Tata Motors Ltd (TTM) 2020 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Tata Motors 4Q and FY '20 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, Mr. Aggarwal.

Thank you so much. Good evening, everyone. On behalf of HSBC Securities, I welcome you all for the Tata Motors quarterly results conference call. I'm very happy to introduce the Tata management team today. We have with us Mr. Guenter Butschek, MD and CEO; Professor Dr. Ralf Speth, CEO, JLR; Mr. P.B. Balaji, Group CFO; Mr. Adrian Mardell, CFO, JLR; Mr. Girish Wagh, CV Business Head; and Mr. Shailesh Chandra, TV and Electric Vehicles Businesses Head, along with other members of the Investor Relations teams. Thanks again to the management team for taking time out today. We will start the session with some comments from the management, followed by Q&A.

Over to you, Balaji.

Thanks, Yogesh. Firstly, once again, thanks all of you for taking the time to join the session. I hope all of you are safe and sound, along with your family and loved ones. So without further ado, you already have the press release as well as the investor deck with you, so we'll try and take out the specific slides that we would want to emphasize, and thereafter, leave it open for questions to the maximum extent possible.

Prakash, can you move to the next slide, the standard safe harbor statement? Nothing new here, other than a callout that we have tried to calculate the impact of COVID-19 on our numbers and those are analytical purposes using our best estimate. That's the only callout that have additional to what we normally have.

A few highlights of the year. It's been an action-packed year from a product and product offensive as well as technology offensive perspective. In India, I think the entire range got ready for BS VI and transitioned smoothly to BS VI. Then, of course, there was an exciting Tata Altroz launch that happened. Nexon EVs was unveiled in December last year. And from a JLR perspective, the most exciting launch of the year and then almost a new Defender as well as the Discovery Sport that got launched into China. And the PHEV versions will of Evoque and Discovery Sport also came through. And we unveiled the Vector Mobility concept earlier this year.

And apart from the product launches, which are quite intensive, going to the next slide, we also had a series of management actions that we have been taking. First was the whole Charge+ delivery, moving Charge to Charge+ and now stepping up that number to now GBP 5 billion. This is what we're now calling out, having delivered GBP 3.5 billion; and of course, the collaboration with BMW that we called out in our Investor Day. And the software over the air was announced along with the Defender launch, including the new infotainment module.

On the balance sheet side, we talked of the promoter equity support. That was through a preferential allotment happened in this financial year. And of course, in March, we called out the subsidiarization of the PV business, which has been approved by the Board. And of course, one of the smoothest transitions into BS VI with negligible inventory as we entered, despite COVID coming in at the most inappropriate time for the transition. All these have been delivered.

In terms of financials -- sorry, go back a slide, please. You've already seen these numbers. Let me just call out the key things that stand out. On a full year basis, we were near EBIT breakeven despite a 23% drop in volumes and the revenue down almost 14%. And EBIT was at minus 0.2%, and the profit before tax and exceptional -- before exceptional items was INR 7,700 crore, the exceptional item being the INR 2,500 crores charge that we have taken for asset write-downs and other provisions in the PV business.

And the callout that we would like to make is that despite all these challenges, second half of the year was positive free cash flows. Even this quarter was a neutral free cash flow despite all the challenges that we see. So a combination of what started looking as a solid second quarter and third quarter performance coming in from JLR and continued issues in India due to a variety of factors, did get offset quite significantly by COVID as the quarter ended and, of course, the big ones in India being the medium and heavy commercial vehicles decline and the stock correction that we did. It's not been a great year, despite promising 2 quarters that came through.

Next slide, you have seen it, combinations of the reasons for what happened. The callout here is, I think, from a volume and mix perspective, that's probably the entire story of why the decline happened. And contributions from JLR was about 4% down, the biggest contribution coming from Tata Motors standalone, dropping almost 8% in the total 13% decline that you saw. The retails, of course, being higher than wholesales in India by almost 65,000 units by the time the year ended.

The next slide. The EBIT walk, you've already seen. The good news is JLR, despite all its challenges, increased its EBIT by about 50 bps, while almost the entire fall can be explained by the drop in the TML stand-alone numbers for reasons we have talked about many times in the past.

Moving on to Slide 8. This is how the debt is actually laid out. We ended the quarter with a INR 42,000 crores of net automotive debt and then add on top of it a INR 6,000 crores of lease payments, which is basically IFRS 16, a combination of those 2 becoming INR 48,000 crores. But it is backed with strong liquidity, both in JLR and in TML, JLR at GBP 5.6 billion and Tata Motors standalone at INR 6,700 crores. And these debt maturities are well spread out. So the liquidity remains strong, and the debt maturities are well spread out is a key callout on this slide. And even as we end May and look into June, the liquidity position continues to remain adequate as we look into the business coming out of the lockdown.

So a few set of slides on the actions, corporate actions, that is out there. As far as JLR is concerned, the key fallout I'm making here is the Charge+ delivery is now being increased to GBP 5 billion, an increase of GBP 1.5 billion over what we delivered in FY -- in the 18 months to FY '20. CapEx is being rationalized quite substantially by 40% to GBP 2.5 billion in FY '21. And FY '22 plans are being recalibrated. I'll give you the context in the subsequent slide.

Similarly in India, the CapEx is being rationalized by a significant 66% to INR 1,500 crores in FY '21 and FY '22 again being recalibrated. And India, again, is falling out of structural cash and cost-out plans of INR 6,000 crores of cash improvements that has been launched, including INR 1,500 crores of cost saving is being called out. These are pretty sizable interventions to reduce the cash burn, both in JLR and in India, given the fact that the demand situation has been -- is quite volatile and likely to be subdued for a while.

Move to the actions that we are taking on the PV business and just pulling out all the actions that are coming together to make PV win sustainably. First, of course, is a callout of reimagining PV in order to rejuvenate the front-end sales and service, and I'm going to ask Shailesh to talk about it in his section. We also have a full -- the most refreshed range of cars that Tata Motors ever had. And therefore, this, we will try and drive salient and customer preference of this fully refreshed BS VI range.

We called out in March a separate legal entity in order we can make this business a long-term value-creation entity. And this will drive transparent capital allocation and focus within the business. And we are now building an efficient cost base as well. You will recollect, we already worked significantly in improving the contribution margins of the business. We'll step it up even further and reduce fixed costs further in this business to reduce breakeven. And along those lines, we are taking an exceptional charge for rationalizing the asset base and other provisions of about INR 2,500 crores in this business in India. And the aim of this business, we are now making it explicit, is to become cash positive by FY '23 through all these steps that have been laid out in front of you.

On the corporate actions front, again, a series of callouts that we are making. Number one, a question that keeps coming again and again, the Tata Motors Group is a flagship of the Tata, and it enjoys full promoter support. And we are now calling a significant intervention in terms of change of strategy to significantly deleverage this business for the entire Tata Motors Group. And starting point of it is all the cash intervention that we talked about, and JLR will -- also, along with that, would be JLR becoming sustainably cash positive from FY '22 onwards, while becoming future-ready. These are big calls that are being taken to ensure that this business remains sustainably cash accretive in the long run and would love to leave this with you in terms of how we are thinking about the business strategy going forward.

So let me now hand this over to Adrian, who can take you -- walk you through the JLR numbers. Adrian, over to you.

Many thanks, Balaji. Good evening, everybody. I just called out a few of these. Of course, our first year loss before exceptional items and tax was GBP 393 million loss, slightly worse than FY '19. Of course, quarter 4 was devastated by the impact of COVID and actually, quarter 4 loss was GBP 494 million, and that was GBP 763 million worse than the previous quarter 4 in FY '19. You all know that our Q2 and our Q3 results were much stronger than prior year. And I think that starts to indicate how much impact COVID actually had in the final quarter.

We were headed for a pre-COVID quarter 4 of just over 6% EBIT. On a full year basis, Balaji has mentioned, the EBIT margin did improve actually versus prior year, but 0.1% was a negative. EBITDA actually was a 0.5% improvement versus last year as well to 8.7%. We’ll talk Charge later, which is clearly the underpinning of a significant turnaround at Jaguar Land Rover over the last 18 months. Temporarily, of course, COVID has impacted that.

