Tata Motors Ltd (TTM) 2018 Q3 法說會逐字稿

Ladies and gentlemen, good day, and welcome to Tata Motors Q3 FY '18 Earnings Conference Call hosted by Edelweiss Securities Limited. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Shah from Edelweiss Securities. Thank you, and over to you, sir.

Thank you, Ali. Hi, everyone. Good afternoon and good evening, and thank you for joining the Tata Motors Q3 Earnings Call. We thank the management for giving us the opportunity to host the call. From the management side we have today with us, Mr. N. Chandrasekaran, Chairman; Mr. Guenter Butschek, MD and CEO, Tata Motors; Dr. Ralf Speth, CEO Jaguar Land Rover; Mr. P. Balaji, Group CFO, Tata Motors; Mr. Kenneth Gregor, CFO, Jaguar Land Rover; and other members of the investment -- Investor Relations team. Now I would request Mr. Balaji for opening remarks and initial comments on the results. And then, we can move to Q&A. Over to you, sir.

Yes, thanks, Chirag. Firstly good evening all of you and thanks for joining this call. Let me also take this opportunity to, firstly, tell you how delighted I am to join this team. This is my first call. So I am very happy to be sharing this opportunity with you. What I'd like to draw your attention to is the Investor deck that we have uploaded on the website. And I'll probably try and take you through some of the slides that are out there and flesh it out a little bit more detail for you so that it will help you understand our results better.

So without further ado, let me quickly cut to the chase, and referring to the slide number as I go along so that you can use it to navigate the deck as well. Starting with the safe harbor statement on Slide 2, standard there.

Moving on to Slide 3. I think it's been an exciting quarter for us in terms of the product development across the board, be it the increased sale in U.S. in EU and U.K. or the Nexon availability across Tata Motors in India. So we're quite happy with the way things have progressed. And we'll also like to draw your attention to the new Slovakia plant that's on track for starting production at the end of 2018. Delighted to see the first EV, first batch of Tigor electric vehicles delivered to EESL. So it has been a very, very exciting period for us at Tata Motors Group.

Moving on to the markets. China and India were the bright spots for us, with very strong consumer demand in China. And as far as India is concerned, the strong support for the infrastructure program and the post-GST rules have really ensured the market is on a high. However, there were challenging conditions elsewhere, particularly the situation in U.K. with Brexit, the diesel uncertainty as well as the new diesel taxes is causing a fair amount of pain to the markets there. And as far as the U.S. is concerned, the cyclicality of the market is resulting in a significant amount of competitive spends to be done to maintain shares there. But all in all, it has been a mixed bag as far as the market conditions are concerned. And in that conditions, we're quite happy with the way the group has delivered a profitable growth, despite these challenging conditions.

Moving on to Slide 5. These are just the numbers out there. The columns that I have is -- it's reassured to see volume-driven revenue growth of almost 16%, with EBIT at 3.6% up 80 bps, and we'll talk more about EBIT as we go forward.

Moving on to Slide 6, a bit -- split up of the revenues. What is really reassuring on the revenue slide is, how volume and mix has come to the party and delivered a significant pickup as far as the growth is concerned. And even more satisfying is seeing Tata Motors stand-alone business coming to the party when it comes to growth, and JLR continues to motor along at 5.7% growth. As far as retails are concerned for JLR, very strong growth in China, and Ken will talk about it in a slightly more detail. And as far as Tata Motors standalone is concerned with a broad-based volume growth of 30%, with CV up 35% and PV up 20% in volumes is a very strong story there.

Moving to the profitability. JLR EBIT was down 130 bps, while Tata Motors standalone EBIT was up 980 bps. And the process for JLR EBIT going down are fundamentally linked to the model year run-out, where Range Rover and Range Rover Sport model years were -- are moving into next quarter. And because of that, we are having a higher D&A expense, which when is getting amortized to over a lower base is costing the margins to actually go down. And as far as Tata Motors standalone is concerned, it is basically the turnaround strategy delivering completely and being on track.

On our full year basis, PBT growth is almost 240%, which is a good comeback from where we were earlier.

On a 9-month consolidated basis, if I look at Slide 8, the story is very similar. And the PBT growth of 113% that you see here has one-off of JLR pension credits that is there. And the cost of concern is of free cash flow outflows of almost INR 1,800 crores, primarily relating to lower operating profit, higher investments and launch-related working capital in JLR, which is of a temporary nature.

So with this, let me then pass it on to Ken to cover the Jaguar Land Rover results in slightly more detail. Ken, over to you?

Thank you, Balaji. And good afternoon, and good evening to everyone who is taking the time to join us on the call. Just also continue to refer to the slide numbers. On Slide 10, we've got some summary metrics for Jaguar Land Rover for Q3 and for the 9 months, and the figures I'm talking are now in pound, sterling. Basically in Q3, we saw revenue up 4% on the back of higher retail volume, also off a similar amounts. In terms of PBT, we saw a profit of GBP 192 million, which is GBP 63 million lower than the same quarter a year ago, although I should point out that the same quarter a year ago did include a one-off recovery related to the Tianjin explosion of a couple of years ago. The EBITDA margin in the quarter was slightly higher than the same quarter a year ago at close to 11% versus the roughly 10% we had in the same quarter a year ago. And the 9 months figures, the results from that are shown underneath.

In terms of the volumes on Slide 11. A mixed picture, as Balaji already pointed out in terms of some of the challenges that we've seen in the U.K., in particular impacted by uncertainty related to Brexit and also diesel uncertainty that we're seeing in both the U.K. and Europe. And in both those regions, we saw volumes slightly lower than in the same quarter a year ago. The U.S. market is -- has gone backwards also in the quarter, the overall industry being somewhat lower than the peak that we saw in 2017. But the brightest spot in our overall retail results is certainly in China, where we saw the volumes about 14% higher year-on-year in the quarter.

By model on Slide 12, you see the picture was actually ringing the couple factors that are going on to be able to just call those out. We've seen Range Rover and Range Rover Sport volumes lower year-over-year that is connected with the '18 model year refresh that we have done of both of those products that was very positive. It gives us a really strong freshening for the vehicle. It adds a plug-in hybrid for both vehicles, and we're in the marketplace with those vehicles rolling out to customers this quarter. But it has been a factor that we saw the run-out of the '17 model year result in lower volume in Q3.

On the plus side, we launched Velar during the last calendar year, and therefore we, obviously, saw a full quarter of the Velar volumes in the quarter 17,000 units. And Discovery continues in its growth phase as we've launched that model at the beginning of the last fiscal year.

Coming to the causal factors for the profitability changes. I think the bridge on Slide 13 helps see from the GBP 255 million PBT that we had in the same quarter a year ago. We do have higher wholesale volume round about 3,000 units. But one of the features that we have continued to see has been relatively higher incentive spending, which has grown further as a proportion of revenue in the quarter, and you can see has pushed us backwards to the tune of GBP 73 million in the quarter and those do reflect relatively more challenging market conditions that we're experiencing in the U.K., in Europe and in the U.S. and that's the cost of responding to more competitive incentive levels generally in those markets. We see a modest positive on product costs that's variable cost, and -- but on the fixed costs side, we see higher -- a continuation of the trend that we have seen in the past and should expect to continue to see, which is continually growing depreciation, amortization, reflecting the investment that we've made in those new models. And that's the largest part of the $178 million increase on the fixed costs side.

Exchange. Foreign exchange has been a relative positive for us in the quarter, although most of that is the non-recurrence of a prior period loss in the same quarter a year ago of GBP 67 million. And then there are actually 3 onetime factors, that's the non-recurrence of the GBP 85 million recovery we had for Tianjin, but we got a positive of $45 million relating to a China market incentive that we received in the quarter. And all of those things together with the EBIT movement, that are called out underneath the bars, helps to explain why we see the quarter the way we have and some of causal factors.

Slide 14. And Balaji mentioned this -- we did see a cash outflow in the quarter in the region of GBP 660 million, which is clearly a sizable figure. It's related to the 2 factors that you can see: The ongoing investment that we continued to make in new models, in technology, in the infrastructure of our business, so that continues; and also a working capital effect, which is broadly related to inventory connected with the changeover between '17 model year and '18 model year on the Range Rover and Range Rover Sport, and would be expected to be a timing item that ought to reverse in Q4.

Slide 15 talks to the investment spending that I mentioned. And we'll talk a little bit more about some of the -- what we're investing in, in the causal -- in the strategy section in a second. But broadly, we continue to be on the front foot in investing for future growth and investing and for testing new products that our customers will love because that is our reason for being as our business. And it gets our best antidote to the relatively more challenging market conditions that we find ourselves in.

Slide 16 talks to the liquidity. So despite the cash outflow that we saw in the quarter and have seen year-to-date, the good thing is we do retain strong liquidity as a business because we expect to see some ebb and flow of the working capital cycle in our business. Some parts of that is normal, as is the seasonality we see in our business. And therefore, we structured our debt maturity profile to spread that maturity over the next 5 or 6 years in a relatively smooth manner that gives us the confidence that we have no major refinancing risks at any one point in time.

