Tata Motors Ltd (TTM) 2019 Q2 法說會逐字稿

Ladies and gentlemen, good day, and welcome to Tata Motors' earnings conference call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Yogesh Aggarwal. Thank you, and over to you, sir.

Thank you, Aman. Good evening, everyone. On behalf of HSBC Securities, I welcome you all for the Tata Motors quarterly results conference call. Very happy to introduce the Tata management team. Today we have with us Mr. Guenter Butschek, MD and CEO; Dr. Ralf Speth, CEO, JLR; Mr. PB Balaji, group CFO; and Mr. Ken Gregor, CFO, JLR; along with members of the Investor Relations team. Thanks again to the management for taking out time today for the call. We will start the session with some commentary from the management, followed by Q&A. Over to you, Balaji.

Yes, thanks, Yogesh. Good evening, all of you, and firstly, thanks for attending this call. What we have tried to do today is that we have given you the investor deck quite early on. And based on popular requests that we don't cover all the slides, we only talk briefly about the things you want to highlight, I'm not going to go through all the slides. But I will skip to the slides that are going to have relevance for this call, that we would like to talk about a bit and highlight and have more time for Q&A. So that's the broad plan.

So what I'll try to do is, in the slides, I'll refer to the page number, so that you can quickly skip to that particular number. So with that, let me move to the Safe Harbor statement, that is Slide 2. Nothing different here, barring -- drawing your attention to an accounting change on IAS 20 -- Ind AS 20, which you can read at leisure. It's basically a, based on the institute statement on how grants are to be accounted. We have followed that, so nothing -- otherwise, nothing there.

Moving on to Slide 3, which is the products and other developments. A very, very action-packed quarter for both JLR and Tata Motors. And you see the products that are new and upcoming products that you see up there. In particular, draw your attention to E-PACE that is launched in China in September and as well as some of the new limited editions, which create a fair amount of buzz in the Indian market. We'll talk about that later as a well.

The other big developments for the quarter has been the launch of Projects Charge and Accelerate, which we're going to spend quite a bit of time on. Ken will walk us through that during the quarter update today, as well as inauguration of the Slovakia plant, which happened last week. So an action-packed quarter, again, this quarter.

Moving on to Slide 4, which is the market conditions. I think it is fair to characterize the market conditions as tough. And in particular, the unanticipated decline in China took us by surprise, as did the market as well. And while the situation in the other parts of the world, be it in U.K. or in Europe continued to be what it was in the previous periods, China has been a surprise element for us this quarter. And India, as far as Q2 is concerned, continued to motor along, and I think demand continues to be strong on the Indian business there. So in this kind of condition, I think performance has been impacted by this conditions in the market.

Moving on to Slide 5. This is how our P&L turned out, with a revenue of INR 72,000 crores and an EBIT of 1.7% and an EBITDA of 10%, is what we finally delivered. A mix of 2 stories here, where in Tata Motors standalone, the growth as well as the EBIT motoring along well, and the challenges in the market did come through as far as JLR is concerned. So that is, be it on the EBIT line, be it on the turnover line as well.

So let me move on to the Slide #6, it's known to you, so you can read it at leisure, what are the contributors of growth so let's skip this slide. Slide 7 is also a similar one, just an EBIT waterfall, where that monies came from and where did monies go out of. We'll skip this as well.

As far as 8, Slide #8 on the revenue growth, it's an 8% growth for the half year, and an EBIT of 0.5%. And the FCF outflow of INR 23,000 crores is probably the biggest line item here for us to keep an eye on. Yes, so let me now hand it over to Ken to talk about the challenges and the performance of JLR, moving on to Slide 11. Ken, over to you.

Thanks, Balaji, and good afternoon to everyone on the call. Thanks for taking the time to join us. I am going to cover the results for the quarter. We're obviously disappointed with that because there's a loss of GBP 90 million in the quarter. I'll explain that, and I'll also talk about the revised outlook that we have for the full year. But the most important thing I want to do is come to the decisive actions that we're taking in order to turn around that performance, which I'll conclude with.

So those are the 3 parts of my presentation. Like Balaji said, I won't talk to every slide, because you have the full deck. I'll just focus on the ones that help guide us through that path.

Slide 11 has the highlights of the quarter. It was a loss of GBP 90 million on the back of seeing lower sales, which I'll come back to. A warranty action included within the numbers of just under GBP 40 million. Higher depreciation, amortization has obviously continued to run through our income statement, based on the new models that we're introducing and some startup costs from our new manufacturing plants, all of that partially offset by reductions in other costs, but not big enough to avoid a loss for the quarter. The first half numbers then build on that. So it's a lower loss than we had in Q1, but still a loss, and you can see them, how the Half 1 numbers play out.

The next slide I was going to pause on was Slide 13, which gives you a picture of the overall retail sales development in the quarter. Really, the biggest feature in the quarter driving the overall sales results to be down 13% to 130,000 units was the sales performance in China, where we're very much seeing weaker consumer confidence on the back of the tariff changes and the trade tensions that's taking place and the slower economic growth that's taking place in China having a disproportionate effect on our sales result, down over 40% in the quarter from a year-to-year perspective. And similarly that impacting the wholesale volume that's numbered on the chart, and therefore, that provides the financial results for the quarter.

Slide 15 talks to some of the movements in the quarter. Here, you can see the comparison versus a year ago. You can see the impact of the wholesale volume being down 23,000 units year-on-year and the impact of modestly weaker net pricing. You could see the impact of the warranty action I talked about, and the extra plant costs that we have, by virtue of the fact that we now have Graz producing E-PACE and I-PACE, and we have Slovakia just in its launch phase right now, which is a good thing.

There are cost actions and other items giving us almost GBP 100 million of year-on-year improvement, however being offset by the higher depreciation and amortization cost. And you can see that foreign exchange was about flat year-to-year.

Slide 17 was the next slide I was going to touch on that talks to the cash outflow, which for the quarter was GBP 620 (sic) [GBP 624] million. Working capital being about flat in the quarter, slightly negative due to inventory being higher, but the big driver being, obviously, the loss that we had and the roughly GBP 1 billion of investment spending that we had in the quarter.

Just moving on to a mixture of the other 2 points, that was the quarter. And what I really then wanted to talk to was Slide 19, that starts to talk about what are we doing about the business results we face? We have launched a turnaround and transformation plan in order to address the aspects that are causing the weak business results that we see. Clearly, we're needing to respond to more challenging market conditions. And we understand that actually, we may continue to see demand more muted than we would wish, due to, whether it's Brexit, whether it's diesel uncertainty and Euro regulatory issues, whether it's the China market continuing to be uncertain due to trade wars and tariff changes, those things. And therefore, our plans need to be shaped to take account of that more challenging market environment.

We clearly still want to grow our sales and rejuvenate our sales portfolio, sales performance, and leverage the strong portfolio we had and resume profitable growth in China. We'll talk a bit about that.

We absolutely have to improve our cash flow and profitability. I'll talk about Project Charge. And we have to fix deeper, longer-term structural issues, Project Accelerate that we've talked about before.