On volumes, retails were down 12%, actually 508,700. Revenue was down 5% at just under GBP 23 billion. Of course, we had a very, very weak Q4, just 110,000 retails in Q4, down more than 45,000 units on last year. Quarter 4, of course, is always our strongest quarter. Market dynamics with the U.K. was significantly impacted.

From a cash perspective, even after the impact of COVID, we were still cash positive in Q4, GBP 225 million; full year, negative GBP 702 million. We don't like that, but it was GBP 553 million better than the previous year even after COVID. Our cash breakeven has now fallen below 500,000 wholesales. It was significantly higher than that before the Charge program actually began.

Next slide, if you would, please. Okay. So this is the retail callout, full year '20 by region. I think China is the one, of course, I'm going to land on. COVID did have a more significant impact in China in Q4 because we all know it started earlier in China from the Chinese New Year date. If you remember, we were trending more than 20% higher year-over-year in Q2 and Q3 in China. On a full year basis, though, you see here, we were down 8.9%, which shows the extent of the falloff in February and March. But that was better than industry, industry minus 16.6%. Wholesales, which excludes CJLR, were 476,000 units, 6.3% down. And from a wholesale revenue, and therefore, of course, cash generation perspective, quarter 4 was the second weakest quarter of the fiscal year after Q1. It's normally, by far, the strongest quarter because of those market dynamics, including, of course, the biggest selling month in U.K. is in March, so a dramatic impact on volumes in quarter 4.

Next page, if you would, please. Okay. So this is retails by nameplate on full year data as well. Year-over-year by nameplate is shown at the side. Standout is the Evoque. Of course, the new Evoque, 25% up year-over-year, even after COVID. I-PACE was also up year-over-year, almost 40%. So that’s standout as well for us, although the Q4, as I mentioned, retails were only 110,000 units. You can see the winners and losers on the right-hand side of the page there.

Next slide, if you would, please. Here we go. Here’s the profit bridge year-over-year before exceptional items. We've done this one. I'll remind you, last year, we lost GBP 358 million, 0.7% EBIT margin. Our actual loss for this year was the GBP 393 million before exceptionals, 0.1%. Well, I'll just call out a few things. We've talked them mostly previously, China JV, we had a worse year, although we have stabilized the position actually in the JV. So you will see better results going forward in our JV business in China.

The most difficult assessment we had to do at the end of the year was on variable marketing, of course. We did have too much dealer stock as we stopped retailing units towards the end of March. We ended up with more than 100,000 dealer inventory, which is about 25% higher at least than we'd wish to have. And our assessment's been around the incremental marketing support in this suppressed marketplace, obviously, to sell those cars into the market. That's significantly within that increase of net pricing you see there.

We also actually have an impact in our U.S. market on residual values. You know substantially all of our U.S. vehicles are sold on leases, which come back to us. And in April, particularly, the secondhand residual value market was very, very weak, low auction numbers as well. Although May has picked up, and we believe the assessment we made at the end of March is still appropriate, but we did book another $78 million at the end of March for those reductions in marketing support.

Then the good stuff starts kicking in. Some really good work in manufacturing: our material costs; all the structural cost improvements under the Charge program. We talked to them a lot before. I think we're really, really pleased. They continued, obviously, on a full year basis and through Q4, even though substantially, these costs wouldn't have been impacted by COVID, of course.

Exchange, I'll bypass. To the right-hand side of this page, what we've attempted to do here is call out specific things that we know were directly as a result of COVID. About GBP 599 million impact in the -- on the full year basis, all happened over the last few weeks and would just give a sense there where we were tracking just mid-2.4% EBIT. Although there was a collapse in sterling as well over the last 2 weeks, and we've ignored that from that impact assessment. We can talk more about that going forward, if we wish to do so.

Next slide, please. Cash. Okay. So our cash full year outflow was GBP 702 million. That was GBP 563 million better than FY '19 there. GBP 225 million positive in Q4 already mentioned. Estimated impact right at the end of March on cash was about GBP 760 million. We effectively didn't passed 16,000-plus units through to the marketplace. We were tracking very, very strong in the first 10 weeks of the quarter. In most of our markets, it was repeating the trend of earlier quarter 2 and quarter 3. So the price out of this is very, very straightforward for us to do. And the big news here is before COVID, we think we'd have been cash positive for FY '20. That's really important. That really shows the turnaround and the reassessment we've had in the business, which is why we can confidently say post-COVID, we will get back on track, and we will be cash positive in FY '22, as Balaji has already said.

Next slide, if you would, please. Okay. This is the investment. It's down significantly versus the previous year, GBP 516 million, just under GBP 3.3 billion, and all areas have actually reduced. Over this period, as we've mentioned before, this hasn't been done by stopping significant programs. This has been done by diligence, efficiency, care over what you spend. There has also been some delays in the launches on Defender, but that car is ready to go once the dealers are ready to actually sell. So we're now in place, GBP 516 million lower on investment versus the previous years.

That's the end of the financial update slides, I believe. Just check next page if you would, please?

Okay. Quick look at other things happening to us. You know what? This has been an awful time for so many people. Jaguar Land Rover sadly have lost 3 of our employees to COVID. That's obviously the really awful side of this. The really good side to this, the response of people within this company, it really has brought out the good side of people. You can see here we turned our 3D printing to 14,000 visors a week for the frontline.

We actually lent 362 cars to those services. Our employees went out to help putting themselves at risk. The spirit of this place, the reason why I love this place has been shown over the last several months of this sad affair. So that's what we've actually been doing in times when we've not been able to get back to work.

Next slide, if you would, please. Okay. So what have we done to respond to COVID? Well, our response was really, really quick. The Board of Management of Jaguar Land Rover met more than 46 times from the end of March through to the end of May, 1-hour meetings, actions decision-based, closure of plants very, very quickly because we knew that was happening, and we knew we had stopped retailing cars to the marketplace, and therefore, we had to slow down production. Of course, health and safety of our employees have been paramount, and I'll talk about the restart at the moment. We had too much inventory at dealers because sales literally stopped. More than 40,000 retails didn't happen over the last few weeks of March. So managing down that inventory is really important. 89% of our retails are now fully or partly open, 58% of which are fully open. So thankfully, all of the retails across all of the regions are now opening up.

We instigated rigorous cost controls and spending freezes. We call them internally Star Chambers. We've ran 155 Star Chambers cross-functional reviews of spend over the course of a period through to the end of May. Everything more than GBP 25,000 was cross-reviewed with a 4-eyes check, and it had a dramatic impact on the cost and spending leaving the business, and I'll show you the impact it's starting to have on cash over this horrible period.

Balaji has mentioned investment. We believe investment target range this year was around that GBP 2.5 billion. We did put some investments on pause, and we'll be talking in Q2 at what point we'll be releasing those. We'll give you that information when we talk to you after the quarter 1 results. And we have actually -- given plants were closed, of course, we have actually taken the benefit of the U.K. furlough scheme. At one point, more than 20,000 Jaguar Land Rover employees were on furlough at home, not actually working, even though a lot of those have now returned as we've started to rebuild cars.

Next slide, if you would, please. Okay. So this is the stop and the restart policy on production. I won't go through them all. You can see them there. The only plant that hasn't yet started back is Castle Bromwich. Our inventory at Castle Bromwich was higher at the end of March because that is a big selling season in the U.K., particularly for those products. And you all know, I think, that the U.K. and the European regions have opened up slower than China and North America. And therefore, the sales rate on those products will be lower. This is a demand-led production recovery. And that plant will be closed until the point in time when our dealer inventories are reduced. On the right-hand side, you see the statistics and to the 89% there.

Next slide, if you would, please. Okay. China, China, China. So you see here, I think, optically on the left-hand side, what you could determine a classic V-shape for China. The sales actually from the end of March recovered very, very quickly. You can see there, we're now at the end of May, more than 4% higher than May 2019, which I'm not sure many people were predicting just a few short weeks ago. All of our showrooms are open, leads are strong, closure rates are better, not many casual shoppers. Most people coming into the dealership are seriously looking to buy vehicles. So we're very, very pleased of the return we've had in China. Of course, we can't predict what's going to happen going forward, but we -- this -- certainly, 2 to 3 months after the Chinese market started to open up, this is very encouraging position for us.