Slide 17 talks to the year-on-year movement in foreign exchange. I just described the various causal factors. Actually what we saw in the quarter was unfavorable operating exchange compared to the same quarter a year ago, but that's been offset by lower hedging losses in the quarter. So the GBP 134 million negative on operating exchange is offset by a positive GBP 151 million on realized hedgings from a year-over-year point of view. And then you can also see the favorable year-over-year foreign exchange mark-to-market that we saw in the quarter.

Just turning to the strategy section. So I'm now looking at Slide 19. I mean, basically our strategy is consistent, and we continue to invest to drive sustainable profitable growth and create experiences that our customers love to life -- love for life through our products and the services that we also provide.

Clearly, Slide 20 has talked about the environment being challenging and, of course, it is. It is exciting environment for the automotive business right now, whether it's the geopolitical and economic environments, including Brexit that I've already mentioned or the market forces, which is causing us to see higher incentive levels. But also of course, the electrification that is taking place in the car industry, and will continue to take place and the uncertainty that's bringing around diesel engines, for example, and emissions compliance. But we're also seeing trends, of course, for driver assistance, connectivity, mobility trends. And bringing with it -- of course, all of that brings with it relatively high investment requirements for the business. And of course, we as a business, we've not stood still. We're seeking to take action to address all of those challenges. For example, we are investing in hybrid and battery electric vehicle technology as evidenced by the launch of the Range Rover, The Range Rover Sport plug-in hybrids this quarter. We're investing in fantastic new infotainment technologies, for example, that are also in those vehicles and with the launch of the Blade technology in the Range Rover Velar we launched earlier this year. And we have launched and continue to launch exciting new products, like the Jaguar E-PACE that is now coming to showrooms around the world as we speak. And of course, we're very focused on cost efficiency management with our Leap project that we kicked off over 2 years ago as a direct response to the challenges we saw around the cost of the missions and the challenges of the market.

In terms of industry volumes on Slide 21, I think, I've really talked about this a bit already, so I won't labor it. But we have seen lower U.K. industry volumes, Europe growth, but with significant diesel uncertainty and the U.S. down, which is really, I'd say, more of a cyclical factor after a peak year in 2016. Overseas recovering somewhat. And China overall industry volumes being relatively flat. And as I said, within that, we managed to grow our volumes.

Slide 22 talks to the longer term. I think in the longer term, we would continue to expect to see premium car volumes grow and, therefore, underpinning our continued belief that we can invest in fantastic new models and increase our market share, but also within a growing premium marketplace in most regions around the world underpinned, as you can see on the chart, by China.

And I think Slide 23 just showcases and evidences what I have just talked about with those new products. Also included there, but I didn't talk about already, our Jaguar I-PACE, our first battery electric vehicle that's coming this year to our lineup, which we're incredibly excited about.

Slide 24 talks to what we're doing to correct the challenges of ACES. Investing in autonomous technology, investing in more connected technology. We'll have our I-PACE electric vehicle on sale in 2018 on top of our plug-in hybrids on Range Rover and Range Rover Sport as well as starting to invest in shared mobility-related investments, in particular we did make a modest investment in the ride-hailing company, Lyft. And we have our InMotion venturing business to invest in some of the future of transport and mobility and that's something we can built on going forward.

Slide 25 perhaps just reinforces what I said about our investments in electrification and related technologies. And as we announced last year that from 2020 all Jaguar Land Rover vehicles would offer electric options, whether that's mild hybrids, plug-in hybrids or be full battery electric vehicles.

With that, I hand back to Guenter and to Balaji to turn to Tata Motors.

Thanks, Ken. So moving on to the Tata Motors stand-alone results. We're happy to see turnaround on track, and we're seeing strong growth in both CV and PV. I think we had talked about the turnaround strategy from July this year, and we're seeing all-around improvement in our performance, which I'll just talk about a little bit here. The EBIT improvement is fundamentally due to lower VME and higher realizations and the benefit of the ImpACT projects, which we will spend a little bit of time on. And what we are clearly seeing is that ever since the bit of a stumble we had post the BSIV migration, we could see consistent improvement in our performance. And the EBITDA at 6.2% is now up 220 bps on a full year basis.

Moving on to Slide 28, which is giving the share performance. We're trying to capture this across time. And you would notice that the business is slowly, but surely turning around in terms of bringing -- building back its share to its -- in the journey back to its heydays. And it's going to be an interesting journey from here onwards and an exciting journey at that.

And moving on to Slide 29. What I am really reassured by is this broad-based growth across the portfolio, be it on M&HCV, ILCV, SCVs or CV passenger carriers. Each one of them is showing significant growth as well as market share gain, albeit we need to still have some journey to cover as far as the M&HCV market shares are concerned and we are on the case as far as that is concerned.

Spending a little of time on CV. What has really changed here to deliver a volume growth of 35% and a revenue growth of 52% is basically driving all-around execution in this business. We had called out portfolio gaps as one of the areas in the turnaround. Happy to report that most of the portfolio gaps have been plugged, and of course we'll continue to now start clearing the white spaces near -- tap into those white spaces and not just plug gaps. We will step up market presence, which we have done in a very good way, and we'll continue to do this journey. And as we look forward, I think one area we will definitely leverage is the superior SCR technology to win customers. And also given this kind of scorching growth rates, we'll need to ensure that our S&OP rigor is done well to ensure we meet the surges in demand. You would notice even in our January call-out, we are still finding some demand -- supply gaps in our setup because of either managing to cope with this growth rates coming through. And of course, profitability continues to be a key focus area, and we will drive aggressive cost reductions to improve that profitability.

Moving on to PV, where it is about getting basics right to win back customers, that's the thematics. We are very, very reassured with the strong response to our new products, be it Tiago, Tigor, Hexa or Nexon. And the Impact design, and now Impact 2.0, which you'll see in the auto show, is clearly creating a lot of buzz in the market and is also driving change in the brand image. And that's a very good place to be in.

In this category -- in this segment, we'll continue to activate creatively to step up product experience because the more our consumers are able to experience our products, we are able to see conversions step up. And we will focus on our network expansion and customer service. And here again, the focus on cost reduction is absolutely rigorous in order to ensure that we deliver an early breakeven in this business.

Talking about PBT. I'm on slide 32. PBT is higher by almost INR 1,200 crores, with EBIT margin up 980 bps, as I called out earlier. And if I tease out the improvements, combination of volumes, which is volumes, net pricing as well as operating leverage, those are the 3 (inaudible) that will come into the numbers. The volume and mix number is fundamentally a combination of both the tailwind of market growth because there is very significant tailwind in this market at this point in time as well as share gains in that kind of a market. So that actually is a double joy. And the pricing now starting to pick up as commodity is starting to rise as well as lower VMEs is what you are seeing as net pricing in those numbers. And between net pricing, product cost and fixed cost, that is where all the impact projects that Guenter had called out in his earlier presentations that are falling. And this fixed cost actually coming down with this kind of growth rates is falling right down to the bottom line and we have fixed cost operating leverage almost showing 600 bps of improvement. And therefore, it's an all-round performance story that you see on the PBT side.

And moving on to the free cash flow slide, very happy to see free cash flows being positive after quite some time. And this is basically a combination of both higher cash profit as well as favorable working capital and that is something that we intend to continue to drive hard as we look ahead.

Moving on to the investment. Tata Motors standalone invests roughly about 6.3% of its revenue. The numbers are slightly lower than what you would see elsewhere because the commercial vehicle business is not that capital-intensive, and therefore that's the reason the numbers are slightly lower. But having said that, we can reassure you that we're well invested as far as the business is concerned to ensure that we're tapping into the growth opportunities. And therefore, we will invest for growth in this business.

On the liquidity side, again, an adequate liquidity with an average maturity of 3 years. So we are quite comfortable on the debt maturity profile.

With this, let me now hand it over to Guenter to just talk us through the strategy that we have in Tata Motors. Guenter?

Balaji, thanks a lot. Very good morning, good afternoon, good evening, everybody. It's my pleasure to put some (inaudible) information into the figures there (inaudible) by balance sheet. Also for Tata Motors standalone, the fiscal year '17/'18 was very intensive and full and very challenging one that would conclude as represented by the figures that we have very well countered to these challenges.

On Page 37, BSIV transition. We countered by a very quick ramp up across the product portfolio, our SCR solution in the field placement and also 180-horsepower in commercial vehicles. GST, we actually leveraged as an opportunity to create opportunities -- value opportunities. On the powertrain debate, we had a very powerful entry into the EV space becoming L1 on the largest public tender submitted by EESL in August last year. And as we move to the right of the slide, we actually see the pressure on margins counterattacked by the ImpACT project already launched in autumn 2016. And Balaji mentioned that we had effectively closed all of the products, and we are now underway to actually open whitespace opportunities for further growth opportunities of Tata Motors.