Just taking pieces in turn. The really good thing about our business, Slide 20, is we have a very strong model portfolio that's fresh and that we can leverage. And we have some other models in the pipeline, such as the new Defender, which we've hinted at coming now, with the spy shots that made its way into the media somehow, and a couple of other models in our pipeline. And we have refreshes of our existing car lines planned in the normal way through the life cycle of those models. So the great thing is we have a very exciting pipeline of models as well as fresh new models, from which we can leverage, and we will.

Slide 21 talks to China. Clearly, China is fundamental to the Jaguar Land Rover business, and we need to resume profitable growth in China. There's definitely challenges around consumer confidence, around dealer profitability levels and dealer stock levels, that we have experienced and some of our competitors also experienced. However, at the same time, there is still continuing premium segment growth, albeit slower than we've seen in the past, and there is the lower import duty for EU U.K. cars into China than we saw in the past and also lower than U.S. -- imports from the U.S.

So we are working in close collaboration with our retailer network to ensure a healthy development for the future, for their businesses and for our businesses, in particular to balance supply and demand in response to the market conditions and avoid otherwise further escalating incentive levels.

We localized the fifth Jaguar Land Rover vehicle to be built in China, the E-PACE. So that's just in the phase of ramp-up as we speak. And we have commitment to continue to collaborate with our partners as part of our strategy in China. And of course, we're going to continue to leverage and build this strength of both brands in China to support a pull strategy, which is what we really wish to aim for, because that supports higher transaction prices and that supports higher margins for both Jaguar and Land Rover and its -- and our dealer partners.

Just moving on. Talked about product portfolio, I talked about China. Project Charge is very important for our future. Clearly, the losses that we're creating is not something that we like or can sustain. And therefore, we've launched the project to drive a 2- to 3-year turnaround plan to improve profitability and cash flows, focused across the entire business, with a very high-level steering committee, together with representation of the Jaguar Land Rover plc board members in the shape of Balaji and Hanne Sorensen, as well as Ralf and myself, and my other executive committee members, supported by consultants from Boston Consulting Group and an internal team that's mobilized with functional representatives from all across the business, meeting every 2 weeks, with the SteerCo making fast decisions in order to drive cash and cost improvements.

We've set ourselves some ambitious targets for that, to deliver GBP 2.5 billion of cost, cash and profit improvements through the end of FY '20. And just to give you a shape of that, because I know you'll be thinking, well, how are you -- that's a massive number, how are you going to achieve that? And it's a good question. We are revising down our plans on investment, while still seeking to protect the core of our product portfolio, because that's our lifeblood for the future. This business is about having fantastic products that our customers will love for life. That said, we're seeking to reduce the investment from the previous level that we were running at, roughly GBP 4.5 billion per annum, to target GBP 4 billion in both this fiscal year and next fiscal year, and thereby reduce what otherwise would be the cash flow by about a GBP 1 billion.

In the second half of FY '19, we want to drive over GBP 0.5 billion of inventory and other working capital improvements. And going forward, we are seeking to drive GBP 1 billion of profit improvements and cost reductions. So those are sizable targets, but that's what we're mobilizing the business about.

Slide 23 gives you a sense of the scope. And broadly, as you can see on Slide 23, it covers the scope of the entire business, everything from product and programs, to what we do in China to be successful, to IT, tax, treasury, through overheads, admin, sales, volume forecasting, inventory, working capital, everything is part of this approach. That's really what that slide says.

Slide 24 gives some specifics of what we have been doing, as well as reinforcing the targets. We've already commenced reducing the investment spend, which we previously guided would be GBP 4.5 billion for this fiscal year. We're now targeting closer to GBP 4 billion for this fiscal year and for the next fiscal year, and that's in progress. The actions to deliver that are in progress through looking at stopping deferral and non-product spend and looking to alternatives there and reviewing every line of our investment spending.

The working capital actions are underway. And as you would have -- many of you would have read in the press, we've been taking action to cut production, specifically, for example: A 2-week shutdown at Solihull in the second half of October; working a 3-day week at Castle Bromwich. And those actions, of which there will also be more, targeted to reduce inventory and ensure that we balance supply with demand.

Our activities don't just span the industrial side of the business; they also span the commercial side of the business in marketing and selling. So for example, we've already identified and implemented GBP 100 million of savings in fixed marketing and selling costs this fiscal year. And we are, of course, looking at our organizational efficiency and how overall we're designed and what that means for our headcount and employment levels within the business and the employment cost we have within the business, as well as taking the obvious steps you'd expect us to take on things like recruitment freeze, stopping nonessential travel and those sorts of things.

Slide 25 talks to Accelerate, which we've talked to before, but it's really intended to address some of the underlying root causes. And we have installed program leads across the business to create dedicated teams to each of these 3 programs of work, across: Enhancing our sales performance; delivering competitive material and variable cost for our products; and thirdly, by reducing delays in our new model delivery and deliver our customers the highest quality that they demand, and rightly so. And the slide gives some sense of the things that we're working on across those 3 pillars in order to address the root causes for these things and give us -- build on the Project Charge turnaround and transformation activity in order that in the medium to long-term, we also address these factors.

That gives you a sense of what we're doing about the challenge. Just to pull it back to a little bit of the present and how we see the full year, Slide 26 broadly says we do still see the opportunity for stronger sales in the second half of the year compared to the first half of the year, based on the new and refresh models, some of the seasonal factors that help us and subject to us delivering the improvement in China. Those things would give us the opportunity for stronger sales in the second half of the year. However, what we are saying is overall, that would result in sales for the year which should be roughly in line with the sales that we saw last year.

Slide 27 builds on the theme in terms of what do we see the profitability performance, the margin performance of the business in the second half of the year. And with the losses behind us in the first half of the year, we, of course, want to target and are targeting profitability in the second half of the year. However, given the lower volume outlook and the weaker China conditions that we're experiencing, we are now saying that we expect the full year to be about breakeven due to those market and China factors.

On cash flow on Slide 28, what we are saying is that we do continue to target and expect positive cash flow in the second half of the year. In particular, on the working capital side, where as I said, we're targeting over GBP 0.5 billion of working capital improvement and inventory reduction, in particular, in the second half of FY '19. However, given that the full year -- sorry, given that the first half has already been negative to the tune of GBP 2.3 billion, I, therefore, expect the full year to remain negative in overall cash outflows in the full year.

And the final bit of guidance, I've already mentioned, which is within that, we are targeting the investment spending to be closer to GBP 4 billion now than the GBP 4.5 billion that we have been guiding to this point.

So with that, I hope I've covered both the fact that we had a loss in Q2 and we're clearly not happy about it. We see, and we have revised our guidance for the full year based on the lower market environment that we don't like, but we have to face up to and the challenges in China. But I also hope I've given you a sense of the very clear actions that we're taking to turnaround the situation.

And with that, I was going to hand back to Balaji to take us through the balance of the presentation.