Next slide, please. I think this is the beautiful Defender coming up. Oh, no, it isn't, sorry, must be afterwards. Recovery by region. This is also important. Okay. I've talked about China on the left-hand side. North America is starting to show a version of a V as well. Our year-over-year in May for North America was 32% lower than last year. We were predicting a little bit worse than that. So obviously, we're looking at that data closely in June. You can see what I was saying on U.K. Bearing in mind that March number fell away dramatically over the last 12 days, we pretty much stopped selling, that's really sales through to about the 19th of March, you can see all of the dealers were closed. Some of them started to open up in May time, and we're watching the data very carefully in June, and the first 12 days are actually quite strong.

Europe, exactly the same story, but more dealers were open depending on market. And overseas as well, is generally following a pattern similar to Europe, although the volumes are a bit less. You can see the absolute numbers, 24,000 in May; June will be bigger. So we're steadily, cautiously improving our demand levels.

Next page, if you would, please. This is the one; beautiful Defender. Okay, not launched at the dealers, but you can see the start of sales. Date at the bottom there: U.K. and Europe have started. We already have more than 22,000 orders. We've actually put on pause the Defender 90 because we're making sure that the 110 actually gets an appropriate launch. 1.6 million configurations we actually have, complete configurations of this vehicle. It's certainly unprecedented in the history of Jaguar Land Rover, just shows the amazing interest that we have actually have had. We will open up the Defender 90, the shorter wheelbase later in quarter 2, and we still believe this is a really very promising start, even though, of course, it's been interrupted. And we're really, really hopeful for what this great vehicle is going to do. It's just an amazing drive.

Next slide, please. Okay, Evoque and Discovery Sport. The data here clearly has been more impacted. Of course, it really depends on where these are sold. These are heavily sold in U.K. and Europe, as you would know, and those are the regions most impacted by closures, and therefore, not surprisingly, this is a data that's most impacted negatively year-over-year. Not much else to say. We just have to watch carefully as we go through the balance of the year. I do expect June to be much better, as I mentioned, both U.K., and in fact, Europe which started strongly in the first 2 weeks of June. So we will have better results June year-over-year, but it will still be negative versus last year. The new PHEVs, of course, are in both of those vehicles from '21 model year.

Next, please. Charge, Charge, Charge, move to Charge+, really strong quarter. Again, it really wasn't influenced by COVID. This was all done by the time it started to impact. Investments were lower, working capital, big working capital gain year-over-year. We did hit the GBP 1 billion profit target, which I know a few of you were interested in, as you thought we had a slow start in the first half of the year. We did say, please watch, please wait, please be patient, and we've actually delivered the results. You've seen it in the bridge as well. The really positive thing is the results have come from across the total business. And as a result of which, Balaji mentioned, we're increasing the target to GBP 5 billion. And I really feel good about that target. Actually, it wouldn't surprise me if going forward, we would increase it again in the second half of the year. Of course, COVID, we need to watch carefully.

Next, please. You saw it earlier, the GBP 4 billion to GBP 5 billion on Balaji's stage. I don't need to say any more.

Next, please. All right. Give you a bit of indication because I know you're keen on, well, what type of program is it? We're basically now thinking about this as a 50-50 program. Investments will be low. We've signaled that. Inventory, one of the things we will do here is we will go again on inventory. We'll lean out our inventories. We'll lean out the dealer inventory. We're bringing it back down to a level even lower than the levels we had pre-COVID, and that's what we've got on the page here.

In other savings, one-off savings, like the furlough scheme from the U.K. government, will bring up our onetime nonrecurring cash benefits mostly to GBP 750 million we're saying here. We've got plans for more than GBP 750 million there.

The other piece is the sustainable pieces, the flow-through pieces. We've got 3 very strong work streams now, been working at them for a few months; variable profit, net revenue improvements. Of course, the marketplace has been significantly disturbed. So you'll need to be patient with us on that one for maybe a quarter or so, but we've got clear plans.

Material costs, we signaled the Ignite program at the end of January. Those plans are in place, and we're now confident those reductions will start to come through once we bring our '21 model year cars in. Of course, a lot of this is change on vehicles and we'll come along at change points to vehicles, the next of which is '21 model year. So as you'll see that coming through as we go into the second half of this fiscal year.

And finally, our overhead costs, people reduction costs. Our selling and general admin costs will be significantly lower, and that will be really the story on that right-hand side of the first half of this year, where our Star Chamber processes have kicked in and have had a dramatic impact, much bigger than the impact you would have seen previously. That's a GBP 5 billion. You can talk to us on October what the new number is. I'm definitely confident that's going to grow.

Next page, please. All right, funding. We've been able to get funding over this period of time as well. We did complete a deal with syndicated banks in China last week. That's the full value, CNY 5 billion over 3 years. We'll take Q&A on that. And we also completed, early on in the process in April, an extension for our fleet buyback in the U.K., and that was worth GBP 63 million as well. So through these difficult times, our network, relationships and people who trust and believe in this company are still prepared to put money forward. That's the greatest sign I can give you for how we're trusted by this external environment.

Next slide, please. Okay. Looking ahead, quarter 1 will be significantly impacted by COVID. Of course, we've given you an indication of the cash positions, April and May, GBP 1.5 billion cash outflow. That is actual data. It overwhelmingly is driven by onetime working capital unwind. We're not building cars. We're paying our suppliers off, and therefore, working capital is unwinding on us. We think that's the best part of GBP 1.2 billion of that GBP 1.5 billion, which tells you, even when volumes are 50% of last year, the underlying cash loss over 2 months has only been GBP 300 million. That's how dramatic an impact we're having on this place. The outflow for FY '21, quarter 1 is expected to be less than GBP 2 billion. And with 2 weeks to go, we're definitely on track to be lower than a GBP 2 billion outflow in Q1.

So let me repeat. We have not drawn down our RCF facility, right? There is no need at this point in time for us to draw that facility down. Adequate liquidity is available with the new funds. Cash on hand, including the RCF is GBP 4.5 billion plus.

Outlook. Full year performance outlook provided when we get better clarity going forward on what that demand is. It's a demand-led production and wholesale and revenue and cash generation. So it would be inappropriate for us to second-guess that with so much uncertainty still around pace of pickup in the marketplace, people coming into the dealers. We're driving free cash flows, though, from Q2 to Q4. That's the plan, and we expect to deliver on that plan.

I think that may be my last slide. Just check? Next one, please?

Yes.

Yes. Thank you. Thank you.

Thanks, Adrian. Looking into the Tata Motors' domestic business and the challenges we faced, callout would be in terms of the growth decline of almost 37%, in which the M&HCV declined almost 50%. EBITDA, obviously, getting impacted significantly because of this collapse in demand that we saw. And the system stock is now almost 0. So we don't have any dealer inventory in CV because the BS VI buildup was planned in the second half of the March, and we had the lockdown at that time. So looking forward to picking up that demand as and when it comes through, and PV also at an all-time low on BS VI inventory.

Overall, I think from a profitability perspective, the exceptionals I've already called out. And would also like to call out that even though overall free cash flow was trending well in March before the lockdown impacted, second half of the year, we had a positive cash despite everything, the mayhem that you see in terms of numbers there.

And moving on to the next slide, so we have -- actually, I would summarize our performance. Go back, Prakash, a minute. If I summarize the performance of Tata Motors, I think we are quite disappointed, that despite the robust internal turnaround plans and actions that have delivered, we are unable to compensate for these shocks that are just coming one after the other and look forward to watch interventions from our end to navigate this crisis.

Go forward. The profitability bridge. If you notice, almost it's entirely volume mix and pricing as the BS IV to BS VI migration was happening. And structural costs, they managed to keep it flat once you adjust for the depreciation and amortization for the whole BS VI investments that you see. And we do expect this to start trending down as we start cutting out CapEx in the coming years.

As far as overall piece is concerned, the EBIT margin is more or less explained again by volume mix and net pricing. And the forward impact for the quarter was almost about INR 500 crores.

Go forward. On the free cash flow side, the good part of the free cash flow is the way the receivables and inventory has come down. But, of course, the sad part of it is the whole operating cash flows not able to fund the investments that are out there. And that's one more reason why the callout on the capital reduction, particularly in the scenario where demand is not likely to be strong, has been done. And the COVID impact for the quarter was almost INR 2,000 crores because of collapse in payables and acceptances, very similar to what Adrian called out as well.