The turnaround plan, Page 38, was -- is very aggressively driven by the organization and with a strong focus on execution. Just to repeat this, we (inaudible) attack to regain the market share, correct the (inaudible) by plugging the product portfolio gaps, building stronger network and relationship with key customers and shareholders and stakeholders, and also to launch innovative, attractive customer offerings. The second angle of attack, drive rigorous cost reduction. It's all focusing on improving the contribution margin across the entire product range, but also to drive productivity and efficiency across the organization as we have just seen the effect also as far as fixed cost allocation is concerned. The third one, build a robust, agile and efficiency supply chain. Very rigorous approach on our new S&OP process. Consolidating and building a strategic supplier base to have the right capabilities also for the future. In the end, a process to optimize our all manufacturing footprint in order to get to a higher utilization rate of our technically installed capacity.

As far as the long-term strategy is concerned, Page 39. We have given it a headline called, win decisively in CV. What it means, we would like to keep the momentum. We would like to further build this momentum by being extremely focused on the actions taken. And they are, principally speaking, 4 actions, which characterize to a large extent the way we focus in CV: Strengthen the product plan with reference to the whitespace, as already mentioned; take the lead in technology in BSVI, but also xEV powertrain solutions, including alternatives to fuel; as far as our product lineup is concerned, build modularity and platform approach in the product development, which is going to create an effect across the entire value chain coming from our suppliers, which gives us the chance to reduce the number of suppliers going for larger content of the suppliers all the way to our own engineering department, where we can actually start sharing more responsibility also with more capable suppliers and actually leveraging our technically installed capacity in the turn of a higher output. And the fourth one is enhanced customer engagement, product and service offering.

If we switch to PV on Page 40, here the headline is, win sustainably in PV. As we talk about sustainability in the context of our PV business, it's all about leveraging a platform-based approach. And as already mentioned earlier, we actually build the future product portfolio in 2 platforms. The one is what we call as of today, it might get a different name in the coming days, just is a reference to the upcoming expo, Advance Modular Platform. It was small hatches to SUVs. Here we're going to bring multiple top hats in order to cover different segments. It's all future ready as far as safety requirements are concerned. High degree of commonality in order to build economies of scale, while at the same point of time, it's a very flexible and light platform. It's going to come in the first instance with diesel and petrol. But as it is future-leading, it's package protected for all kinds of different xEV solutions.

The so-called D8 platform, that's what we're going to show this week at the expo the first vehicle, as it is about to get into the market in a year's time. It's a proven architecture with its roots in Land Rover. It covers all the safety requirements. It's plug-and-play for the future technology, and intellectually give a platform for all the future models from 4.3 to 4.8 meters. Also here, it's diesel and petrol. It's packaged protective for xEVs. And it will come as the first product of Tata Motors standalone with manual, with automatic transmission and even in the future with DCT solutions.

On Page 41 because it has been mentioned with reference to the financials, we have plugged all the product gaps. Page 41 gives you, on all the relevant segments, a good idea of how many products got effectively launched. Putting this into context of the -- across the product portfolio introduction of BSIV plus the 70% increase of output in the second quarter and furthermore in the third quarter, you can probably get a flavor of what kind of degree of exertion we have accepted for ourselves, which we have also improved on the entire supply chain and value chain. On top, we have introduced an electric bus in the 9-meter and 12-meter version, fully tested and already as it participates in the upcoming tender. And Tigor EV, I made a reference to it, became L1 in the public tender of EESL.

On Page 42 as far as the future is concerned, the future discussion is all built around leveraging the extended ecosystem. And as I currently see it, 4 main directions. It's about leveraging new partnerships and new business models. It's about going for leadership in EVs and have a very focused investment in technology and powertrain solutions. Also for India, we see an increasing importance of advanced driver assistance systems and connectivity as well as by the higher demand of the evolving customers' comfort and convenience. And last, but not least, drive mobility-as-a-service to create disruptions, where we think that we are in a predominant position to actually play this game most effectively.

For the ones that would like to know more and for the ones that try to benefit to effectively be in India the coming days, I would like to invite you to come and see our facility at the Auto Expo because there we have our interpretation and our representation of smart mobility in the context of smart cities, which we believe is the overarching theme in India on the way forward for the automotive industry. Balaji, back to you.

Thanks, Guenter. Moving on to the rest of the deck, I think just to summarize Tata Motors finance into their subsidiary where we talk about a little bit in our deck, but I am very happy to see the strong broad-based rebound that's happening in this business. The loan book has grown 17%, the market share is up 500 bps, PBT is up. And most reassuringly, the nonperforming -- gross nonperforming assets on a 90-day basis is down by almost 1,350 bps, which is a very good position to be in. And it's -- corporate lending book is also now starting to grow. This is a very pivotal investment that Tata Motors has because it's a financing arm of Tata Motors, and seeing getting it back to pink of health is a key priority for us.

So talking about the last slide which is a looking ahead section of how do we see the business going forward. Clearly, as Ken alluded to and we've been alluding to in the markets, it is very clearly a challenging global environment. There are softer markets in U.K. and the U.S. and the competitive situation is pretty intense. Geopolitical uncertainty, Brexit, in particular, is a cause for concern and the challenges on diesel are continuing to rise. And in this environment, there is all-around disruption happening from ACES, and this is a context that JLR finds itself in. And how do we intend to see this going forward? Very clearly, JLR will continue to invest in products and technology. And for this year, we expect to see a GBP 4 billion plus investment happening for products, technology and capacity for this year. As far as Q4 is concerned, we expect a stronger performance, driven by newer models, seasonality and improved profitability coming in from JLR. It should be definitely better than Q3. And as far as the medium term is concerned, we target to achieve an 8% to 10% EBIT with newer models, better cost efficiencies as well as operating leverage. So that's the JLR story.

Moving on to India. We clearly see an improving demand outlook in India with stepped up infrastructure fund -- spending, rising consumer confidence as well as disposable incomes. However, the regulatory environment continues to remain challenging. And in this environment, we will continue to drive our turnaround strategy. As far as Q4 is concerned, we expect the strong all-around performance to continue from Q3. And as for the medium term, we aim to achieve a 6% to 8% EBIT through higher growth, better cost efficiencies and operating leverage.

In this context, we should also keep in mind that with this challenging environment, we also need to look at getting fit for the future. And therefore, in this spirit, we will continue to review, redesign and refresh our asset base, our investment priorities, our policies, our processes and capabilities. And if there are any changes to this, we will update you in the next 3 to 6 months. So that's the outlook.

And as a quick logistics note on Investor Relations, we had heard you over the last few days in terms of -- I'd met with a lot of you and you did comment upon things that we need to step up on our investor relations' side on communications, so I'm happy to confirm that with the support of the board, we have ensured that this analyst call will always happen at 6:30 p.m. on results day. And there will be one comprehensive deck for all stakeholders. Also happy to confirm that there will be an annual analyst meet that will happen in -- for both TML India as well as JLR. TML India is now scheduled for the 5th of June, do mark your diaries for that, and JLR is on 22nd June in the U.K. Again, we look forward to seeing you there. And with this, let me now turn you over to the Chairman for his comments.

Thank you, Balaji. Let me thank all of you for this opportunity to share a few thoughts on Tata Motors. I just want to give a few comments on the domestic business as well as the JLR business. With regard to the domestic business, our key focus has been on 3 areas: to gain the market share back on commercial vehicles and also improve the market share in passenger vehicles and deliver growth that is profitable and cash accretive. And that is a transformation journey that we have been on. And I'm happy to see the progress steadily in the September quarter and again, in the December quarter. And as Balaji highlighted, the outlook for Q4 remains quite good. So I think we are in a sustainable growth and sustainable profitability performance journey. But we have a long way to go. And we are also happy to see the traction that we have got on the passenger vehicles for our new models. And that business also is continuing to improve the margins at the contribution level and at the EBIT level and the focus there is to turn neutral as early as possible.

Moving to the JLR. It has been a spectacular journey for JLR for the past many years. The business has been continuing to run on the treadmill, with tremendous focus on innovation, on new product launches and creating brands that are truly aspirational. We continue to see a strong volume-led growth in the face of a very tough market conditions. When I say tough market conditions, it is the multiple factors that they are facing. One is the geopolitical scenario, particularly Brexit. And then the advancement in technology, whether it is EV or whether it is some of the other things that we are -- connected costs and everything else that we are seeing. But we are committed to make investments in the right places in order to ensure we stay ahead of the curve. In fact, both businesses, Tata Motors and JLR, are committed to the EV journey on making all the right investments in order to stay ahead of the curve.

At the same time, we are also focused on delivering strong financial performance. Though the JLR performance this quarter has been rather below their own standards that they have been delivering, the team is extremely committed to build a very sustainable profitable growth over medium term, as they have articulated, to deliver that range of margin with volumes that are industry-leading for a period of time, and also we are focused on being cash accretive. And I expect Q4 to be a better quarter for both Tata Motors domestic as well as JLR. But here my main message is to tell you that we are focused equally on CV and PV in the domestic market and in the technology innovation at JLR so that we come up with aspirational products and deliver continual financial performance going forward. Thank you.

Thank you, Chairman. With this, we are now happy to take questions. So Chirag, over to you.