Thanks, Ken. Moving on with Tata Motors, I'm on Slide 31, the revenue at 33% growth and an EBIT of 4.5% of revenue. This gives us the confidence, I'll talk about later, to inch up the profitability plan that we are internally working on in the end. This PBT number of INR 150 crores includes one-off charges and foreign currency reval of -- between the INR 2,000 crores to about INR 500 crores -- INR 450 crores. And that needs to be added to the number of the under -- what I was underlying, PBT there. And very happy to see the positive free cash flow for INR 692 crores in the quarter. So that just tells me, clearly, that Turnaround 2.0 is continuing to gain momentum and we intend to drive it that way.

Moving on to Slide 32, just gives you a walk of the PBT number. I will draw your attention to 2 numbers there, which is -- actually, 3 numbers there. One is savings from ImpACT projects giving us almost 440 bps of improvement in profitability. The other one is a number with respect to some of the things that we always keep discussing on in terms of the discounting in the market. Within volume, price, mix, net pricing, commodity impact and savings, that we are actually positive, which means that we are actually stepping up realizations that we are having and covering for costs more than what the inflation is, which is another good feat.

And the last number is the fixed cost number of 3.9%, which just tells you that the controls we are putting in fixed cost to ensure that we're able to deliver the operating leverage that we have. This is an area you would expect to see us continuing the action on, and we will report back at appropriate intervals. So this combination has given us a 360 bps improvement in EBITDA.

Going to the next slide on free cash flows. That is just for information, how the positive free cash flow came from. Basically, investments being fully funded from cash from business.

So I'll probably skip Slide 34, move on to Slide 35, which is the CV business. We're delighted to see the market share continue to increase. We are at 46% now, so the turnaround underway, and a pretty elaborate set of actions on -- implemented, which we shared with you on the Investor Day, be it on customer engagement, be it on service levels, product pipeline, better S&OP process, which is one area which put a lot of challenge for us this quarter, particularly with the regulations changing on axle load and the confusion that got created in terms of the one segment shifting from one to another, pretty nimble management on that front, which we are happy about. And of course, the cost agenda continues to pace on that one.

This meant that -- moving to Slide 36 -- this meant that from a profitability perspective, EBIT at 8.7% and EBITDA is stable. As far as Q2 is concerned, of last year, there is a few one-offs in the base, but we should probably look at Q1 and Q2 together. Because we had such a bad Q1, you also meant that some of the earnings did not get spent in Q1 had to be spend in Q2. So don't -- read it as a H1 number. But more importantly, for the last 3 quarters, the EBITDA has been pretty stable despite enormous step-up in commodity inflation, rupee depreciation as well as other challenges in the market in terms of axle loads, et cetera. So that meant that we had to be really on our toes on ImpACT project savings as well as driving mix harder to hold the EBITDA line. So quite happy with the way we have managed this, and this is something that should continue to improve going forward.

So moving to PV. I think the market share is up 50 bps, which is great news. Particular call out at the #2, being the #2 in the J.D. Power Customer Service Index. We're now -- we were earlier, last year, we were joint #2. This time, we are the only #2, which is good. And market share increase continues at pace. This is the 33rd month we have grown ahead of the market. And the market conditions, particularly this quarter, have been very, very poor for PV, which you are already aware of.

Moving to the next slide, something that all of you have been asking me in terms of how sustainable is the PV turnaround? Happy to report that EBITDA breakeven has been reached and we intend to keep building on this as we go forward. And this has happened despite seriously trying times from the cost side, as well as market conditions side as well.

Probably 39 I will skip. But at this point in time, other than calling out EV deployment is now across multiple cities, and the EESL Phase I production is complete and Phase II has now been activated as well.

Moving to Slide 40, I'll probably stop for a minute on this one, to just share with you our thinking on how we take Turnaround 2.0 and how we intend to push it forward. It starts with ensuring volume growth. We want to ensure volume growth ahead of industry. And we also want to ensure pricing is ahead of net inflation with secure mix. These are the 2 things which we want to design the business on. And thereafter, we want to -- we're quite, I mean, absolutely, clearly, focused on reducing breakevens through aggressive savings. And when we do that, we will also ensure that we want to drive process efficiencies to ensure working capital cycles are well controlled. This is the fourth intervention that we have made. And when we do this, we also want to be sure that we are spending CapEx prudently and proactively at the same time in order to ensure that we are investing for growth going forward. And this alone is not enough. We will have to -- whatever plans we put in place, we have to stress test this plan to deliver value even in downtimes -- downturns. This is the way we are thinking about this business, and you'll find all our interventions are fundamentally falling within this -- these buckets, in order to ensure that we deliver value even during trying times. So this is a new for Tata Motors, and that's something that we are very keen, we implement with gusto in the coming years as well.

Moving on to slide -- I'll probably skip this slide on other developments, other than saying -- no, actually, let me skip and we'll go forward, yes? Let's move to Tata Motors Finance. Maybe just 2 comments I'll make on that. Despite challenges on liquidity, this business continues to motor along pretty well for us. Disbursement is up, shares -- market share is up, ROE is up, GNPA is down. So everything about is going in the right track. So Tata Motors is now infusing INR 300 crores of equity in October, and we'll probably do another INR 300 crores of equity during the course of this quarter. And that is to ensure that we bolster the balance sheet of Tata Motors Finance, which will help us gear up and also finance the commercial vehicle business. Then we have been waiting for this turnaround in the Tata Motors Finance performance to ensure that we are -- they earn the right to grow the way we want them to. Happy to report that has happened and therefore, we are now going all in as far as Tata Motors Finance is concerned.

Maybe take -- let me take net debt out and probably go on to Slide 45 and 46. Yes, net debt has -- net auto debt has increased by INR 8,000-odd crores from June of this year, fundamentally due to cash flows -- cash outflow in JLR, which we talked about. But I would reassure you that the liquidities are adequate and the debt maturities are very well spread out. We will have another GBP 1 billion of loan that we have signed in September and which we have drawn down in October. And with these 2 together, the pro forma liquidity of JLR stands at GBP 5.3 billion at this point in time and Tata Motors is INR 4,800-odd crores. So there is adequate liquidity at this point in time. And with our interventions, both Charge and Turnaround 2.0 are focusing on a very strong cash recovery in the second half and going forward. And on top of that is our Fit for Future actions as well. So we believe we are well placed as far as liquidity is concerned in addressing the challenges of the market that are there in front of us.

So let me then move on to the outlook slide. Maybe I'll stop a minute for Slide 47, so that you can admire the new Harrier that is there, as well as I-PACE that you have in front of you, cars that you would die for, and let me move on to the outlook.

As far as the global market conditions, we have talked at length. I think it will remain challenging and China being a significant concern for us. So therefore, that's a reality. And, therefore, the response to that from the JLR side is ensure Project Charge is launched, because the demand will be uncertain means that we need to take cost out, cash out, but at the same time, focus on growth. So -- but the unfortunate part is as far as the China slowdown has resulted in a disappointing FY '19 for JLR for us. And therefore, while we expect to see an improved performance in H2 on all matters, be it sales or profitability or free cash flows, firstly, disappointed that we are just having flat growth rates and EBIT breakeven only, despite -- unlike the 4% that we had originally planned for. Not able to deliver that is disappointing. But the plans are robust and the plans are granular. The plans are owned by the business and driven with a lot of intensity. And therefore, this 2 -- the target of GBP 2.5 billion of profit opportunities and cash opportunities over the next 18 months is absolutely crucial for us, which we will be reporting back every quarter.