Go forward. Investment spending just go forward, the same numbers. You've already seen it, rather than the callout that FY '21 is restricted to INR 1,500 crores. And it will be fundamentally on regulatory spends and products that have already reached advanced stages of landing. And everything else will be kept in abeyance until we are able to see demand coming through, and we are on our right to grow.

Go forward. Market shares has been a good story for us on the key categories of medium and heavy commercial vehicles and intermediate-light commercial vehicles. These are quite high shares that are coming back after a long period of time, so quite happy with that. At the same time, I'm disappointed with the small commercial vehicle and pickup segment, where this is a volume segment, and therefore, this does talk from a salience of the total category. This does have significant salience, and therefore, that's the reason why the overall market share is being held.

Clearly, plans are afoot with -- which Girish can talk about in terms of how to pick this up, but it is good to see M&HCV and ILCV picking up despite very, very clear focus that we're not focused on wholesale, we want to do the retail focus and that's helping deliver sustainably.

On the P&L of the CV business. Move forward, Prakash. Overall, I think the EBITDA numbers just comfortably trends on double digits has definitely been impacted by the collapse in the business on the M&HCV side. And while we believe that while inventory levels have all been well managed there, clearly, the operating leverage hasn't kicked in at all and that has clearly created the problem that you see here.

Move forward. On the passenger vehicle side, despite shutting down the retail of -- say, sales system under Concorde as well as the distribution arm, the wholesale market shares were held and -- from a point of view of during the course of the year. Retail market shares were in line with last year of roughly about 6%. And this is something that has helped us in terms of keeping our dealers interested in this and ensuring that they do not get into trouble with the BS VI. But this is not good enough, and this is what Shailesh will talk about in his section.

Move forward. And the profitability is fundamentally coming out of drop in operating leverage as well as the inventory correction that we have done, all contributing to the drop in operating leverage. The good part is contribution margins are steady, in line with the turnaround plans already implemented. We now need volumes to kick in for this business to start picking up, and that's the brief that Shailesh is working towards.

Move forward. And what is our response? Similar to what Adrian talked about in terms of the focus. From our side, the 3 clear imperatives in the India business: one is to secure growth; secure cost; and secure cash. On the secure growth side, I will leave it to Girish and Shailesh to talk about it briefly. On the cost side, we've clearly put out a plan to reduce INR 1,500 crores of costs in the Tata Motor system, both variable and fixed. And on the cash side, one is about the CapEx and working capital of a reduction of almost INR 4,500 crores and also secure a funding of INR 4,000 crores, which we are in final stages of closeout. That is the overall funding situation which I'll talk about in a while.

Just move forward. Let me hand it over to Girish, who is on the line to talk about briefly the CV challenges that he is seeing in the market and how we plan to step up customer engagement. Girish?

Thanks, Balaji. Now, I think before I get into customer engagement, just a point of information on the market share. So as Balaji mentioned, we grew the market share in both medium and heavies and intermediate and light commercial vehicles. And you will recollect that this growth has now happened for a second year in succession. And especially in medium and heavy commercial vehicles, we actually had grown the market share last in FY '10. So FY '11 to FY '18, there was a downtrend, which was reversed last year, and this year, we continue to grow. So that's how, I think, the market share in this medium and heavy and LCV have grown for 2 years in succession.

Coming to this year, I think as we entered into or we were exiting the last financial year, I think the COVID struck us. And the first thing which hit us was disruptions in the supply chain, especially where our material was coming from China and Europe, and then started the national lockdown in the last week. So the first step that we took was to develop a business continuity plan for ourselves. Then we also deployed this business continuity plan to all our channel partners, both in domestic market as well as international market. So this business continuity plan essentially focused on a few things -- few themes, 10 themes, essentially. So on employee safety, then social responsibility, cash conservation, cost reduction, and then also, as we start getting back into the restart phase, how do we look at demand generation and demand fulfillment. So this business continuity plan has been a very good mechanism for us to keep the company on track as well as the channel partners on track and all of them have found it to be very useful.

Coming to the customer engagement, I think in this period, both the customers as well as our dealers have learned the digital way of increasing very well. And I can tell you that more than 1 million customers have been engaged during this period for 2 reasons. One is to explain to them the BS VI product range and also to start generating the pipeline. In addition to this, there has been a lot of engagement with the other stakeholders in the business, so be it financials, body builders and so on and so forth. So this has also helped us to finalize all the financing schemes, which are required for the BS VI vehicles. And in quite a few segments, we have been able to finalize the schemes in a manner that the equated monthly installment is equivalent to BS-IV EMI. So this gives a good lead for the customer.

This year, we are also focusing on looking at the segments that are likely to grow or likely to show better growth as compared to the others. So we see a few segments which are coming up. The first one we see is, for example, tippers in medium and heavy commercial vehicles. And this is comparative to the cargo range of vehicles. We also see good demand coming in for e-commerce for petroleum, oil and lubricant segments and also for segments like transportation of agricultural and dairy produce. So we are focusing on these micro segments and engaging with the customers to generate the demand, to generate pipeline.

We also started seeding the BS VI vehicles for the initial lot of identified customers, which is a good thing. So retail of BS VI has obviously started. And we've also increased our focus on the non-vehicle business or more so after-sales business. So here, we see that more than 95% of our workshops across the countries are open now. We also see that the job parts of the number of vehicles serviced in our workshops have approached very close to the pre-COVID level, which means that the workshop revenue for the dealerships are coming close to earlier period as also the spare parts revenue for us. In addition to this, used vehicles -- used-vehicle business is likely to go up this year and that remains our focus area.

Coming to the cost reduction and cash conservation. So Balaji has already spoken about it. So in cost reduction, we have actually repurposed our teams, mostly the engineering and operations team, to look at cost reduction. And this cost reduction program goes even beyond what we have been doing over the last few years. So this is focusing on direct material cost as well as all the variable and fixed conversion costs and as well as other fixed costs. So significant targets have been taken across all the cost heads and we have good plans for almost the entire amount that we've targeted. And for rest of the plan, also, we have good visibility to these areas, as the teams work towards idea generation.

In terms of production, I think we are working with strong guidelines for inventories as well as receivables. And also the CapEx has been reduced by a great extent as compared to the previous 2 years. So in previous 2 years, we have done bulk of our investments in the BS VI transition, as also improving the product propositions. And now this year, as well as next year, we are going to focus on some of the remaining BS VI products, the Phase 2 ones, which we had intentionally decided for Phase 2 and also preparing for the next set of regulations. So that's where we are focusing and have been able to cut down the CapEx very, very well.

In terms of demand fulfillment, as you know, we have 5 plants in commercial vehicles. All the plants have started operation -- have become operational now. From 18th of May, we started the first plant, and 28th May, it was the last plant which started. And all the plants are functional now. We have around 30% of the manpower, which is coming to the plants to start the production. So transition to BS VI has happened now and we have started producing the BS VI vehicles.

As a part of this, we are also tracking the suppliers' ramp up. So we were tracking almost 1,000 supplier sites within the country to ensure a smooth ramp up. And I'm very happy to tell you that more than 95% of all these vendor sites have started working, which are required -- which actually supply the material to us. And as a part of that, we are in a good stage now for ramping up our BS VI production.

We are maintaining the social distancing measures within the plants. And the MHA guidelines have been converted into very clear standard operating procedures. So more than 100 standard operating procedures have been put in place, be it for our plants or channel partners. And there is also a strong audit mechanism to ensure that all these procedures are adhered to.

During this entire period, we also looked at our social responsibility and support to the community, especially to the driver community. So we have ensured that the insurance policy that we were giving to our drivers, the medical insurance policy, also covers COVID testing and treatment now. Within our plant, we have continued to support all the temporary workforce as well as the local communities around the plant. And through our channel partners, a lot of support has been provided to drivers all across the country. Especially when the lockdown started, there were a lot of vehicles which were stranded, the drivers were stranded. And our channel partners have provided a lot of support to them during this entire period. So these are the actions which are in place, in the buckets of demand generation. So we did start off the pipeline generation as the country comes out of lockdown. Demand fulfillment, I think we are ramping up our production for BS VI, and we'll be in a position to supply the pipeline that we generate.

And finally, I think a very strong focus on cost reduction and cash conservation actions also continue to ensure that we are absolutely on track.

Balaji, back to you.