(Operator Instructions) We will take the first question from the line of Kapil Singh from Nomura Securities.

Mr. Balaji, thanks a lot for incorporating the feedback that we have sent and really appreciate this presentation deck that you have uploaded and the presentation format as well. So first of all, thanks for that. Secondly, I'll start with -- I have 2 questions. Firstly, related to ForEx for JLR. We have seen currently pound appreciating to levels of around 1.41. So how does that impact your margin outlook if at all, especially the medium-term outlook of 8% to 10%? And related to that, the outstanding ForEx loss that we have given at the end of third quarter, does it become neutral at current levels of currency? That would be my first question.

Thanks, Kapil. With respect to ForEx, I think, one thing which I have -- we have tried to put out together, and I hope you appreciate that, is that we have tried to now look at ForEx impact at an EBIT level rather than looking at individual pieces. The reason you put a hedge is that there is an underlying that will go the other way, and between the underlying and the hedge together is what you have to look at the number, that's what is the purpose of the hedge is and that's what volatility -- that's how volatility gets stemmed out. So therefore, if you look at this quarter, the net impact at an EBIT -- EBITDA level is a very marginal $20-odd million, which is comfortable there. And even if you look at our full interest line level, which is what you see the next number of $79-odd million, $67 million out of it came from the prior period base year impact. So actually this time, ForEx is almost no news as far as our numbers are concerned. What you are drawing out in terms of the depreciation of the pound, yes, it is bringing down the hedge reserve and you're seeing about $897 million of the closing hedge reserve that we had. And this obviously will improve going forward because of the changes in ForEx, but simultaneously, keep in mind, operational exchange will go the other way. That is the nature of the beast we are trying to tame. And therefore, I would urge you to look at this together. And the -- another broader way to look at it is, if you look at it -- though we hedge out anywhere between 3 to 5 years, the duration of the hedges that we put in place is about 18-odd months. And most of -- therefore, the impact of the Brexit numbers are all mostly behind us. And therefore, this amount of 18 months is something will keep going up and down and that is -- we need to put that 18 months in place on a duration basis, I am not looking at the tenure basis, but on a duration basis that will move up and down in line with the ForEx numbers there. So hope that gives you a sense of what ForEx is about.

Yes. So what I was trying to understand is that, does that in anyway change your medium-term outlook in your current...

No. It doesn't because you also have -- the operational exchange will go the other way because if pound doesn't appreciate, most of our costs are sitting in pound sterling. And therefore, you are likely to see a difference there. So the 8% to 10% EBIT, please, keep in mind, will have to be done under all conditions, whether ForEx goes up or goes down.

Got it. The second question is related to China JV. We have seen a significant dip in contribution from there. And I believe, we had a incentive from there for this quarter as well. So could you just help us understand how to expect the profitability? And what led to low profits this quarter?

I think the model year launches that you are expecting to see in CJLR going into Q4 is one of the reasons why we did -- we have called out there is likely to be an improved Q4. Other than that, intrinsically the business is in a very good shape, and we'd like it to continue that way.

So no change in -- no major changes in profitability for the business over, say, 1 year.

Nothing fundamental.

We will take the next question from the line of Pramod Amthe from CIMB.

Basically taking into account, given the call duration and all, the feedback. My 2 questions are, one, with regard to the stand-alone entity. The improvement in margins is phenomenal. Is there any one-off and you feel these type of 8%, 9% EBITDA margins are sustainable? Second is with regard to the JLR. You are entering the interesting phase where you are taking the third party, which is Magna, as a assembly for your E-PACE. What will be the accounting-related impact in terms of margins because you are outsourcing the same and also to the bottom line?

Okay. Coming on to the Indian business, I think, if you see the numbers there, there are 3 big movements that you would notice in the EBIT margin improvement because of volume and mix about 2-odd-percent improvement in EBIT, net pricing improvement about 1.6%, product cost marginally the other way around, and the significant number coming because of fixed cost leverage. I would -- from a fixed cost leverage perspective, they are linked to the size of the business and as long as we are ensuring that the cost growth is lower than the business growth, this number should continue to improve. So it's a very straightforward piece there. And the things that we will be very, very keeping a close eye on is how are we ensuring net pricing continues to remain positive. There's intense competitiveness in this market. And therefore, we need to be careful about breeding too much into that piece. But having said that, we are committed to improving this business and the profitability of the business. So there will be various levers that we'll play depending on what we're able to move at a point in time. And the same, therefore, holds true for any conversation on outsourcing, et cetera, in JLR as well because there will be up elevators and down elevators, and it's for us to manage the business overall. So I wouldn't want to get drawn into an individual line level conversation on that.

We will take the next question from the line of Yogesh Aggarwal from HSBC.

Just a couple of questions from my end. Firstly, on JLR, from a little longer-term perspective. If you look at the last few years, there has not been much operating leverage in the business because things like employee cost per car have continuously gone up, almost like GBP 1,000 per car. So now that the new cars have been coming from Magna and most of your big launches are over, if volumes grow, can we expect operating leverage to start kicking in, in the next few years or few quarters?

Yogesh, you are right. The -- if you look at the fixed cost leverage of JLR, it's something that we are acutely aware of. And that is one of the reasons if you look at our 8% to 10% leverage slide that towards the end looking ahead when you're calling out, we are explicitly calling out operating leverage as one more area of leverage to look at. And therefore, we will be looking at this pretty closely and the team there is absolutely committed to the same.

Okay. And just for this quarter, the realizations are down like 3% sequentially and the margins -- clean margins ex hedging is also down like 300 basis points EBIT, and it seems like it's probably the Range Rover runout (inaudible) in realizations. And secondly, do you expect higher volumes also from the new Range Rover? Or it will be largely impact on realization?

Okay, let me do -- let me answer the question on margin, and then I'll hand it over to Ralf to comment on the volume impact of the new Range Rover. Number one, as far as -- you are right the fact that you had a model year run out on Range, one of our most profitable products, does impact the numbers and that has been called out there. And as far as the margin improvement plan is concerned, we will look at all options. So identical to Tata Motors, all levers will be at play there. And with respect to your expected performance of the Range Rover Sport, we expect to see a bounce back.

First of all, welcome on that comments from my side and thanks for being in [the test] for today. And quite clear, run-out delivers challenges on the margin side and so on the volume side. And our expectation is quite clear that we can really come back with both margin and volume. What we hear at the moment is already very strong demand out of the regions around the world.

Yogesh, I hope that answers your question.

Yes, thanks. Ralf, just now that -- I mean, you are on call, just a quick one for you. Any update on I-PACE bookings because we are hearing that the Model 3 in Europe is lot more expensive than U.S. So does that put you in a much better position for I-PACE? And have you seen any acceleration in bookings for I-PACE?

The vehicle is -- I will -- by the way, I will immediately talk with my marketing team to maybe make the vehicle a little bit more expensive. The I-PACE is the very first, premium electric vehicle, consequently designed, engineered and also packaged with a creative method of new technology. And therefore, we expect high demand for the car. And we are absolutely optimistic. The car is also produced in Magna, and we are going to deliver it, more or less, at the very first premium brand, a really premium battery vehicle already this year. So we are very well advanced and optimistic.

We will take the next question from the line of Binay Singh from Morgan Stanley.

Couple of questions, actually. First, I will start with raw material side. If you could comment on the raw material question, both on India side as well as on JLR side, particularly for JLR because we have seen aluminum prices rising very sharply and so then all guiding down predominantly because they use high aluminum like JLR. The second question on JLR, again, in the past you talked a lot about Leap 4.5, the $4.5 billion cost-cutting plan at JLR. So the target -- I think, it was announced in 2016, the plan was by 2020, we'd see a sizable gain. So any update on that? And the last, again, on Jaguar Land Rover. Two of your most profitable products are now coming up for ramp up, the Range Rover and the Range Rover Sport, but when we look at the U.S. retail sales still weak. So when do we exactly see the volumes are hitting the market for these 2 models. These 3 questions.

Let me hand it over to Ken to cover this question. Ken, and then I'll pick up the material cost for TML stand-alone at the end. Over to you, Ken.

Thanks, Balaji. Yes. On material cost, in the fullness of time if aluminum stays at its present level, then that would -- all other things being equal, be a cost pressure on the business, which we have to take on just like all other sorts of pressures. But of course, it's only one of a number of input costs into the business that we have. But yes, it's a bit higher than it was this time last year. In the short term on aluminum, we do have some hedging that is providing an offset in this quarter, in particular from the mark-to-market of the hedge gains on aluminum and other commodities. In terms of the Leap cost efficiency project, very much that's still one of the core planks of what we're pushing forward as a management team to address the twin challenges that we saw when we launched it a couple of years ago, being one, the normalization of the new normal that's emerging in China -- has emerged in China in the marketplace and more competitive market conditions there. And two, the cost of investing in CO2-related technology and the material cost associated with CO2 technologies. And very much we're pressing forward with those initiatives because we clearly, in the face of the present market conditions that we've talked about, need to, from the point of view of continuing to press forward on cost targets underpinned by industry benchmarking, accelerating supplier cost efficiency and value management driving efficiency in our operating cost base, including making changes, for example, that we did at the beginning of the fiscal year to our pension scheme to reduce the ongoing cost of our defined benefit pension arrangements. And finally, I'd say, of course, that the launch of our factory in Slovakia, which launches later on this year is very much part of that thought process in order to access a lower cost location for manufacturing and sourcing all parts at the same thought process. So yes, we push forward with that. And on Range Rover and Range Rover Sport, I mean, we're very excited about the possibility that the refresh gives us as well as the plug-in hybrid. So I think I do look forward to seeing those products being successful in the marketplace this year.