The investment plan, and we are assuring our intentions also, already confirm that we have calibrated our CapEx down to GBP 4 billion in the, this year and next. And then thereafter 11% to 13% thereafter. That is a revision in the investment plan. But as far as next year onwards is concerned, this planning for EBIT 4% to 7% is a 1-year observation and thereafter, we will be, intend to get back into the road map that we have laid out.

Coming to India. Indian business, while Q2 has been good for us, we are cautiously optimistic on CV coming in the near future. And as far as PV is concerned, the near -- what has happened in Q2 in terms of market declines are a cause for concern. As I look immediately forward, be it the liquidity in the market, the inflation and interest rate risks in the market and the rupee depreciation, does leave us concerned on that front. But from our [side], we think that's external. Let's do all that we can to ensure that we drive all around performance to Turnaround 2.0, that's one. And given our delivery of 4.5% for the second quarter, we believe we are on track. We could improve this further, because the market conditions at this point in time do not warrant us to take anything different from that. And for the medium to long term, it remains as it is. So that's, that's where we are. We are now -- I've overrun by about 5 minutes to my plan. So let me know hand it over to you, back to Q&A.

(Operator Instructions) The first question is from the line of Chirag Shah from Edelweiss Securities.

Sir, I had 1 question on the CapEx for JLR. Frankly, I was expecting a slightly larger cut in the CapEx outlook. If you can help us understand that in FY '20, when large -- when there will be no major growth CapEx, what other area that we are likely to spend this GBP 4 billion?

Ken, would you like to take it?

For sure. We have -- clearly, if I just talk about the areas that we're spending in, as I said at the beginning, yes, we're reducing the CapEx spend compared to what we would otherwise have been spending, planning to spend. But we are still committed to delivering fantastic products that our customers love for life. And in that respect, we have got a model pipeline that has got more new models coming, in addition to the ones we have already launched. We have refreshes of those models coming and we have electrification plans and powertrain plans across all of our model lineup, which are clearly important for the future. And those -- those plans broadly drive that GBP 4 billion of spending, including in FY '20, roughly split. It's a very rough split, roughly split half and half between engineering and the physical tools, equipment to infrastructure required to support those new models and facilitization.

And 1 last, 1 question on this demand in Europe as a whole, including U.K. Anti-dieselization sentiment seems to there for some more time. So how are we looking to handle that, because we have a very big exposure of diesel portfolio over there?

Yes, I mean, on the positive side, the vast majority of our customers are still choosing our diesel engines in the U.K. and Europe, because of the fact that they offer performance as clean as petrol, but have 25% more fuel economy. So from the first point of view in terms of what we're doing, it's continued to ensure that our customers understand that, and potential consumers, understand that those engines are so clean and offer fuel economy better than petrol engines. And at the same time, of course, we work with governments and regulators to ensure that those messages get across in the marketplace. And thirdly, of course, to the extent that we need to react, the good thing is that we do have a certain amount of flexibility across powertrain, in terms of our model lineup, given our engine manufacturing facility in the U.K. and mix of powertrain between diesel and petrol, if consumer demands do shift. But actually, our customers continue to choose diesel engines despite, yes, the uncertainty, which we do believe is having an effect.

And I guess I'd just want to add that at the end of the day, we have to go away from a very emotional discussion, back to facts and figures. As Ken already alluded, the diesel engine is a very, very competitive engine in terms of particular NOx emissions, but even more so in terms of CO2. We have to think about all these kind of value. And that also will enhance the diesel engines for a very long period of time still in the product program. We need to have diesel, but also petrol engines in the future. So therefore, we also have to refine diesels and petrols in the future. We have to refine the internal combustion engines and cannot only really work just on 1 technology. Battery electric vehicles are the futures, but we have to have and offer a variety of choices for the customer.

Yes, just an update on the WLTP. Is the WLTP issue sorted out and behind us and it's in business as usual or there are some impending issues left over there?

Broadly, yes, the tests have been completed and the cars have been certified, barring maybe 1 or 2 out of hundreds of tests. So basically, yes, that issue is dealt with.

The next question is from the line of Kapil Singh from Nomura.

Congrats on the strong cost controls that we are starting to see. My question was firstly on volumes. You have talked about flat volumes for the full year, which implies a significant improvement in run rates that we have been seeing in the first half. So and particularly, if you could give some color on how much of it do you expect from seasonality and new models? And also, if you can talk about what's really happening in China, because the first half volumes have significantly underperformed the market growth and what do you see happening there?

Yes, some good -- go on, Balaji.

I've brought up Slide 26 for you, so you can speak to that.

Okay, thank you. Yes, in terms of -- let me take the last one first. In terms of China, certainly, we've seen a significant volume reduction in the quarter. And that's being driven by a mix of factors: GDP growth is slower, consumer confidence is lower and our retailers have also been suffering with profitability and also incentive levels have been rising. And when faced with those circumstances, it's fair to say that one could take the response to push more volume and continue to raise the incentive levels, but that risks devaluing our premium brands, and that's not necessarily what we want to do. And to continue to drive higher incentives in order to push volume, which ultimately, wouldn't be profitable for us or our retailers. And therefore, what we really want to do is drive a pull strategy in China, and elsewhere, frankly, which would enable us working with the dealers to enhance their profitability, dealing with the reduction in inventory, dealer inventory, our inventory, that we have been working through in the second quarter. And thereby consciously beginning to take action to move ourselves to a situation where we protect our premium brand image and target more sustainable profitability in the future. I think it's fair to say that we would also certainly like to see trade tensions between the U.S. and China easing. That's outside of our control. And for all the actions that we are taking and we will continue to take, I suppose one uncertainty will be the extent to which consumer confidence returns and we see those -- we see those trade tensions easing and giving people who buy cars in China the confidence to spend their money. So we look to that, but we're clear on the actions that we're taking.

In the balance of the year outside of China and from a plus, positive point of view, we do have the model lineup that we have that's fresh. We've just launched E-PACE as a locally produced car in China, for example. The I-PACE volume is ramping up and we also have the fresh -- the freshened 18 Model Year Range Rover, Range Rover Sport and the first full year of Velar here with us. So all of those things give us the opportunity to drive improved sales performance in the second half of the year. From a seasonal factor, without giving a precise number, the U.K. is stronger in the second half of the year, because of the March season. I mean, roughly 40% of cars in the U.K. are sold across March and September, and March is still in front of us. So that's important. And the U.S. typically has a stronger selling season associated with the model year change and in advance of the Chinese New Year. Although the Chinese New Year itself is not a good time for selling cars, the period from now through until then, in a normal environment, would normally be a strong period for China. So we look to those things and the actions we are taking, in order to seek to grow our sales in the second half of the year. But it's obviously subject to the market conditions that we find ourselves in, in particular in China.

Okay. And my second question was on margins. Should we expect slightly tougher margins in Q3, given that market conditions are tough, and the Slovakia plant is starting, before we see improvement in Q4?