Yes. Thanks, Girish. Can you quickly move to the PV slides, and I'll hand it to Shailesh on his plan. Shailesh?

Yes. Thank you, Balaji. So as far as PV business is concerned, as mentioned by Balaji, now we have a very strong product portfolio in place, which provides higher addressable market on the back of a completely new refreshed range, and this provides us an opportunity to reimagine the PV business and secure its future growth.

So the approach would be to deliver on some key milestone in a very time-bound manner and through very strong rigorous execution. And as you can see, these milestones are driving higher sales to achieve a double-digit market share on the back of these strong products. We would be focusing on strengthening the operating cash flow, and here, it will be through corrections in the variable -- structural corrections in the variable cost and fixed cost. And of course, then expand and strengthen the product portfolio through the internal approvals and a potential partnership going ahead.

So in order to support these milestones and drive systematic actions, we are going to focus on 6 key areas to reimagine the business and prepare it to be relevant and fiercely competitive in future. So the first one is reimagining sales. And we'll focus here on driving change and mindset towards retail. And we would direct the policies and work practices that drive this behavior and also bring forth cohesive working between the Tata Motors sales team and the dealers, which would ensure better channel engagement as well as a very strong focus on the customer experience.

The second one, which is reimagining the PV dealer process and resources, in this initiative, we are going to focus on driving twin objective of growth and network profitability by redefining the dealer systems and the HR practices to ensure that we don't compromise on the sales attractiveness.

The third one is around reimagining the product delivery. And as I mentioned, we now have a very comprehensive and refreshed product portfolio in place. Now the focus of this initiative would be to ensure that an agile system and a team is in place that keeps the portfolio relevant, basically, through timely and speedy interventions so that we keep the market excitement on as far as our portfolio is concerned.

The next one is reimagining the PV digital transformation. As you know, digital is going to be the key source of differentiation and key interface of the new evolving customer journey. And we see that COVID has just accelerated the shift towards greater need of the customers to get an end-to-end immersive experience on digital platform. And therefore, digital transformation initiative is focused on delivering enhanced user experience, customer connect and reach.

The fifth one, which is reimagining PV aftersales, here, it is of great important, I think, for the business, and we have the aspiration to be seen as a leader in aftersales experience. We have covered some distance in this regard by being rank #2 in CSI for last 3 years, but I think we definitely need to bring greater transformation to achieve our aspiration and this specific initiative is going to focus on the same.

Last, but not the least, reimagining PV brand and marketing. Over the last few years, the new products that we have launched and the strategy of focusing on being NEW FOREVER has actually helped us in establishing stronger connect with the personal segment customers and also relates to the younger customers. And it gets reflected in the fact that we -- our NPS score has been increasing over a period of time, and today, it stands at around 25. And therefore, we need to continue working on enhancing our brand imagery to build very strong perception of the PV business in the market, which is very essential to drive the future growth.

Apart from this, pretty much similar to what Girish mentioned about cost reduction initiative. There's a very steep reduction which we have planned for both bringing structural improvements and variable costs as well as fixed costs. And the focus here is to take it to the next level of what we have been doing for the last 2 to 3 years, and we would take it to the next level by implementing new cost reduction levers, making the decision-making faster. And also, we have significantly increased in the last 2 months, also, the intensity of ideation workshops. So we are pretty confident that the stretched targets that we have taken, as far as variable cost and fixed cost reduction is concerned, gets delivered.

So this is, in summary, what we are planning to do as far as reimagining the PV business is concerned. Back to you, Balaji.

Thanks, Shailesh. Let me now cut -- move forward, Prakash. This we already covered, so let's move forward. I'll just get into the funding slide.

At this point in time, we have -- we are in final stages of securing a INR 4,000 crores of term funding. INR 1,000 crores, already done, another INR 3,000 crores will be done this week itself. And we'll continue to evaluate other options at an appropriate time. And we believe, therefore, we are well placed from a funding perspective.

Move forward. Tata Motors Finance, take a minute on that. It's a business that's now actually implementing the strategy that we had called out assiduously. And it's going asset-light. It's looking at its ROE improvement plan and has -- even though the disbursements have slowed down, thanks to the market situation, continues to hold a steady market share of about 27-odd-percent. And its asset-light strategy meant that it has securitized or assigned more than INR 9,000 crores of assets. So we have sold down our assets. And the overall GNPA, we'd want to track it both on and off book so that the quality of the assets that we are managing is fair, so that's about 5.1%. And most importantly, the cost-to-income ratio, which was about 67% last year, is now down to 51%, and it will go down further in the coming year as well. Sufficiently liquid, and we are not seeing any challenges with respect to it getting its monies that is needed. And this business has now delivered a PBT of INR 149 crores compared to INR 123 crores last year, an improvement despite the challenges of the NBFC market and the industry actually face.

Move forward. So last, but not the least, I'll leave the looking-ahead slide with you calling out 2 things. One is, at this point in time, we will suspend the outlook until we get clarity on the demand. We -- with the minimum revenues and -- both in JLR and here, we do expect Q1 to be significantly impacted. But we do expect to see a sustained improvement in cash flows from Q2 onwards as things pick up and both in TML and in JLR. And therefore, the plan on -- with the very clear callout on deleveraging, which I called out earlier, and the focus on JLR getting cash positive next year and TML from cash positive from this year itself, we believe that we are on the right track. But obviously, the COVID crisis means that the level of challenge that all of us are dealing with has gone up multifold. So that means we need to respond also with the same level of intensity. And we believe with the intervention that we have planned on cash and cost, on Charge, on CapEx and explicit callout on deleveraging, we believe we are moving in the right direction. And as and when we have further actions in this direction, we will share with you. The theme of deleveraging is something that I want to leave you with as a takeout.

With this, let me now hand you over to questions. Yogesh, over to you.

Thank you, Balaji. Operator, can we take questions now?

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

This is Pramod here. Two questions. One, with regard to the stimulus packages accounts launched in the global car market, how do you view them as they are more inclined towards CVs? And how you feel JLR is positioned to benefit from the same?

Do you want to cover that, Balaji?

Adrian, yes. Please go ahead.

I thought the first question -- wasn't the first question on PV?

It's very difficult to understand the questions here. So we have problems to understand it, so.

All right. If I can repeat. Basically, considering that there are stimulus packages being announced globally for reviving the car demand, what's your view on the same? And how JLR is positioned to benefit from the same?

JLR stimulus. Stimulus package for what, excuse me?

From the government.

For car demand revival in Europe and other countries.

The stimulus at the moment from the countries is quite different. They're in Europe, difficult to understand. In Norway, we had the very first one in introducing premium electric vehicles. And we have our I-PACE, the award-winning car. So in this kind of going green, we can maybe benefit. In addition, we have 6 PHEVs already in the marketplace. So we have a very, very young model line. So also, in that context, I guess it will help. And I see in the U.K., still the discussion about the order of stimulus. So I cannot give you a clear picture about that.

Sure. Second question is with regard to the PV business. What's the interest you are looking at or a time line for bringing a partner into the PV business? And how should we look at those milestones?

Yes, apologies. I didn't realize my phone had gone into mute after I finished, so I couldn't respond earlier. So the partner, I think, we are in conversations with various OEMs and multiple levels of interest is there in this. And at an appropriate time, when we are finding the right partner, we'll definitely tell you. The -- one of the reasons for the subsidiarization is also to enable us to get a right partner in the subsidiarized entity and is very much part of our plan to take PV sustainable over the long run.

The next question is from the line of Pramod Kumar from Goldman Sachs.

Sorry for your loss at JLR to COVID. My first question pertains to the debt covenants, Balaji, as in are there -- is there any risk of any of the debt covenants across the group companies getting breached given what's happening with the financial performance? And also, related to that, is basically the existing financial support what you guys are getting from the U.K. government. And how much does it impact your ability to really rightsize the U.K. operation given the substantial drop in volumes and substantial scale buildup outside of U.K.? So if you can address both of them, please.

Yes, I can confirm we don't have any financial covenants that are onerous or that get breached because of this. So those are well under control. As far as U.K. government, those are -- the last one we had was a U.K. funding that happened. And that is something that we were -- we took in October last year, and those have been well received and as part of the funding plan for the year. The new ones, conversations -- as JLR has called out earlier as well, conversations continue on a variety of areas. And as and when something fructifies, we will let you know. And I think from our plan, those are refinancing debt. They are not fresh debt because the overall deleveraging plan is basically being called out to ensure that we take down the levels of debt to more sustainable levels. And hence, as and when something fructifies, we'll share with you.