So sir, just to follow on, on that, how is -- is aluminum rally, like, a sizable headwind? Or do you think it's something manageable? And when exactly do we see the Range Rover, Range Rover Sport refreshes and like which month do they start getting launched globally?

Impossible to get into the specific line items of the specific sensitivity on aluminum. But it's, as I say, it's one-off a number of headwinds that we have to confront, which is why we also hedge it. And on the Range Rover and Range Rover Sport, yes, those are in the marketplace now. And so I'd expect to see some retail sales of those 18 Model Years this quarter and then developing through the next fiscal year. Thank you.

Thank you. And as far, Binay, on your domestic material is concerned, clearly, we do see inflation and particularly steel is inflating as you're well aware of. And therefore, we are watching the developments closely and taking prudent pricing corrections wherever we need to, wherever we are not able to manage it through just cost savings.

And maybe I can add concerning U.S. We achieved in the calendar year 9% growth, in the fiscal year 5.2% growth. So overall, we are on a record level volume-wise in U.S. at the very moment and we think that we can grow further.

(Operator Instructions) We have the next question from the line of Robin Zhu from Bernstein Capital.

Firstly, on the FX, I mean, this quarter you seem to have realized just over GBP 300 million of FX losses. There is GBP 700 million of current FX reserves. I seem to remember, a few quarters ago, there was a company presentation that said the FX losses coming down in Q4. Does that still stand? Should we expect the FX losses realized to be less in Q4 than Q3? Or is it -- or has that changed any way, first of all? And then second question, you mentioned -- I mean, obviously those [iPad] coming, you also mentioned as plug-in hybrids, Range Rover and Range Rover Sport. On the left hand, keen to understand whether you think these plug-in hybrids, whether they will have higher margins than the group average? Or if you think that these things will [fall over] because of the incremental technology costs?

Thanks, Robin. Let me take the ForEx one and I will pass the other one to Ralf. You noticed that the hedge reserve has indeed been coming off as we originally said. The numbers are now at about GBP 900 million as you said. And it's got 2 factors going into it, one is the hedge itself elastic because the time is now finishing. We are consuming the hedge off. The other is, the currency is moving. And therefore, we expect to see that trend to continue going forward as well. Ralf, you want to talk about that?

In terms of battery electric vehicle and PFs, we see PFs as a kind of purging technology, which will not last for very long but has to be offered also. It's twice the technology; these are twice -- 2 drivetrains. So we expect that in the mid- and long term, battery electric vehicles will overtake in cities.

But in terms of the margins of a plug-in hybrid, I mean, obviously, the Range Rover and Range Rover Sport are very profitable with the extra technology costs that you have for the plug-in hybrids. Will these still be accretive to the group margins? Or does that stop being the case?

I guess, overall, we have to manage the complete business. Plug-in hybrid is, at the very moment, a very, very small percentage in addition to the completely new Model Year '18. So with this complete mix, we expect that we can continue a profitable sustainable growth in a good rate.

We will take the next question from the line of Sonal Gupta from UBS Securities.

Just one number question. I mean, could you tell us how much of FX loss or gain is built into JLR IFRS stock line?

JLR IFRS stock line. Okay, could you just give us a minute?

Sure.

In the meanwhile, you go on with the remaining questions.

Sure. So my other question was on, I mean, like, JLR is spending about $4 billion -- GBP 4 billion-plus in CapEx this year, which includes R&D plus, I mean, the plant-related CapEx in Slovakia and engine-related CapEx. So I just wanted to understand over the next couple of years, given that we will require more investments in -- on the technology side, I mean, like you've highlighted. Do we see CapEx going up further? Or do we see that as plant-related CapEx falls off or volume-related CapEx falls off, then we have more room to spend on those areas without necessarily the absolute number going up very sharply? So I just wanted your thoughts on that.

I think going forward, what kind of CapEx is put in place I think the right appropriate time to discuss that is in the context of the strategy. So I think, I would suggest we await them, we'll be able to give it a fuller picture of it and we'll also be able to share with you how we are pulling it together. So don't want to just (inaudible) a number without backing to it. So rest assured that if you look at the Chairman's statement that we are equally keen on cash-accretive growth as well. And therefore, we will be looking at all angles from which to look at this number. But we will build the investments into this -- investing for growth and investing for cash-accretive growth. So it is a tightrope balancing that we'll have to do. And the best time to explain that in fullness would be the annual analyst meet.

Okay. And if I could...

On the realized FX in the P&L this time, close to about GBP 304-odd million is the FX derivative that we have -- that are hitting us on the revenue line.

Which is a negative, right?

Yes, that's right.

We will take the next question from the line of Jamshed Dadabhoy from Citigroup.

So one question on JLR and one on the domestic business. On the domestic business, very strong performance. So congratulations out there. On the net pricing that you all have had on the year-on-year basis of INR 612-odd crores. Could you give some more color or context, is this coming from CV? Is this coming from passenger cars? And how sustainable is this going forward?

Yes. Thanks, Jamshed. The pricing is happening in both the places. Keep in mind that there's also commodities coming through. And therefore, to that extent, there is an element of pricing that is to cover off for inflation. At the same time, VMEs as a percentage of turnover are coming down, that's an another one that is contributing to the pricing that you see. And thirdly, of course, both in CV and in PV, there are strategic price corrections being done. And as mix starts to [plow], coming in your way, better products are coming and you are getting pricing through that as well. So all the 3 factors are coming together to deliver the price.

Okay. So broadly, this is sustainable?

Yes. The only thing the fly in the ointment is the intensity of competition because we are very, very clearly on a growth path and winning back shares, as Guenter rightly put it, in terms of winning decisively in CV. And therefore, we will ensure that we do all that we need to compete effectively in this market.

Okay. On JLR, you all have mentioned that the VME has now hit above 6.9% of revenues. And if I recall, in the time of the financial crisis, you all were close to about 7%, 7.5%. So would you say that discounts on the JLR side have peaked? Or do you think they are going to continue from here? Like continue to trend up higher as a percent of sales.

I think the story is identical here as well, the thing that we will do whatever is needed to ensure that we win in this market. And therefore, we have great products and we have to ensure those products are reaching our consumers. And therefore, we will do what is needed. At the same time, we are very, very clear to our objective of delivering the medium-term EBIT margin. And therefore, instead of looking at the individual lines of the P&L, I'd suggest we look at the full piece. And we will move all lines of the P&L as it is supposed to be moved.

Okay. And broad brush on this medium-term target in JLRs 8% to 10% EBIT margin, what is the sort of underlying sort of volume growth assumption you all have penciled in for FY '19, FY '20 or medium term? Forget FY '19, FY '20.

Why don't we take this question for the analyst meet because I need to give you the full context of it rather than just give a number to you? We will then be able to give you a more coherent, well thought through and more importantly everything tying up together, which is what I have to give you. Just a number alone would not make much of a sense here because it's got immediate ramifications on model introductions, immediate ramifications on CapEx and how does it all tie up together. So I think you just need to give a little bit of time on this. Suffice it to say, we don't intend to give a guidance in any case. It's more about sharing with you how our thinking is and how we put our plans together.

You are correct. But right now, I mean, from where we sit. Honestly, it's appearing a little unachievable. So if you could give some sort of bridge and how you intend to get there? That would be useful because the context is as you mentioned, the macro is definitely challenging.

I think that part is a straightforward one because it is attributed on 3 things. First is volume growth because keep in mind, this is a high investment business, and therefore, volume growth is a very important part of the puzzle. And one of the reasons why we have stumbled this year is with the kind of external challenges that you see on diesel and others, which are creating the volume growth challenges. And hence, the trouble there. So volume growth is an integral part of our equation. And second is cost efficiency. And these cost efficiencies at a contribution margin level are crucial and they come from 2 directions. One is the kind of model introduction in the premium that we can charge on the innovations that we do. And second, of course, is the tight cost control we need to maintain on our models or modularity as well as the kind of complexity we have in our setup. And third, of course, is the operating leverage where we have to keep a tight leash on our cost -- fixed cost so that whatever volume growth that we get, we are able to plow through as far as operating leverage is concerned. So that's how we intend to look at it. And we should be able to share a more granular plan with you when we are there for the analyst meet.

We will take the next question from the line of Sahil Kedia from Merrill Lynch.