The short answer is yes. We, we actually say that, I think, on Slide 22. We have a little strap line at the bottom of the chart, if you could just call that one up. Hang on. I've got the slide number wrong.

I brought it up, Ken, it's Slide 27.

27, sorry. And just to be super clear, the -- you're correct that the, some of the actions that we're taking to reduce production to align, to reduce inventory and to align supply with demand, hit harder in Q3, and therefore, less production means less wholesales of vehicles. That's good from the point of view of reducing inventory. It's clearly bad from the point of view of revenue and profitability. So actually, we're saying that we would expect Q3 to be relatively weaker, due to that, with the improvement that, in the second half really coming in Q4.

The next question is from the line of Sahil Kedia from Bank of America.

Wanted to get a sense of how fast we should expect the Slovakia plant ramp-up to happen in terms of productions? And can you give us a sense of the cost that we've seen associated with the starting up of the plant, is that for the full quarter? Has it been for not for the full quarter? And how should we think about that as the production ramps up?

Yes. On the plants, it's in a phased ramp-up process right now. Just starting relatively low volume of build of the discovery, which is ramping down production at Solihull over the next roughly 6 months. So we'll have a period of dual running between the plants before production in Slovakia takes over fully from Solihull and at which point we'll be producing discovery there. As you know and we've talked about in prior sessions, we have plans for another model to be produced in that plant, which will then start to build the volume in the plant towards the capacity at the first phase that we've built in the manufacturing plant. But that's when -- over the course of the next 12 to 18 months start seeing that development. In terms of the plant costs in the quarter, they're probably round about, just to give you a sense, GBP 20 million, GBP 25 million in the quarter. I think I'll probably park -- I don't have all the details actually at my fingertips to be able to give you a more precise answer on exactly how that develops. But clearly, what I would say is the plant's operating cost is very competitive due to its position in Slovakia and the lower cost base that we have there relative to the U.K. cost base. So as we move forward in time and as the plant is utilized, I expect to see that be a positive contributor overall to the efficiency of the Jaguar Land Rover business because of the -- this. And together with that, by the way, as well as the lower labor cost for the manufacturing plant itself, the opportunity to source parts for the vehicles that will be produced there from a wider supply base in Eastern Europe. So that's something that, again, will take time to see the benefit of in our results because, really, we need the plant to be at full utilization of capacity, which, as we launch the second model in there, we will get there. But we will then be reaping those benefits of efficiency of that lower-cost footprint.

In the meantime, there should be higher depreciation costs attached to the plant considering that the plant has just come on stream. Is that right to expect?

Yes. Part of -- again, I don't have the specific figure at my fingertips, to be honest with you. But part of the growth in depreciation, amortization that you should expect to continue to see will be coming from the manufacturing facility. Yes, that's true.

And one more question here. The warranty actions of GBP 39 million that we have taken at this quarter, which seem to be additional as for the commentary from you guys, is that a one-off? Or is this now kind of the new run rate that we should expect when we think about the other expenditure line in your P&L?

In principle, that's a one-off to deal with some specific issues that we needed to deal with.

Okay. I have one follow-up question. Can you -- this is to Balaji There seems to be some one-off charges in the stand-alone earnings here. Can you tell us what those are for, please?

If you recollect, we [we called off differential] in each of the cases and wherever we are looking at investment that we don't intend to invest going forward, we're taking those charges, and that's what we -- hit us in the domestic one. We believe that we are nearing the end of those -- as we scrutinize our investments, we are nearing the end of those. But yes, let's keep a close watch on that. The other one that hit us in the PBT was the ForEx, foreign currency, rebound of about INR 250 crores. That's the second item there. And on the consol, you have a hit coming fundamentally because of the restructuring charges they had to take on Thailand, which we have called out last quarter in terms of the decision to suspend manufacturing operations -- I mean, exit manufacturing operations there. Those are the costs there. But that again, it's total (inaudible) that have been taken there.

So just to clarify, sir. The 8.7% EBITDA margin that you guys have reported, based on the filing, it's more like 6.2%. The difference is all either the FX or the one-off. Is that correct?

The other way around because some of this is the -- close to INR 400-odd crores are those one-off charges that's in the -- below EBITDA. And close to INR 100 crores is actually inside EBITDA. Therefore, the underlying EBITDA is higher to the extent of INR 100 crores because of this one-off charges taken.

The next question is from the line of Robin Zhu from Bernstein.

So I have 2 questions. One is just the capital structure of JLR. Given that the cash burn in the last couple of quarters -- and it sounds like your guidance points to more certainly FY '19 and seeing fairly likely thereafter. If the company was solely focused on debt as a way of financing the announcements and the growth of the company or might there be consideration in terms of equity or how management thinks about the sort of securing the financial stability of the company in light of the cash burn. And the second question is on China. You mentioned profitability issues. I mean, this is something that's I think is true more broadly. If you could you share some thoughts on the likelihood of a payment to the deals and in a sense of a one-off incentive or nothing sort of more structural? There was news that BMW had paid a reasonably substantial additional amount to their dealers to compensate for the summer weakness. If you could share if that has already been done or if that's likely to come in the current quarter also or more, that will be great.

Let me take the first one and Ken, you can take the second one. As far as JLR is concerned, the underlying equity that we have, the network of the company is very strong. What we have is your cash flow issue here and what we have is a profitability issue that we have at this point in time. And therefore, the entire focus of Project Charge is to restore the profitability, is to restore the cash flows of the business so that we can get back to cash accretive growth. In the meanwhile, we have sufficient liquidity at this point in time, which I have talked about. And therefore -- and the debt market, we're accessing the debt market, getting the debt that is needed. But the clear plan of action is getting the business back to cash generating mode, which is what our intervention is. So in this fashion, we are keeping a close watch on the performance of the business as well as external factors. And as the Chairman said in the Investor Day as well, we will do whatever is needed. But at this point in time, it's a very important investment for us and therefore, it's absolutely clear that we'll work closely with them to ensure that the cash is generated within the business and whatever interventions needed are done. Ken?

Thanks. Yes, we see some of the very large payments that some of our competitors appear to be making to the dealers to ensure the dealer -- the dealers are profitable. We would prefer to take an approach where we make sure that our retailers are profitable through the models that we sell, generating them margin and incentivizing our retailers to achieve that linked to volume and margin performance. So one way or another, we do believe in having a profitable retailer network and we will take action to ensure that we do. But we prefer to do it in a way in which it enables us both to be profitable and drive positive behaviors in the marketplace and sales performance rather than pushing unprofitable volume onto the retailers and then making very large compensatory profit support payments. I don't know if Ralf wanted to add anything to that statement. I'll just leave that open for him, but that's all I was going to say on it.

Ken, if I may just follow up. I think last quarter, you said that China inventory levels are about 2.5 months. If I could get an update on where that sits at the end of September, that will be appreciated.

I'm going to have to pause on that question. Maybe I'll pick it up later in the Q&A just in order to get the correct facts and figures and not mislead you. Or we deal with it as a follow-up outside of here. We'll come back to it.