And any restrictions which come attached with these funding arrangements on your ability to rightsize or shut one of the plants, anything like that?

The conversations happen on multiple forums on this. And we have said at this point in time, we will take the debt that we believe is comfortable for us in terms of adhering to the requirements, our strategy as well. So still, I think these are still in discussion stages. If something fructifies, we will share with you.

And second question is on the JLR negative working capital. This is one of the few global companies which has got a negative working capital cycle. How sustainable it is given the headwinds for the dealer community is also facing and the shrinking volumes, right, and the increasing complexity of the business? So do you -- because that's a big source of capital for us in terms of cash flow -- of cash flow generation, sorry. What is the level of confidence on this being a sustainable practice, even, say, 2 to 3 or 5 years out from the management level?

So let's be clear about why the negative working capital is actually happening. It's happening because we stopped building vehicles in the third week of March for 7 weeks. And therefore, we stopped bringing parts into our factories. And therefore, we were paying suppliers for previous deliveries 2 months before, which we actually are now no longer building vehicles. It will reverse once our plants open, as they have. It will reverse once we start bringing parts into our factories, and it will reverse once demand -- it will fully reverse once demand lifts towards pre-COVID levels. So it's purely as a result of settling supplier payments for the previous 6 to 8 weeks' worth of production, and not actually building cars from the end of March through to the end of May. The restart process page we showed you showed that most of our plants began building again, week commencing the 18th.

Hello?

Adrian, apologies. My question was on the sustainability of the negative working capital model, where you get the money from dealers upfront and you pay your vendors with a delay. How sustainable is this practice of getting the money from the dealers upfront? Because most of your global peers don't run a negative working capital cycle, wherein working capital is a source of cash flow. My question is pertaining to the sustainability of this in the longer term.

We work with funding partners within all of our regions. We've referenced North America where we work with Chase. That's a well-established model that we actually put in place just after we came out of Ford Motor Company 11 years ago in the great crisis. So that is incredibly sustainable as a model, and it will continue. And the working capital negative will reverse once we start building cars.

Fair enough.

Yes. I think...

Yes. Sorry, sorry, Balaji.

I didn't have any...

By the way thanks a lot to Goldman Sachs. It increased their forecast. So credit was really very interesting.

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

Balaji, my first question pertains to only a housekeeping one, on gross margins. We have seen across businesses in this quarter, gross margins deteriorating, essentially, be it Y-o-Y. So any specific reasons for that? Is it more because of inventorization? Or there has been pressure on commodities or pricing pressure also?

Two -- three things that come to mind straightaway. One, of course, is if I take the India business, the mix has been completely out of whack given medium and heavy commercial going down. So that has been a headwind against us. Then, of course, is VME both here and in JLR because of the BS VI migration, BS-IV inventory being taken out, discounts in the market because of a stressed-out market situation. And JLR, of course, Adrian did talk about the residual value impact coming from an, let's say, area like U.S. And third, of course, is given the entire China situation that we had during the course of the year, mix from a geography perspective also works against you as far as JLR is concerned and the combination of these mean that you do have a challenge on the contribution margin. And those are the things that we hope to reverse as we look ahead of it.

Commodities per se, as we look into the future, no major inflation expected as far as material. Yes, there will be here and then things there, particularly some of the more -- things like rhodium, platinum would be things that we'll watch out for. But barring that, no major commodity inflation coming up.

And the second question was on the comment made as in JLR break-even level has been brought to around 500,000 units. How much lower it can go by -- over next 12 months, the break-even levels in JLR?

Adrian, would you want to pick that up?

Yes, we're really struggling to hear the questions. I'm sorry, the line clearly isn't very clear. So could you repeat your question, please?

Yes. Let me. Actually, I think Chirag's line has got a problem. The question was at 500,000 units, the cash breakevens have come down significantly to 500,000 units. How much further can it go down, basis your experience for this one, was the question?

Well, it's going to be -- it would be much lower in this fiscal year. So at least another 10% lower than that this fiscal year. But my view is, once we actually reappraise what COVID means, we'll be better placed to actually respond to that question, right? But it certainly can and will be lower in FY '21 than the 500,000 units, significantly lower.

The next question is from the line of Sonal Gupta from UBS Securities.

So one on JLR. I just wanted to understand, there seems to be a very sharp decline in average selling price per unit in this quarter versus previous quarter. So any exceptionals which are going in the revenue -- I mean, in the VME? How big was the VME for this quarter?

Yes. So there's 2 pieces impacting that. There's -- obviously, in Q4, COVID actually impacted China more than other areas, and that's important to us. On a VME basis, we had 2 significant adjustments to make. One was a reappraisal on the marketing required to actually sell the 100,000 units that we actually had at the end of March. We booked about 2 percentage points increase in VME for that within the quarter. And the rest was, I think I referred to earlier about the incremental residual value risk we fed in, which was $78 million, which is just about -- just over 1 percentage point as a result of weakening of residuals and the auction prices in April and May, although they did actually strengthen in May. We think that $78 million incremental provision is about right. That was the late assessment we did towards the end of May. They're the 2 big pieces within the quarter that dramatically impacted the net revenue.

Sure. And Balaji, the other question I have is, I mean like, what is your thinking in terms of raising further equity for the company and what will drive that? So I just want to understand how do you see the funding requirement from an equity perspective?

I think 2 comments here. One, if you look at the internal plans for the business, very clearly looking at significant cash generation both in JLR and in TML going forward. And I think the trigger for this -- and additionally, a callout on deleverage has also been done. So I think the key trigger for this, if you look at what is the level of our demand and how fast it is coming. And basis that, we will need to decide how do we ensure that the business remains in sustainable levels of debt and at INR 48,000 crores and also the callout on the Q1 numbers, we believe definitely this debt is unsustainable. And therefore, the operational plans have been put in place. And then we believe that is good enough from a point of view of ensuring a level of cash generation that we can show the debts to start coming down. And then we need to look at other options subsequently. But the entire focus is to get the operational performance up and not just look at it from an equity perspective alone. So the issue is not a debt equity issue per se, it's about sustainability of debt per se and the interest cover that you need to operate with. And the demand shock is what we are watching, which we believe is tough, that's going to get worse, then we'll need to think about it.

The next question is from the line of Binay Singh from Morgan Stanley.

The first question is on China. As the chart showed, we've started to see volume recovery. Could you comment a little bit about discounts in the market? How is the profitability of the China -- and how do you see the profitability of China JV going ahead? That's the first question.

Okay. Let me take that one before your next question. So think about China as 2 pieces of our business. One is an import model, where most of our larger SUV-5 units go. Actually, through this recovery period of April and May, transacting prices have increased, and therefore, marketing support has been a little lower. So not only do we get a bounce back over year-over-year, we -- actually, the price that the customer is paying in the market was slightly higher, 1% to 2% more than in pre-COVID periods.

From a JV model, we've done a lot of work as a team with the joint venture over the course of the end of 2019 calendar year. That was impacted by COVID. You know the plant actually was the first of our plants to close at the end of January, but we did actually introduce the Charge+ program too at the JV and it was sponsored by our partner, Chery, as well. So we now believe we have actually reduced the break-even point in our China operations very, very close to the forecast volume for this year. So you will see improvements. And that's all areas, just like the Charge+ program. So that's on manufacturing costs, that's on structural costs, that's on marketing costs, that's on material costs and also net revenues. So we're working hard to increase the net prices for all of our vehicles.

I think I've mentioned before that 4 of the 5 nameplates have been refreshed over the previous 12 months. We took a lot of action to reduce the stocking levels and that's all starting to come together. So I can confidently say on the track we're on, you will see year-over-year improvements from Q1 and going forward for our JV business.

Great. The second question is that...

It really looks positive.

Yes, that's encouraging. The second question is when we look at the Charge+ plan for 2021, how dependent is it on underlying volume, especially the sustained improvement target that you have for GBP 750 million? Or the other way around, what is your sort of underlying volume framework when you're setting out for this GBP 1.5 billion of savings?