Most questions have been answered. I do have one question. Considering that there is so much uncertainty from a macro and geopolitical and also regulatory where we are hearing of multiple cities also putting restrictions on diesel engine stuff like that. Is it -- is there a rethink on the length of the hedging policy purely from the fact that it becomes that much more difficult to forecast? That would point #1, question 1. And the second, a couple of years ago, there was a lot of talk of platform consolidation helping JLR margins. Now that we are largely through with that, Ken, is it possible for a little bit of color in terms of how it helped the cost structure of the company?

Yes. Fine, let me take the first one and then I will ask Ralf for the second one. As far as, I think, I must correct a misconception here. We are roughly about GBP 26 billion, GBP 25 billion kind of a business size, yes, anywhere in that range. And a business of that size holding on roughly about GBP 20-odd billion of covers is what we maintain. And though we do 5 years out is what we have said before, but the actual volume that we do in that is only some 5% or less than that. The duration of this hedge is only 18 months, yes. Given the duration of 18 months, worst case where you -- keep in mind, we are a growing business. It's not that the business is not delivering volume growth. I would be absolutely with you if you're (inaudible), turning up and saying, we are not able to deliver volume growth. We're delivering volume growths. So an error and estimation of a forecast will take you up by a plus or minus 1, 2 months max, that's the border. It doesn't go beyond that. So therefore -- and we are seeing strong growths in places like China. We're seeing places in other parts of the world, which have gone into a bit of a jam right now, but we are hoping that would clear out at some point in time. But we are still delivering volume growths there as well. So therefore, the hedging per se is not like we are hedging way out of line. We are hedging very much in line and 18 months' hedge for this kind of a business and having coming from another company, I can see the challenges needed for why we need to do this level and if I were more naturally hedged, I wouldn't have to do this level of hedges. But I am not naturally hedged in JLR, and therefore, we will have to get this volatility out of our equation so that we can plan better. So therefore, I believe we are hedged appropriately. We've done the benchmarking with others as well. We are not out of line. If you correct for the fact that we are not naturally hedged, yes. Does it help give a better context to it, Sahil?

Yes, sir.

Yes, Ralf.

And from an overall architecture point of view, yes, we have consolidated the platform strategy and getting to really a very flexible advanced model apps. And we have reduced overall platforms, and nevertheless, achieved higher commonality overall lower cost. But please be aware, Jaguar Land Rover is also advanced, very advanced in this electrification, hybridization and battery electric vehicles. That means that right at the moment, we are already creating new architectures. New architectures for the battery electric vehicles because you have a totally different architecture, you have a totally different package. You need also then for the remaining cars, totally new architectures because, and by the way everybody not only Jaguar Land Rover, everybody need these new architectures. Why? Because they have also to combine the internal combustion engine with the electrification, hybridization for then, as I mentioned, the battery electric vehicles. That's a shift, that's a transformation of the automotive industry and that's quite clear, it's challenging everybody. And to this effect, we are advanced, we are feeling these kinds of elements a little bit earlier.

We will take the next question from the line of Jatin Chawla from Crédit Suisse.

The first question is on, again, just a bit of clarification on the China JLR, CJLR number that you've reported. You've reported $25 million EBIT for the quarter and you said, there was a $45 million grant there. And so 50% of that would mean $22.5 million. So does it mean that the profitability of that business without the grant was very low in the quarter? And when I compare that on a Y-o-Y basis, $35 million versus a number even adjusted for tax of, let's say, $5 million, $7 million, there is a significant drop. Anything I'm missing here?

Yes. Let me pass it to Ken who'll just give a context to it. I think he will give a better more detail. I think we must also keep in mind the model year changes that are there. It's one of the most profitable businesses from that perspective. So we are not unduly concerned about the numbers coming from there. But why don't I hand it over to Ken to give it a bit more color.

Sure. Thanks, Balaji. Just the point of clarification. The $45 million local market incentive that I referred to earlier came to Jaguar Land Rover, not CJLR. So that figure is not in the CJLR numbers. And whilst, yes, the CJLR profit for the quarter is lower in the fullness of its calendar year, we're actually very pleased with its results and with the overall development of the business with the new models that we're launching. We are looking forward to its continued development in 2018.

And I may just add. New models, we have now also launched the XE long wheelbase after the XF long wheelbase so that we are better in the market. And in addition, we deliver outstanding high quality out of these plants. And by the way, we have just launched the new engine plant in China.

Just a quick clarification on this. Does $45 million in JLR gets accounted for in the top line itself?

Yes.

Second question is on the India business where on the M&HCV side, we've seen that you made a lot of efforts on reaching out to your customers as well as plugging the white spaces, but still the market share numbers are flattish on a Y-o-Y basis. What is more that you need to do to improve share there?

I'm going to take this question. Thanks a lot. As this has already been mentioned in part of the presentation that we have still been constrained as far as our operational capacity is concerned. It's against a strong market demand or as it was told by Balaji in the presentation, the tailwind, which we have enjoyed after a long period of headwinds in the Indian markets, we're in the process to debottleneck it. And we have seen significant ramp ups across the entire product range. But since the recovery, it was largely based on a range of new products launched, and as we have seen, at the same point of time, a shift from the previous, those assumptions to a rated payload assumption that was a very strong demand for a couple of new products, just to mention the [indiscernible] 3718 replacing the 25-tonned product solutions in the past or then the 4923. And this is one of the reasons why we have not been able to fully capture the market potential and where we actually were behind our own expiration as far as the volume was concerned. But as we are debottlenecking the system, so from building a strategic supplier base, we do see upside potential on the demand side, which we are going to capture on the back of the product and the high acceptance of our new engine technology in the market.

One last clarification. On the big chart that you give, how do you define product cost? Is it the variable cost and would things like commodity changes or vendor rationalization savings, would all of that go in there?

That's correct.

Yes, that's correct. And just a quick clarification, the $45 million of China market incentive actually is not in the revenue. It's in the other income on the Jaguar Land Rover income statement.

We will take the next question from the line of Amyn Pirani from Deutsche Bank.

My question is on the overall variable marketing expenditure at JLR now. The way I look at it, there are 2 aspects to it. One is the additional incentives for Range Rover, Range Rover Sport, which will most likely come down or reverse in the coming quarters. But at the same time, we are also seeing increased pricing pressures on the existing portfolio. So could you help us understand what is happening in the various markets with regard to the relatively newer models, which is Discovery and Velar as well as those models, which are facing some fatigue like the Evoque and the Discovery Sport so that we can understand how this metric could move in the coming quarters?

Ken, you take it?

Yes. Thanks, Ralf. I think, overall, I don't want to get specific on specific levels of variable marketing for specific models. The general pattern that you allude to is the general pattern we would normally see, which is older models would tend to have higher variable marketing and newer models would tend to have lower marketing spend. And in a run-out phase, like on the, you're right on the '17 Model Year Range Rover that would attract somewhat higher variable marketing ahead of the launch of the new model, I think overall what I'd say is, therefore, I don't particularly want to give an outlook here on incentive spending other than the general trend that I've described would be one that I would expect to see. But the other factor that I've already alluded to is we do continue to see relatively more challenging market conditions in the U.K. and U.S. and Europe and that's the underlying theme of what's driving the marketing expense. And I think, therefore, we should look to see some of those trends continuing. But that, again, is something more for discussion at the Investor Day, perhaps, in terms of our outlook for the following year.

And just to close that point one of the -- if you look at the call out that we are doing on Q4 being better than Q3 would -- definitely one of these would also include wherever possible VME optimizations as well. So that would be very much part of the play that is there.

We will take the next question from the line of Jinesh Gandhi from Motilal Oswal Securities.

I've a couple of questions. First on number side. In JLR, we have seen Q-o-Q decline in realization. Is it just run out of Range Rover, Range Rover Sport? Or is there anything else?

Ken, would you want to pick it up?

Can you repeat it again? I hardly could hear it.

Realization in JLR lobe.

Okay.

Go for it, Jinesh.

Yes. JLR realization is a decline of 3% Q-o-Q. Is it just because of Range Rover, Range Rover Sport? Or is there anything else to that?

No, I think that's perhaps -- the biggest causal factor between Q2 and Q3 is the weaker product mix that we've seen in Q3. And that factor -- the model runout is the biggest single driver behind that.

Okay. And how would this net pricing compare? If this quarter is 6.9% of revenues impact, how it would be in 2Q?

Yes. In Q2, somewhat lower, more around about 6%.

Okay, okay. That largely explains that. Secondly, tax rate in JLR has been almost [53%]. Is there any one-off there? Or how should one read into that?

I think we've called this out. If you look at the press release, we've called it out in our effective tax rate. You would recollect that the -- there is a tax rate reduction both in U.K. and in the U.S. and that is, therefore -- we have to, therefore, adjust our deferred tax assets, which we had originally assumed that we'll get it at the higher rate, that's now coming down at a lower rate, which means your effective tax rate for the in-quarter goes up to that extent. So that's the biggest one-off that you see.

Okay, okay. So that adjustment has been largely done or we will see this recurring in coming quarters?

The deferred tax asset has been restated to this level. So it's a onetime correction. Correct me if I'm wrong, Ken, in case I've already...

No, that's correct, Balaji.

Yes.