The next question is from the line of Ruchit Mehta from SBI Mutual Fund.

Just on the cost savings front, you've said that you have a target of about GBP 1 billion on the cost profit segment that's there. Could you give us a little bit more color on that because if I look at your half yearly income statement, you've got about GBP 4 billion of employee-related expenses, so you're running at about GBP 8 billion annualized. And if this GBP 1 billion, what we targeted it at, you're talking about 29% cost reduction. And does that sort of imply a lower headcount going forward? Or is it merely about more efficiency and squeezing out more from lenders, dealers, et cetera?

Yes, good question. To be honest, it's about all of those things. Just to give you a sense, we have to target lower material cost across our vehicles in order to drive efficiency there across the current vehicles in production, albeit that -- actually, we need to do that anyway because there are additional costs associated with those vehicles related to CO2 compliance costs and technology costs. So material costs on our present vehicles, absolutely part of it. Efficiencies in nonheadcount spend, be that marketing spend, be that sales spend, be that variable marketing expense, yes, all of those things also in scope, be that that design and development spend that we spend on engineering, but with our suppliers also in scope. Logistics spend in scope. Headcount and employment cost also in scope. And some of the actions that we take there will be matters for the future perhaps in terms of discussing the impact and the quantum, but I'm fairly clear that in order to drive profit and costs improvements of over GBP 1 billion a year, that we need to tackle every area, and that includes employment cost. Just while I'm talking, I'll just give -- in terms of retailer inventory in China at the end of September, in terms of the -- and this is only a partial answer because it's dealing with the import vehicles. We had roughly 7,500 units, which is roughly 1.5 months of projected sales of those import vehicles. So that's in a better place than it was at the end of June. And therefore, that's a trajectory that we continue to want to head in and also make sure that we head in that direction also for the locally produced cars. That was -- sorry, that was an answer to a prior question. Just following up with the data in front of me.

Okay. And just -- yes, just a couple of more questions. One is on your cost reduction on the CapEx side. Has that resulted in cancellation or defer or sort of stepping away from a particular model line or a particular set of cars that you would have thought you would have added or would have refreshed going forward? And secondly, just going back to the previous participant's question on dealer incentivizing in China. We've seen that commentary comes from all your 3 major competition, and their volume performance has been -- the margin better than yours. If the system in China is looking at something like this to have push to volumes, would you change your stance going forward?

I think thing going forward, we're pretty clear we want to build a long-term sustainable profitable business in China that generates profitability for both us and our retailer network, and we do want to do so by supporting pULL performance in terms of demand-driven sales in China. So beyond that, I don't necessarily want to speculate on the future. We will have to clearly react to whatever market environment we find ourselves in, but we're clear about how we want to pursue, that's for sure. Your other question was on product -- yes, sorry, on the CapEx profile. We are seeking to reduce our CapEx spending broadly through -- whilst still protecting the core of our new model portfolio and our model lineups. So therefore, that remains intact. And therefore, the 16 new models that -- sorry, the 16 model lineup, including 2 or 3 new models that we talked about back in June on our Investor Day, remains the same shape of our plan that is in my presentation today. Within that, of course, we're looking at the timing of our product spending. We're looking at the content of model refreshes. We're looking at the nondirectly model-related spend such as capacity-related spending, such as infrastructure-related spending, such as office buildings spending, such as testing facility spending, those sorts of areas of capital spending and looking to drive reductions in those through either stopping or deferring or reshaping those projects in order to reduce the investment spending. And we've made a fair amount of progress already towards our -- getting down to the target of about 4 through those means already, which has been good. It's clear we're going to have to do more, but we also want to do it whilst preserving the core of our model lineup because that is our lifeblood. So we fight to drive the cash inflow in order to continue to fund the product lineup because that's ultimately what will deliver the best long-term outlook for this business, which is what we're seeking to do.

The next question is from the line of Prateek Poddar from Reliance Mutual Fund.

My question is on slide -- if you go to Slide #28, most of your free cash flow generation in FY '19 called JLR is driven by inventory and payables. Could you just talk a bit about that?

Yes. I mean, in the first half of the year, we have had some growth in our inventory of finished vehicles. And as part of the reduction in working capital in the second half of the year, we're seeking to basically turn that around. A, not have the negative cash flow associated with the inventory growth in the first half; and b, have the positive cash flow through reducing that inventory in the second half. And that's why that bar on that chart on Slide 28 is the size it is because it's a half-to-half chart that's sort of first nonreoccur -- the negative in the first half, and then also have the positive in the first half of about equal size. So broadly, we're seeking to reverse the negative working capital movement we've had in the first half largely through inventory reduction. There is some parts of this, by the way -- not wanting to get into necessary discussion on payables, but there is also an element of normal working capital profile within the first half to second half because of the timing of production relative to the payment terms we pay our suppliers on, which is typically 45 to 60 days; relative to the timing of how we collect cash from our retailers, which is relatively fast within 2 to 3 days. That working capital profile broadly gets us an outflow in payables in the first quarter of the year. It generally gives us an inflow of payables in the last quarter of the year. So that's another part of the half-to-half cash flow movement. But the biggest physical thing that we're driving is seeking to target an inventory reduction in the second half of the year of our inventory of finished vehicles.

How much is the inventory? How many -- how much is the inventory because this is like -- I mean, the size -- this is like is most of your free cash flow generation is coming out of this so I'm just trying to understand how much of the inventory as of now this year as we plan to liquidate in quarter 3 and quarter 4.

In terms of inventory reduction, it's over 15,000 units, and it's circa GBP 0.5 billion of inventory and other working capital actions we're seeking to drive just to give you a couple of metrics around it. It's sizable, yes.

And GBP 0.5 billion is around payables, which you are planning to further squeeze from?

All right, sorry. I'm clearly confusing. GBP 0.5 billion is inventory and payables, working capital reduction. It's across both.

Both, okay. Second question was on China. Some of the dealers in China have been talking about a 0% gross profit margin when it comes to JLR -- the JLR inventory which they sell. What are your thoughts about that? And how do you plan to compensate dealers? And in addition to this, we've lost market share in each of our geographies. How do we plan to get that back?

Yes. No, good question. I mean, look, on dealer profitability, it's really about ensuring that our retailers and ourselves are not needing to continue to chase higher volume at the expense of margin by needing to put ever higher incentive and discount levels behind our product. If that means accepting lower volume as a consequence of sticking to maintain higher margin, then that will be something that we take on in order not to chase ever higher volume at high discount levels. And reducing those discount levels that both ourselves and our retailers put behind the product is an important part of enabling the retailers to get back to a situation of better profitability.

So sorry, just you talked about 1.5 months of inventory at China -- with China dealers. What kind of inventory are you comfortable with?

Yes, good question. Probably lower than that. I think we would want to probably -- well, just -- it wasn't meant to be a funny comment, but just to dimension it, between 1 and 1.5 months is where we would wish to be. And I think given the market environment, our instinct is to plan to target being at the lower end of that range in order that the retailers don't have sort of more stock around them that they feel comfortable with, that they then feel that they need to discount in order to turn it into cash. So that's been part of the painful process over the last 3 months, which will continue over the next 3 months to get inventory levels into the right place so that we're better able to meet supply with demand and not have that kind of higher level that causes discomfort for the retailers. And I'll just say, given the way the numbers are, there's a bit still to do to get that into the right place over Q3 given the market environment that we find ourselves in.

