving market share. Any roadmap or general what you have on profitability of the domestic business and also some color on when we are talking about reaching 60% market share, will it largely be through the new Signa Range, we are talking about. So, just some thoughts on both market share gains and profitability when we look in the medium term?

Surely, the domestic vehicle profitability is not where it should be and not where we like it to be. There have been quarters in the past and even full years where we have achieved double-digit EBITDA margins in the domestic business as a whole, 10%, 11%, 12%, et cetera. It's not impossible go back to those levels. Even if you -- since you talk about EBITDA margins, even if you talk about Q3 of last year, even that quarter the EBITDA margin was about 6%. And if you compare some of the best quarters we have had in the past, they have touched around 10%, 11%. So that's a target one would look to work for in the coming quarters and coming years.

We have seen significant turnaround. Early stages, but major upward trend in the performance of our passenger vehicle business improving the volumes, market recognition, and welcome for the new products, which gives us over a period of time a better pricing power and a better capacity utilization, which is at present still low in passenger vehicles. In commercial vehicles, though more dependent on macroeconomic factors, the industrial growth in the country and so far in terms of overall profitability. Definitely, we intend to be much more focused through a series of actions on the market share. Number one, in some of the segments, the product gaps becomes key factor, which will be addressed in the coming one or two quarters, with launch of some of the expanded product ranges.

In some of the segments, in addition to product, I think, we also need to get much more focus in terms of market actions. When I say market, I don't necessarily mean higher discount levels, but more in terms of customer connect, dealer effectiveness, dealer expansion and network strengthening and so on. All these actions are underway. When I talked about 60% market share, I was specifically referring to medium and heavy commercial business, within commercial vehicles, which is an important part of the commercial vehicle business, both in terms of vehicle value and the margins. So that is where we said from the current level of 55%, 56%. Within the next six to eight quarters, we hope to get back to where we were at one point of time, which is 60% plus. There is definitely a series of action plans behind that, some of which I may not be able to share with you today, but yes, you're right, product actions is surely one part of it.

Robin Zhu, Bernstein.

Just have couple of questions please. First of all, sorry to keep returning to this FX issue, but it is the biggest single moving parts in your earnings this quarter that we can see. First of all, can you sort of describe why we went from GBP270 million in Q2 to GBP450 million this quarter, is it because the delta between what you took the hedges out and the price they were realized was much bigger? Is it because there was just suddenly a lot more in terms of hedging instruments that sort of matured during the quarter? Which of those drove the bigger increase? And from what I've been hearing on this call, you seem to be guiding for that loss -- for that GBP450 million number to be sort of recurring over the next [three] quarters. That seems to contradict what you said on the last call, when you said that in FY18 -- starting FY18 the losses do come off more meaningfully. So just wondering where you stand on that? Second question, you guided for 370 basis points of cost that contributed to the margin decline. Part of it was because of the Discovery run out. Part of it was the MY16 run out, if you could just go into the different -- between those two and within the 370 basis points, how much of it do you think it was due to the Discovery changeover, in essence, and how much of that goes away in the coming quarters? Thank you.

Ken, you will have to step in and help me in this.

First off, on the hedging. I'd actually summing up say that it's not -- FX is not the biggest moving parts in this quarter when looked at on a year-over-year basis. And the reason I say that is, yes, obviously I see the GBP455 million and I see the year-on-year effect of the hedge losses, which have increased [GBP384 million] over year, but the operational FX benefit year-on-year is GBP438 million. So net-net, actually FX is -- the operating FX is about a [GBP50 million] positive benefit to the business year-on-year. What I would say is that, yes, I mean we're talking sort of round numbers. The GBP455 million, when I look at the schedule of how I expect the hedges to evolve if exchange rates carry on at these present levels, then yes, quarter-by-quarter into the second half of next year, it would be somewhat lower than the GBP455 million, but for the next couple of quarters, it's in that ballpark. So I am just giving a bit of texture, but the reason we're kind of -- if you like, not wanting to give a very precise answer on it is that the thing that is going to move it around is foreign exchange rates and that brings me back to an answer to what you asked, why does it move from Q2 to Q3? It moved from Q2 to Q3 because Sterling weakened by a further 5% quarter-on-quarter at average rates from Q2 to Q3 against the dollar. And therefore -- and then by doing that against the dollar similar movements against the RMB and other currencies, which are important for us. And therefore that caused the overall level of our hedge losses to be bigger just by itself.

When I come to your question on the operating effects, I mean one of your questions was in relation to 2016 model year versus 2017 model year, what that relates to is in fact there is a nice, I'm going to turn into the car salesman here, a nice infotainment upgrade on Range Rover, Range Rover Sport at 2017 model year when we put in our next generation infotainment system into both vehicles. It's fair to say that's actually quite a big change from an electrical point, architecture point of view and features and point of view, so that did have a bit of a changeover effect in the quarter. And that did cause us, it had a couple of effects, it caused the 2016 model year in the US to run out for a bit longer, and it caused production of wholesales of Range Rover and Range Rover Sport to be modestly lower in the quarter year-on-year than the year before. And that caused an adverse product mix effect, which perhaps is worth a point of EBITDA and of the higher level of incentive level spending that we have seen as C.R said, that is something we've been talking about all year, and it is something we've seen at more modest levels in prior quarters, but that did have an extra effect of the run out of 2016 model year in the US in particular that's perhaps worth half a point of EBITDA in the quarter itself on top of the underlying level of incentive spending being a bit higher, generally quarter-on-quarter, sorry year-on-year.

So within the 2% including the run out of the Discovery, could you quantify how much of that was the run out of Discovery versus [whatever else it was]?

I mean, essentially it's most of the balance. I think it's -- I don't really want to try and give a precise answer. Although, as I'm going to be trying to break by EBITDA down into individual factors and then we can have a discussion about which order to do the variances in, but yes, I will say that the biggest next part is the impact of the run out of the Discovery because if you look year-on-year, we've got the [thick end] of 10,000 fewer wholesales of Discovery in Q3 this year compared to Q3 last year and Discovery earns us good solid margins. So that 10,000 units is quite a big effect from a profitability point of view year-on-year. So, yes, that's the other part of the EBITDA margin change that we called out related to volume.

Okay, thank you. Thanks a lot.

Pleasure. Thanks.

Thank you, ladies and gentlemen, that was the last question. Due to time constraints, we will end the con call. As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Thank you everybody for joining us on this call. There is nothing much I would like to add in terms of closing comments. I think we have, I have said the context and what we are looking forward to with for the future in the coming quarter and in the quarters to come. Thank you very much for taking the time to come on this call. Thank you, bye.

Thank you very much. On behalf of HSBC, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.