Yes. Less based on volume than you might think. Of course, elements of the Charge program like our material cost would be. If we take a GBP 1 out of the car and produce 500,000 cars, it's more than we produce 450,000 cars, right? So there's a direct link on our material cost element of the program. But I did mention, I think, earlier that, that particular element of the program will kick in, in the second half of this fiscal year, where we do expect volumes to be higher.

The other elements, warranty cost is a big piece of it, much less volume dependent. Actually, more about where we sell which cars. And the energy we're now getting in speed of fix, which has dramatically improved over the course of the last 12 months as well as the early signals that we're starting to see on '20 model year vehicles, they are definitely tracking better than the last 3 model years, particularly '18 and '19, which is the really great news here for us. Rules of the road do not allow us to start to show that until the vehicles become maturer. But at the end of quarter 1 and certainly, quarter 2, if we continue on this track, we will see improvements on warranty cost performance.

Parts and accessories will partly actually be impacted by volumes, of course, as you would expect. There is a link to volume there as well. Other elements like overheads, if anything, we have been more aggressive through the Star Chamber. So those structural costs will likely be lower in the first half of the year than they would otherwise have been as we've constrained the organization in partial hibernation, where we just haven't been building.

So it's a mixed bag. But the pieces that flow strongly will be the material cost piece, the parts and accessories at the warranty and elements of that structural cost piece. So the program is really well balanced, actually, and I think you'll be quite impressed as we go forward in the quarters.

The next question is from the line of Atul Singh from Nomura Securities.

This is Kapil. Balaji, I wanted to know what is the sustainable level of CapEx that we should think about, both the India and JLR business? And how much is the R&D and maintenance split for both?

Yes. I'll let Adrian talk about the business -- on the JLR business. As far as India is concerned, I think the starting point of it is about what is the level of demand that is out there and what's the level of affordability that you can have. And obviously, we want to ensure that the products are out there, but all these also require a demand on the other side. So at this point in time, it's a recalibration of the CapEx of INR 1,500 crores, all of it is CapEx. And this will have -- bulk of the focus will be on regulatory compliance and the new products that we intend to launch, not much as far as on-the-ground factory investments are concerned. Yes, there will be to the extent of tooling or jigs and fixtures and robots that we need to put in place, that's about it. The bulk of it will be related to regulatory and products.

As far as sustainability of it is that, I think it totally depends on what's the level of affordability that you have. And in a plan to deleverage, we will obviously look at all options including partnerships to ensure that we are managing this in the right way. Yes?

Adrian, on the JLR side, would you want to take that?

Yes. Thank you. Well, we've given you the guidance on the GBP 2.5 billion for this year. Just so you're clear on that, we do have some of our programs on pause. Obviously, the ability to actually work all the programs the way we're attempting to work is more difficult. So you should see and you will expect to see actually, half 1 investment being lower proportionately than the second half of the year. We do expect to lift those pauses as we go through the course of Q2 into Q3, which is the GBP 2.5 billion. I mean, the afford -- and by the way, within that, just to repeat, there is no significant change or cancellation of any of our programs. Clearly, affordability and speed, speed of development will be judged going forward. We will build our liquidity. That's most important. We are determined to be free cash flow positive, right? Within there, there's a level of affordable investment, and we will moderate for time without actually missing a drumbeat on the product. So we've given previously guidance of up to 4%. It will be lower than that. We'll come back later in the year once we've figured out speed of liquidity build and affordability and what that means for those programs on pause.

And then, Kapil, just to add to it, there was a precise reason why we are giving ourselves degrees of freedom with the interventions on cost and cash, both here and JLR, because it's not sustainable if you just keep -- you can't cut your way to prosperity, you'll need to grow your way to prosperity. And the cuts are more disciplined to ensure that we choose the right vehicles to invest in. So this is not the norm. This is more a way to ensure we survive the crisis. And then once we tighten the belt, get our processes right, nothing stops us from getting back on track again. But we need to acknowledge the external reality.

Yes. Fully appreciate that. Second, on Defender, we have 22,000 bookings. Are these retail bookings with deposits? And could you give some color what kind of demand you're seeing there? I mean, monthly bookings or something?

Yes. So these are dealer orders, half of which is -- half of which have already been presold to customers. We're seeing quite a positive, as we often do in early parts of the program, mix of those vehicles, it's proportionate across all other regions. So there's no one region any stronger than the others necessarily. So we've got a good balance of those sales, a good mix of the sales across all regions. We've got more than 4 -- more than 3 months forward cover. And bear in mind, we haven't had 1 dealer launch yet. So we've already sold this off virtual events with just the 120 and we've actually contained all orders on the 90s. So it's a really, really, very strong start.

Clearly, we're in an unusual environment, in an unpredictable environment. And again, I know I keep saying this, but we'll be much stronger placed in 3 months to be able to give you some direction you may be looking for from what we can expect from this product, but very excited over the first few months.

You should drive one. It's fantastic.

The next question is from the line of Gaurav Khandelwal from Mirae Asset.

My first question is I wanted to understand how well is the pension account in JLR funded? And while you were there, is -- with the decline in interest rate, is there a risk that you would have to invest onetime in the pension account?

Do you want me to take that question?

Yes. I'd love you, Ben, to take that question. Thank you.

Okay. So because of the way rates moved at the end of March with many of the distortions in the market, we actually ended the year with a pension surplus of over GBP 400 million. So I would say that was, in part, a result of unusual rates, particularly wide credit spreads at the time. And so as credit spreads have normalized, I would expect that we see the pension return to a deficit position as it was before. So I think that's what I'd say. I think that it's a manageable burden at this point in time.

Good to hear that. And Balaji, any indication what kind of a funding you would need to invest in Tata Motors Finance?

None for the year. You'll notice that we have gone in for an asset-light strategy, and we are selling that down. And the debt equity ratios, measures all are trending well, and therefore, no plans to invest at this point in time. And they will be self-sufficient in their funding requirements by sourcing and selling down assets. We will go asset-light there. We're already at about INR 32,000 crores, and we will bring it all the way down to INR 23,000 crores.

Okay. So can I -- Balaji, last question from my side on the domestic business. So if you -- if I just draw horizontal comparison on a quarter-on-quarter, employee costs and other expenditures, I think both these expenditures have been very sticky in the stand-alone business from the last 8 quarters, particularly the employee cost. So you -- and now your volumes, because of exceptional reasons, have been down at almost around 40%, 50%. But, I mean, what gives you confidence that you will be able to cut down your costs going forward when, in the last 2 years, these costs have actually not reduced, they have only increased on absolute basis?

Yes. We shouldn't forget that as a business that was growing at about almost 40%, U-turn and then drops to 37%, there is a lead time to -- actually, to navigate that kind of a fall that is there. And if you look at percentage turnover, 3 years in a row, the employee costs, the percentage turnover was actually trending well down. And our entire focus in JL -- in Tata Motors, if you recollect, I said it multiple times, whilst fixed costs have been tightly managed, our intention was to go look at the variable cost and get it right. And now with the collapse in volumes of this magnitude, I know by coming through this, the current cost road plan will have all aspects of course looking at it, including fixed costs. And therefore, those plans will be put in place to ensure that we remain -- we reduce our breakeven in a collapsed volume scenario. It's a question of focus that we are working on. And at that point in time, with the growth in volumes, you had 1 kind of an objective. And now with FY '20 turning the way it did, you obviously have to correct for it going forward. And that's part of the plan for the year.

Next question is from Sahil Kedia from Bank of America.

I have a question for Balaji. Balaji, what happens to your hedging strategy in the ForEx side at JLR, considering that there's been such a sharp decline in volumes? How are you thinking about that because some of the hedges would have been taken before? So first, if you can kind of give your thoughts on that?

Yes. I'm sure Ben is itching to go on this particular point, but let me just set the context and then hand it over to Ben as well. Hedging and the underlying go together. And as the volumes start coming off, we consistently keep reviewing our hedge position, and we do dial-down, dial-up depending on the ranges that we operate under. So this is a dynamic process, and it is very similar to ordering inventory, we order hedges on that respect. And that's how we put it out and take it out depending on what is the external demand out there. So therefore, we do not expect any dramatic noise on the hedges because of this. Once you take underlying plus hedges together, which is what we have been consistently reporting. Let me hand it over to Ben in case he would love to give more color to it than what I've given.