And one question on market share. I think that's -- that got answered. Across various countries, we have lost market share. What are your thoughts about that?

I do think I may have broadly answered it. I mean, obviously, we know market share. We're aware of market share. And all other things being equal, of course, having a higher market share broadly is better than having a lower market share. However, at the same time, what relatively is one of our strengths is that we can build on is being relatively smaller than our competition and maybe not quite so dependent on needing to slug it out for every last unit of volume in order to fight to boast who has the biggest market share and instead, seek to create a business based on sustainable profitable growth with sustainable volume growth. And if that means having a slightly lower market share than we might otherwise wish, then so be it. So I think that's my general thoughts, unless Ralf wishes to add any more to that.

Let me comment here again. One is if you look at our performance, U.K. and overseas, going ahead of industry. And we expect to be called out that our strategies to ensure that we grow ahead of industry. So there, we are picking up share. China, yes, has been a tough dealer. And I think we have done a fair amount of discussion on that in the call today. So to that extent, yes, we have lost share there, but the intention is to, with all the products and by resuming growth in China, the intention is to grow share by ensuring not the share for share's sake, but as Ken put it, ensure that they do profitable growth. And if share happens, so be it, but the intention is to grow ahead of business and ahead of market and in a manner which is profitable and sustainable.

(Operator Instructions) The next question is from the line of Pramod Amthe from CGS-CIMB.

You got confidence in terms of your estimates for the full year. First, with regard to the JLR outlook which you're projecting, if I have to look at on your first half performance, how much of the deterioration of performance you attribute for more of an internal factor versus the external changes which happened? And as a result of which, what gives you the 2H -- or how much of your 2H recovery is dependent upon the external factors than your own internal actions?

Let me comment here in terms of the philosophy with which you'd want to look at it. If you look at the turnaround, the plan itself, we have said that demand situation is likely to remain muted. That's why we're actually saying that the business needs to move into a trend here, where there's one side of the business which is all about growth, innovation, getting the product out there and selling -- making exciting costs, which for us is business as usual. There's no change as far as that aspect of the business is concerned. The thing that we are now purely teasing out is that this has -- be that as it may, in a situation where the external factors can be external or volatile, it's important that we have a Plan B. And that's the reason why the turnaround plan has been exclusively called out, where we do not quantify an absolute number. It is not a number that we are seeing linked to demand. It's more about we need to take out INR 1 billion of cost and profit, we need to take out INR 1.5 billion of cash from CapEx and working capital so that we want to take charge of our own destiny and run with that. And then demand comes and we -- and all the work that's happening on the demand side has been delivered, that is jam on the cake. But that is something which you want us to move the business and do a twin focus of business as usual as far as growth is concern and business unusual as far as cost is concerned, cost and CapEx is concerned. That is what I hope we are able to communicate to you during the course of the discussion today. So with that in mind, if you go look at the first half of the year, I think I will say that we have issues related to -- some of the issues related to diesel, et cetera, are more external. And yes, if you look in our history, that is internal (inaudible) we had an electric version earlier, but that is water under bridges. There's no point talking about it now. Things like Brexit, things like tariffs are purely something that's external to us. But things like, for example, dealer profitably are more internal to us, where we believe we can do more on it and get it right there. So it's a very acknowledged fact that we'd love to have -- look at it both internal issues as well as external matters. If I look at the Accelerate slide that we put out there, there's a host of internal issues that we called out, but we want to go ahead and fix it as well. So one way to look at it is that this is a crisis time. And therefore, we will never waste a crisis, and it is important that we use this crisis to our strength and ensure that we come out stronger over this crisis compared to how we went into it. So that is the philosophy and the mindset with which we are looking at it, and the JLR team has been absolutely positive in terms of approaching it with a sense of using this as a lever to open up the intrinsic capabilities of the business. So that's the philosophy with which we want to approach it. Hope that helps that.

And the second one is with regard to external sales. If I could look forward, either for the industry or for you, what will be the leading indicators we should be looking for, for your turnaround in China sales volume or for profitability?

Well, let -- I'll get Ken to comment next. From my perspective, the way I look at it, I think transaction prices and the kind of discounting in the market, I think, will be a good one to look at as it's starting to pick up. Profitably of dealers, number two. Brand health measures, number three. And overall -- then when you get all these right, then you start seeing your wholesales and your retail starting to come through. And then, of course, external factors related to market conditions, growth, kind of walk-ins that you see. So it is going to be a meticulous effect. And the only thing I can reassure you is that exactly what we have done in passenger vehicles in Tata Motors here is exactly what we've done in commercial vehicles here. So I believe there's a fair amount of knowledge-sharing from our side within the 2 teams and -- as well as it's a pretty experienced team that we have in JLR who knows exactly what needs to be done on this and working through this meticulously. So that's how I would look at the lead indicators for this. Ken, anything that you would like to add?

I thought that was really a comprehensive answer, Balaji. Thank you.

And the last question from my side with regard to India business. On the LCV side, there seems to be some concern in terms of dependence on the NSBC funding. Have you seen any other stress in -- related to the LCV sales or NBSC funding? And how you plan to handle if it comes through in the coming quarters?

It's fair to say that the liquidity in the market is stressed. It is not an issue of availability of liquidity. It is more about the cost of the liquidity and a bit of holding back as people have their (inaudible) repayment cycle, et cetera, planned out. So is there something that we need to watch for very closely? The answer is absolutely yes. As you'll well imagine, commercial vehicles' liquidity is a very, very important part. Financing is a very important part of the commercial vehicles' business. And therefore, we are watching it closely. So far, we could see caution there rather than we're pressing any panic button at this point in time. It's not what you think. But there's definitely an element of caution that we need to have. One of the things we are trying to do from our end, or there's one other reason why we want to put in more capital into Tata Motors Finance -- putting INR 600-odd crores into Tata Motors Finance as well as ensuring that we're working with all the banks to get them in the right place. So that's kind of all the work that is currently underway to unlock that part of the puzzle. As part of the 3 companies here, which is Tata Motors Holdings, Tata Motors Finance company and the finance solutions company, the lending companies do not have liquidity issues. They're very well in the market because keep in mind that commercial vehicles -- and those assets are extremely liquid assets, and they have a real business sitting behind it as the economy is growing and people are getting trade rates. The repayment cycle is comfortable. You see our GNPA levels coming down, collection efficiencies continue to remain strong. So all that is -- we're watching a -- keeping a hawk's eye on that. The thing that we need to ensure that we get it right is the holding company piece, which is a [CFE] and that is a company where the equity investment is going and we're ensuring that is corrected so that the asset liability mismatches there are ironed out. We are in a pretty good clip, but we want to be absolutely foolproof on that, which is the focus at this point in time. So we're approaching this quite proactively to ensure that we do not get into trouble on this one.