Okay. And lastly, with respect to our FY '18 -- JLR FY '18 retail volumes, we were expecting about 10% growth. Are we still expecting that kind of a growth because that in turn will mean very strong growth for fourth quarter?

No, I wouldn't want to -- the reason why we've specifically called out, I wouldn't want to hold on to a particular number at this point in time because it's a quite -- we are dealing with a pretty tumultuous times as far as the market conditions are concerned. But we are very clearly signaling that Q4 will be better than Q3, but wouldn't want to hold mine as to a particular number because we are dealing with a -- quite a moving piece here.

We will take the next question from the line of Kumar Rakesh from BNP Paribas.

Balaji, my first question was to you related to JLR. We see that you have taken the EBIT margin guidance range of your predecessor over the medium term. Now at that time when this was introduced, since then incrementally many new headwinds have come in, in terms of accelerated diesel reduction in the portfolio, accelerated adoption of EV, which itself is a margin headwind and much higher investments, which we are seeing, which is now showing up in much higher depreciation as well. So with these incremental challenges, which have come up since the time this margin guidance was introduced, how do you plan to address these heavy headwinds coming your way to achieve this 8% to 10% guidance? And this, as earlier participant was also mentioning that it looks like unachievable right now. That's my first question.

Thanks, Kumar. I think the point on 8% to 10% being a significant number that is out there and how we are going to achieve it is what we are trying to tease out with our comment in saying that it will be a combination of 3 factors. And I think new models play a very, very important role in this. And therefore, they are -- as long as they're margin-accretive in the renovations, typically you are able to pull that off. And that's a key first -- to our first step in this. I think an area where we haven't delivered the best of results there is operating leverage. And therefore, that's an area we'll be looking at very, very closely. And if you look at the -- just to compare and contrast, if you look at the Tata Motors stand-alone results, you're seeing one of the significant improvement journey that is coming out of operating leverage. And given the business size compared to what it was when it -- very, very small earlier on to now a EUR 25 billion business, it does give you the ability to start looking at this lever as well. But I -- what I would suggest is that we will be able to tease this out in greater detail when you come for the annual analyst meet because you are right, there are multiple challenges we are currently dealing with. And therefore, we need to ensure that we are factoring those in and make our choices very clearly as we navigate this turbulence. But the fact is we've got 2 fabulous brands in Jaguar and Land Rover. And normally in tumultuous times, a very strong brand helps. And the fact that you've got really 2 strong brands gives you the ability to then start premiumizing this business and it's a premium car portfolio as well. So we are, therefore -- we are fully cognizant of this target. We are fully cognizant of the fact that we need to give the road map for this. And you should hear start getting better plans on this being shared with you when you come for the Analyst Day.

That's helpful. Sure, we look forward to it. Given that we also have Chandra on the call, I had one question for him. Are you considering rationalizing long list of subsidiaries, which Tata Motors currently has? Especially given that some of them are loss-making and not exactly in synergy with core auto business?

Yes, Chandra has just stepped out. As far as subsidiaries here, I can answer that. I can take this question. Very clearly, in focus and something that we will have a very, very strategic road map for each of these subsidiaries and a plan on how they'll deliver value-creating growth or they are better with someone else. So therefore, that's a plan that we will be executing. And we are going through the plans one by one as we speak. And therefore, that is something that you should hear a more comprehensive plan on this in the coming days.

So you'll have a blueprint on what you would like to keep and what is the procedure.

Exactly. We already have the blueprint. It's a question of us now getting that aligned internally, and more importantly, execute it once the board gives a requisite approval. So we are in advanced stages of putting the blueprint together and you should hear from us once we have that ready.

We will take the next question from the line of Pramod Kumar from Goldman Sachs.

My first question pertains to the diesel exposure. So if you can just help us understand how does our diesel exposure stand at the end of the quarter or probably for the 9-month period or even for the calendar year 2017? Because historically, we always had the highest diesel exposure in the luxury bag. So if you can just provide color on that? And related to that, is there any rethink on the incremental CapEx what you're doing on the new engine lines in the -- especially on the diesel side, on the 3-liter side? So is there any rethink on the CapEx of that?

Ken, maybe you will take it.

I think in terms of diesel, overall, of course, our -- the nature of our products and the market feature that we have is that in the U.K. and in Mainland Europe, the majority of our volume is diesel. However, it's also the case that in the U.S., in China and elsewhere in the world, the majority of our engine sales are petrol. So globally, we do have a measure of balance there. But of course, U.K. and Europe is heavily diesel.

Apologies, I should have been more specific. I was actually referring to Europe there, there's anti-diesel move. What would be our percentage of volumes coming from diesel?

It's a high majority of diesel in Europe. And therefore, with the industry volumes overall being somewhat lower in diesel, that's one reason why we see our sales also down in Europe in the quarter. As far as our investments go, it is the case that we see an important future for diesel as well as for petrol engines. And we see an important future for clean diesel, which all of our diesel engines that we produce are EU6 diesels today. And given the market balance that we've got with U.K. and Europe being majority diesel and the rest of the world being majority petrol, we see a continued need to invest in both clean diesel and clean petrol technology as well as, of course, in plug-in hybrid and battery technology that Ralf already talked about.

Okay.

Maybe I can add something from Europe, we -- as I mentioned, we have a very high percentage of diesel, but the market has leveled out now. So, I guess, in Europe despite the diesel [case] coming out of Europe, I guess, we can stabilize. More critical and by the way, of an issue for us is the U.K. Why? First of all, it is a similar issue concerning diesel and on top of that, we will see from the very 1st of April, an additional diesel tax and nobody knows how this at the end of the day will, let's say, involve or impact the customer choice. Over the last -- if you see the market, the market has fallen now the fourth month in sequence and the market is down by 22% to 30% already, and we see a further market decline. From our side, from a production point of view, we have a flexible process in the production, so we can shift from the one to the other for pricing system. Also, I really would like to make it a highlight. Diesel is necessary in the future and all of our vehicles have decent EU6, EU6x or whatever it is, a, b, c whatever, and we run it with a SCR, so with the latest and highest technology. So that in principle, the NOx issue is not an issue. So is, for instance, also not the particle an issue anymore. And CO2 is by far more, let's say, favorable within the diesel and the petrol. So overall, please don't, let's say, bring diesel down. It's a very, very interesting engine to bridge under reliability, electrification and battery electric vehicles coming up further.

Yes. Second question pertains to the CapEx with JLR. This quarter, we have done net -- practically, net debt at JLR though in the marginal number and fourth quarter, it may reverse out. But how do you see the [FCF] situation at JLR for FY '19? And also given in the context that how much of optionality is there really left in the CapEx? Especially given the pressure on diesel and the increasing competition on the stagnating growth when new launches become more relevant. At the same time, we need to continue to invest on hybrid and EV. So how should one look at FY '19 at JLR levels in terms of both free cash flow and the CapEx?

Yes. I think -- Pramod, let me take that. I think I've already covered that saying that we're going to spend time giving you the more fuller story in its entirety, but that requires time. We need to spend a quality time to explain the whole piece and then the story needs to be told together. So I would suggest you, as far as '19 is concerned, it is a -- we'll need to wait for that period of time before we can give it you. I'd rather do a proper job of that then to give a number on the fly, yes? But I think what I would really draw your attention is to the comments that we have made explicitly saying that we are keen for cash-accretive growth everywhere in the business, and therefore, within that, we will need to see this piece as well. So we have stayed committed to the investment. At the same time, we are committed to cash flows, both will have to be done. And what we are going to explain to you, how we intend to do that.

We will take the next question from the line of Hitesh Goel from Kotak Securities.

Sir, my first question is related to this, again the associate income in China. You said that there's been a ramp-up in the new launches because of which this has happened and in the Q-on-Q, there's a huge drop in the income. So is it related to the genuine increase in the precision expenses and also the onetime cost that could have come in because of starting of the Indian plant? So can you give more clarity on this?

Ken, would you want to take this call.

I actually felt that Balaji had answered the question relatively fully already. Overall, yes, the results of the JV has ebbed and flowed quarter-by-quarter related to launch costs and deliveries in the particular quarter. But for the full calendar year, we're actually very pleased with the performance of the joint venture and its level of operating profitability. And as Ralf mentioned, we have the XE long wheelbase launching now and, therefore, gives us another product in the China marketplace to move forward with in 2019.

Okay. Sir, also on the second -- can you give us the variable marketing expense as a percentage of sales for the second quarter. And if you can provide it for the last 4 quarters too -- for us to do -- get some sense on how these variables incentives are moving, would be very helpful.

I think I again answered that question earlier saying that we don’t want to get drawn into individual lines. We have -- I think to ensure that we give you reasonable sense of where the business is, is why we explicitly called out Q4 is expected to be stronger. And I think that's where we'd have to leave it at this point in time.

Okay. Sir, my final question is stand-alone operations. You have written in your PPT that the passenger vehicle business is -- you expect it to break even. Is it at the EBITDA level or PBT level? Can you give us some sense? And what volume should we look at the -- in the PV business, so that it would break even. So then what should we watch out for, basically?