The next question is from the line of Jinesh Gandhi from Motilal Oswal.

My question pertains first to -- first for JLR. The impact of GBP 45 million for Slovakia and Austria plants type of cost, would that be recurring in third quarter as well?

Broadly, yes, because those costs are the sort of -- mostly the operating costs of those plants are starting to show through in our business results. They pop up here because this time last year, they weren't there. In principle -- as I said earlier, in principle, if the volume builds in those plants, then that operating cost starts to get paid for itself. But there's also -- although I don't have the precise figure at my fingertips, also within those numbers, there are launch costs for Slovakia within there.

Okay, okay. And secondly, the China, so after turbulent second quarter, are we seeing signs of volumes normalizing and pricing also normalizing? Or do we look at the 16% margin of JV as the new normal?

I think it's been a challenging -- certainly a challenging quarter for the JV. And just likewise, with our own business results, we're not happy with the performance -- the stability of performance of the JV in Q2 and certainly, the joint venture team is very focused on rebuilding that EBIT performance in the balance of the year. That said, of course, we're facing the challenging market conditions, and part of the volume adjustment and inventory reduction that has to take place is also happening in the joint venture. And hence, I would expect to see in the balance of the year relatively weaker profitability from the JV than what we've seen in prior years. And in Q3, I would also expect to see a relatively weak result, just as I just described for JLR, because some of the production adjustments that we're doing to continue to move the inventory to get to the right place is taken in Q3 -- taking place in Q3.

Okay. And lastly, clarification on the capitalization rate. So a quarter, you had indicated that we'll be reducing the capitalization rate for R&D to 70%. But if you look at the first half, cap rates have been close to 82%. So is there any change in stance? Or do we expect it to normalize and for FY '19 still to be close to 70%?

Ken, let me take that. Both Tata Motors and in JLR, the same issue will be there. The accounting policy is a gate-based policy. It totally depends on how the products are coming through the gates. And then if you're -- not many products are coming through, it's quite likely most of the expenditure is happening on products post our approval gate, and this gate is more likely to be compromised -- more likely to be capitalized, sorry, Freudian slip. As far as the earlier piece is concerned, if you want to get more products coming in, in terms of thinking, then it's quite likely they'll get expended out first. And the more that they -- the ones that past the gate, they get onto the other side. So it is just the right pacing of projects that are moving rather than -- there's no change in accounting policy. That is the accounting policy specifics.

Okay. So there could be years where it could be higher, but when it passes through, then it gets adjusted and the following year, you're likely -- or is that the right way to look at it?

Yes. One way to look at it, think of it as anything up to a particular gate gets expensed. Post that particular gate, it's getting capitalized. Think of it that way. We have a lot of products -- projects are getting started off, then it's quite likely you'll see them go into the capital expenditure. Most of them are likely to get expensed out because they will not hit the gate to pass it. Starting off a lot of projects. When you're putting an affordability envelope because it's natural to expect that the number of projects that you'll start off are getting reduced, but you want to do bigger and better projects, and to that extent, you will have -- whatever expenditure you're getting expensed, it is more towards the projects that are getting later on. And as you've tightened the CapEx, you'll also have lesser projects that are starting on. You'll only start projects that are likely to see all the way through. So that is the dynamic that you're seeing reflected in the numbers.

Ladies and gentlemen, due to time constraints, we will be able to take one last question, that is from the line of Pramod Kumar from Goldman Sachs.

My first question is regarding the macro. I just wanted to understand the dramatic improvement, what we're expecting in second half both in volumes and profitability. How much of this is kind of based on the macro recovery? Especially in China, what is the expectation on China market, say, for the management for second half? Because we've generally seen all your peers, be it Volkswagen, BMW, they all toned down their guidances and profitability targets while you're kind of continuing to step up on CapEx, especially on R&D. So I just want to understand how much of -- is this a macro call?

I think what I'd say is what you've heard from us today is that we've also toned down our guidance and our profit outlook for the full year and the second half of the year per -- compared to our prior calls. In terms of how much of it's macro, slightly difficult to say in precise terms. But perhaps what I would say is that the present overall environment is one that we're expecting to continue, that we find ourselves in more challenging market conditions is for sure and we're not assuming that those market conditions suddenly become benign overnight. It's also the case, I would say, just to be clear, though, that if we saw some further significant worsening in market condition, that, that could clearly impact us further, whether that be further macro headwinds in China or further Brexit uncertainty or matters happen if there's some sort of escalation in trade wars. Those things could cause some further uncertainty for us. But we're not assuming that there would be some rapid return to much more benign market conditions. We're, therefore, more focused on the actions that we can take to improve our brand health and performance, balancing our supply and demand and leveraging the really super portfolio of new models that we've launched over the past 2 or 3 years and maximizing the performance of those in the marketplace despite the more challenging market conditions, which undoubtedly we find ourselves in.

Yes. And the second question is on the competitive intensity because I do agree when you say that you're looking at profitably and not exactly chasing volume. But how does that tie up with the overall volume aspiration? Because at one end, we are aspiring to get our volume one moment and back and kind of close the year on a double-digit growth towards the 4Q and have a full flat year. But at the same time, we're also looking at dramatic improvement in profitability. And as we understand, the discounting pressure are just getting higher and higher at the market. So I'm just trying to understand how we're going to juggle -- or kind of balance both of these because...

Look, it's actually quite difficult to give you a clear answer to that other than what you just said. It is about finding that sweet spot, finding that balance because, clearly, volume is important in the car business given the significant fixed cost base and investment pressures that obviously we face. So we do need a certain level of volume to support that. And equally, it's finding that balance between that volume being not too little but not so much that it causes us to over push incentives in order to create it -- to happen. And I think I'll just leave it at that because it's really about finding that balance. That's the challenge for us as a management team.

And final question on alliances. That is something which we still haven't kind of done, where most of our peers seem to be taking that approach more and more. Is there any thought now that -- is it probably they're making the most of the crisis as you call it? Isn't it one part of cost reduction and probably technology of kind of leap frogging which you can get by doing probably alliances? Are you guys looking at alliances and also probably part divestment of some of the brands like, say, Jaguar, which we understand is clearly in a much bigger trouble given that recent launches haven't exactly worked the way the management expected them to be?

Let me comment here, Pramod, then I'll move on. We have absolutely no -- we have all the intention to support Jaguar. There's absolutely no intention of -- or any need of Jaguar divestment or anything. So that is off the table, number one. Number two, as far as alliances, partnerships, JLR is already onto a lot of them, and that's an area we'll continue to keep looking for alliances way more as a classic one that is there in the area of autonomous investments. So that's an area we'll continue to actively look at whenever we consider such things. So rest assured that is something that we're looking at extremely closely all the time.

Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for their closing comments. Thank you, and over to you.

Firstly, thanks for the -- I hope this time you had a better sense of the numbers as well as usual to ask far more questions than what you had, but do feel free to write back to us and give us the ability to sort of improve this process. Open to it all the time. So thank you, and see you soon. Bye-bye.

Thank you very much. Ladies and gentlemen, on behalf of Tata Motors, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.