I think the -- when we talk about breakeven, it is really breakeven, it's at PBT level, what is the time we need to take to break even. And these are capital intensive business, so interest is also. We are a borrowing company. And therefore, we need to take interest also into the equation then. So it is at the PBT breakeven. It's our plan to get there. And of course, teams are working to see how early we can get there, which is exactly what the Chairman called out as well. So rest assured that, that is agenda, which is extremely crucial, and Guenter just referred to how do you win in PV sustainably. And so you will notice that we are all hands on the pump as far as that is concerned.

We will take the next question from the line of Saurabh Kumar from JPMorgan.

Sir, both my questions are on the India business. First of all, congratulations for that turnaround being achieved. So this guidance of 6% to 8% which you've given for the India business EBIT, I'm guessing this assumes that the PV business breaks even. So that's first. And second is this debt of INR 18,000 crores, can you just lay a target as to where you want this to go over the next 2 years?

When we move the business from where we are today to get to a 6% to 8%, definitely PV also has to play a part. It can't be only on CV alone. And therefore, how soon they get to breakeven is the challenge that the teams are currently grappling with. And again, we'll be able to share a better plan for it when you come for the Analyst Meet Day. As far as the debt itself is concerned, our net automotive debt to equity is quite all right. It's just that we are not happy with the level of debt. Therefore, we would love to generate cash and then pay down the debt. And therefore, we will look at every area of investment, every -- be it CapEx or subsidiaries or whatever else that may be there to ensure that we generate the right levels of cash in the business and pay down the debt. And therefore, we've more of -- it's not about are we uncomfortable with the level of debt. It is more like we should be generating cash as a business and pay down the debt. That's how we would love to do it.

Okay, sir. Sir, just one final clarification. This 6% to 8% assumes no contribution at EBIT level from PBT? Is that understanding correct? Or it does?

I lost your question. Can you repeat it?

6% to 8% EBIT target, which you've given. Does this -- I mean, does it factor in any contribution from PV business at EBIT level? Or no?

Let's look at it differently. Say there's an X amount of EBIT we make, and there's an X amount of losses the PV business makes. So for us to improve from current to 6% to 8%, PV will have to improve, CV will have to improve, and that's how it will get to that place. And as far as individually the PV business is concerned, they have a very clear mandate that they have to get to breakeven as soon as possible. And that's the plans that they're currently drawing out, which we can share better at a slightly later time once we are ready with the plan. So they have an equally important contribution to make as anyone else into delivering that 6% to 8%. Hope that helps.

We will take the next question from the line of Chinmay Gandre from Future Generali.

Sir, just one clarification. With respect to the JLR P&L, depreciation, which is roughly GBP 546 million. So it does not have any one-off or anything -- I mean, going ahead more or less this kind of depreciation would repeat?

Depreciation is very difficult to get a one-off. So it is on the line.

We will take the next question from the line of Priya Ranjan [H.] from Systematix Shares & Stocks.

My question is related to both...

Speak a bit louder, please. We're missing -- we're losing you.

Yes. Is it audible now?

Yes.

So my question related to mostly India business. So on the CV side, we have been seeing that continuously, I mean, despite all the market share talks and all, we have been continuously losing even in tipper side, and -- although the demand for tippers, et cetera, is very high. And the second part, we are talking about leading or winning in BS-VI. But what we have seen in BS-IV, the global player like Daimler BharatBenz has actually gained in terms of sales at the expense of domestic players. So how do you look at this?

Without giving any comment on the competition. But let's assume for a second, since we have the same technology, namely SCR, for the higher displacement of the commercial vehicle engines, whatever the gain of the competition has been, it was certainly not just because of the engine technology because there is no difference between Tata Motors as a global player and global technology applied. As far as the tippers are concerned, (inaudible) what I said earlier, we have significantly been ramping up the volumes, in particular, on some of the models I have mentioned. The market demand would have been even stronger than our production capacity. That's the reason why we had to take certain choices as far as the overall demand structure in M&HCV was concerned. And amongst other choices was the question not only which kind of model do we produce but also what kind of customer do we serve, the cargo segment or the construct segment. That's the reason why you are possibly not seeing in all of the segments the same growth as we overperformed it in the third quarter.

And just on, in -- even in multi-axle side, we have seen -- we have gained significant share in 3718, but we have lost in terms of 2518 or 3118. So is it more related to the production issue in both the models? And even in the tractor-trailer side, we have seen some kind of market share losses, despite gaining in 4923.

I don't like to get lost in the discussion of line items as far as our overall sales statistic is concerned. But as I have just mentioned, if you have a constrained operations, constrained production, you have to make a call, and you make the call according to the way you actually see the current market priority, with effectively the priorities of your customers and adjust the capacity also in line with the capacity availability at the same point of time. So therefore, all of the -- as you would most probably call it a deviation sort of from your expectations, have been very conscious calls on the basis of constraints across the different products and for different reasons.

And one thing on the production of Nexon. I mean, are we fully aligned with the market demand? Or we need to do more in terms of production for Nexon.

We can do more. Let's take it from the positive side. The market demand is very strong. And we were told to ramp up our capacity in order to keep up with the increasing market demand as the visibility of the product in the market has improved. And we see an increase of showroom traffic and a much higher conversion rate in our showrooms.

We will take the next question from the line of Avi Hoddes from Sandbar Asset Management.

A couple of questions relating back to Tiago. First, could you give us some color as to roughly what percentage of the GBP 5 billion capitalized R&D on the balance sheet pertains to diesel technology? And then of the GBP 2 billion, say, R&D that you're spending in JLR at the moment, how much of that relates to diesel technology still?

Ken, would you want to take that question?

I'll take it, but only to, perhaps, say, I think, that's getting into a level of detail that's difficult to address on this call and maybe one I'd push forward into a broader discussion in June when we have our Investor Day.

We will take the last question from the line of [Shailendra Mundra], individual investor.

I just wanted to make a comment and perhaps get some response on the marketing side of the journey of JLR. I believe that JLR is -- both Jaguar and Land Rover are iconic brands. And you have been producing great products. And while there is a requirement -- there is a need for continuing the renewable of the portfolio, I think you already have great products and, particularly, congratulations to the team for winning the World Car of the Year Award for Velar last year, and I hope you'll win it again this year. So my comment is, let's have a very strong -- a lot of discussion on the marketing side, the discussion is -- has been dominated by the financials, the hedging costs, the production, the design, the investments, but we haven't spoken much about marketing. And I believe the marketing -- what Al Ries and Jack Trout have said, "Marketing is a battle of minds." We already have great products. What are we doing to win in the marketplace? And I suggest that in every conference call, in every analyst presentation, we present the most important KPI for any consumer product brand, which is the market share. As long as we are winning and gaining market shares, we are doing fine. If there are headwinds for everybody, diesel headwinds are for every diesel car maker, are we still winning? And I would humbly suggest that Tata Motors and JLR should have a very ambitious target of becoming a leading luxury car brand player in the world. We should gain market shares in front of Mercedes and BMW and Audi. And I would like to see slow and steady rise in our market share. We should have very, very ambitious goal for this, and we should not be apologetic about market conditions, about exchange rates, about not having brands or not having products or having white spaces and all. These are all excuses. I believe we should have very strong commitment to gain market share. And I hope as an investor, I'll see that in next 3 years.

Thank you, [Shailendra]. It wasn't just a comment. I agree with your statements, by the way. Yes, Jaguar Land Rover really runs the 2 most iconic brands in the industry. And so we really go from a quantitative to a qualitative sales and marketing operation and growing also -- your idea to grow only market share is right. But it's for me not only market share, but it's a profitable sustainable growth. That means also next to, let's say, poor volume, we have to see the profitability, which goes with it. Now we're absolute on this trend to reduce this one-dimensional volume and price equation and really do by far more for the brand health, as you requested. And I can only agree, in the premium business, brand is everything and would become even more important the closer the vehicles are going to come from the competition.

And I agree that we should not blindly follow market share. It should be profitable growth. However, I'm requesting that we present market share numbers for most important, maybe not for every product, but at least the most important products so that we can -- everybody within the Tata Motors and JLR team and outside, they can see the progress. And also, I suggest that don't forget to use digital marketing. We are a global company, we have limited resources, but digital marketing is becoming very, very important tool to become a big player in the consumer minds.

You're absolutely right, and we absolutely agree with your statement.

Due to time constraints, that was the last question. I now hand the conference over to Mr. Balaji for closing comments.

Yes. So thank you. I think, firstly, really appreciate the in-depth questions that came our way. We hope we have been able to answer it to your satisfaction. And any further questions, clarifications you require, both the teams at the Investor Relations in Tata Motors and JLR will be more than happy to assist you on this. And look forward to seeing you all in the coming days. And most importantly, look forward to seeing you all on the Analyst Days in both here in Bombay and in -- both here in India and in U.K. Location, we'll confirm shortly. Thank you, and all of you have a good day. Take care.

Thank you. Take care.

Thank you, everybody. Bye.

Ladies and gentlemen, on behalf of Edelweiss Securities, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.