Yes. The only thing I'd also mention is that we have been more -- just because of all the uncertainty in the world, we have been more -- with Brexit and otherwise, we have been more conservative about our hedging levels. So we went into this with lower hedged levels than perhaps we would have in the past to start with. It is the case that we've been dynamically monitoring the reduction in volumes, and we've been proactive in essentially closing out hedges as soon as we see any risk of overhedging involved. And that hasn't involved any significant release of P&L as a result of those closeouts just because of where the de-designated hedges have been relative to the hedging rates they were originally done at.

I have one more question. You guys have taken the advantage of the furlough from the U.K. government. Can you tell us what is the amount? Or what is the likely amount that you could have done? And what is the benefit that you've got? If you could just help us quantify that.

So we expect over the quarter 1 period, a monthly amount to be close to GBP 50 million. 20,000 people were furloughed at maximum. That is now reducing in June. Of course, now we have 13,000 people. If you use the GBP 2,500 a person, you broadly get to the monthly amount.

Before we go on to the next question, it's 8 o'clock now here. And we had the call so that we're ending at this time. But given there's a fair number of questions in queue and maybe the presentation overran a bit, happy to extend it by, say, 15 minutes, if it works for all of you. And else, happy to take it down here, depending on how each of your individual diaries are. So we are happy to stay here in case of further questions are coming up for the next 15 minutes.

We take the next question from the line of Rakesh Jhunjhunwala from the Rare Enterprises.

I applaud your late fight back. My question is one of the electric cars, since your electric car, I-PACE, has got such a good response, what is the capacity we have to manufacture? How can it be scaled up?

Shailesh, can you pick this question up?

And what is it regarding Jaguar cars?

Balaji, this was regarding I-PACE.

Jaguar's.

This is regarding I-PACE?

Sorry, it's regarding...

Regarding the Jaguar's electric car.

Oh, Jaguar I-PACE, sir?

Yes.

Okay. Adrian, this is about Jaguar I-PACE capacities and ability to scale up further.

Yes. Well, it's more about battery supply, actually, I think for us. So you see the volumes there within our FY '20, 16,000 units. I think we referenced on several occasions, the demand ebbs and flows with different incentives from governments. Ralf mentioned that earlier. We have capacity to scale that number up based off the battery supply contracts we have, 30%, 40% relatively easily. So we don't see any upside misses or upside losses as a result of potentially scaling up as those government incentives shift going forward.

And is the gross contribution in this product as much as the other products?

It's a poor line. So I think the question was, is the gross contribution of this product as much as other products?

Well, the propulsion system, as you know, I think, is more expensive than other products. Where it holds -- where the market price holds up, you don't oversupply, it can be, certainly yes. We're learning what those supplies are and they're changing very quickly on us because changes to government incentives. We know as a base contribution, we actually make a considerable margin.

And don't forget, of course, it's also there as a strategy as a part of our CO2 compliance. Obviously, their full BEV units are the most compliant units and it's a part of our overall portfolio, which enables other sales and other nameplates as well. So there's 2 reasons. Obviously, the vehicle itself and the value we make on the vehicle, but also it aids our compliance strategy, which is so important to us.

How good is the demand? Hello? Adrian, how good is the demand?

How good is the demand?

Yes.

I think I've answered that. I think there's some upside capacity we could build, should the demand be there and the demand ebbs and flows really quite quickly depending on government's approach towards full BEV units.

Another question I had is -- can you repeat, please? Hello?

Just to add -- just from a numbers perspective, if you look at like the current year, the I-PACE sold about 16,000 units, and it's one of the growth drivers in terms of 4,000, 5,000 units more than what it sold last year and in these challenging times. So we believe there is opportunity here. And now with all the PHEVs and other electric options coming through in the cars, we believe this is something that's going to reduce the risk profile of the sales in JLR across markets, across the board.

No, no. I'm talking from the point of view for price/earnings ratio. But look at the way Tesla is valued as you are selling electric cars, why should you also not be valued there?

Another question I had is, can you give us the quantum of hedges that you have? To what percentage of -- or what is the hedges -- because the pound has recovered very sharply against the dollar? So the question is that what are you are hedging your dollar revenue? And what are your open hedges? What is your hedges amount?

Okay. Ben, would you want to pick this up in terms of your dollar revenues and the hedges that you have and your hedging rate, all of which is there in the update that you gave?

I'm sorry. I apologize, Balaji. I couldn't quite understand the question. What's the question?

Yes. The question is, what is the dollar volumes that we have? What are the dollar hedges in absolute that we maintain and typical hedge ratios we operate on?

Look, I'll -- no, I'd like to correct it. We make our accounts in pounds. So therefore, we are hedging the pound against all currency. Our revenue is finally recognized in pounds.

That's correct, sir.

Okay. So what is the quantum of hedge that we have, both on the supply side and on the sales side?

Correct. So Ben, the question is, what are the revenue hedges we have put in place?

And at what rate it has been hedged?

Correct. What are the revenue hedges and the rates at which we do it? And what are the pound rates and the -- sorry, the supply rates and the hedges with, particularly, euro? And what are the rates we have done at?

Yes. Balaji, that's a little bit too specific a question. I've actually got -- I'll need to pull up the notional principal of the hedges and come back. I don't know if we could go to another question, I'll pull that information up, and then we'll respond.

Yes. Can we just take this question in 2 minutes, sir, as he pulls his data?

Yes, sure. And I must congratulate you all for your response. I mean, it's very good and limiting the return, but I think things will improve dramatically.

Thank you, sir. We'll come back to your point on this one once Ben pulls up. Just WhatsApp me once you are ready, yes? Yes. In the meanwhile, we'll go to the next question?

The next question is from Amyn Pirani from CLSA.

My question was on the fact that you have cut your CapEx significantly, especially in India, and you have taken write-downs also with respect to the passenger vehicles as well. So what are the tradeoffs which have been done in terms of future launches? Because part of the strategy for passenger vehicle business turnaround was new launches and improving gross margins. So how does that work going forward?

Okay. Maybe, Shailesh, you would want to pick this up as to how you're prioritizing your portfolio?

Yes. I will take it up, Balaji. So thanks for the question. I think there is going to be no compromise as far as some of the future launches are concerned. And that is pretty much on track. And the significant release of CapEx has come from the work which we have completed as far as the regulatory work was concerned. As you would have seen that at the start of the year, not only did we launch a new product like Altroz, but also took this transition from BS-IV to BS VI to completely refresh and do model cycle enhancement, mid-cycle enhancements also with the significant changes in the product styling, et cetera. So a lot of investment has been made already, and that allows us that we are able to bring down the CapEx for the time being.

And there are new products which are also in the pipeline. This is something which we are continuing to invest on, and therefore, there is going to be no significant comprise as far as our future product plan is concerned.

Of course, as we improve our profitability, our cash generation from the business that allows us to more strengthen and grow our portfolio even better, that is something which is a decision which we are going to take as we also come out of this very uncertain environment. And then we would also have to invest into the next set of regulatory changes, which are going to come, emanating from CAFE as well as the BS VI Phase 2 and RDE. So I think we should be pretty much on track if everything goes as per the plan. So not major compromises is what we have made.

And then just to amplify that point further, I think this is not the way it will happen forever. We need to be clear that at some point, we need to get back into product creation mode, and we don't want to leave gaps in the portfolio because of that. But it is just in a cognizance of the collapse in demand for us to sometimes take this bitter pill of saying that let's just pause it a bit and get back to normalcy before we start again. We can't just keep burning cash.

Balaji, we can go back to that question, if you want?

Sure. Go for it, Ben. Mr. Jhunjhunwala, if you're there? Ben, go for it. Yes.

Yes. So okay. So the outstanding value of our hedge book in terms of notional principal, and recognize that we're hedging out as far as 4 or 5 years on some currencies, it's about GBP 3 billion on renminbi, about GBP 8 billion on dollar and then on euro, around GBP 6 billion equivalent and then smaller amounts on some other currencies. So that's the amount of hedging.

In general, we're hedging between 55% -- between 60% and 75% one route and then descending in 20% drops from thereon beyond that. So for example, we would be at 55% to 40% 2 years out. So that's the policy that we operate.

So what is the rate at which you're hedged?

Hang on 1 second. So as an example, in this year, the hedge rate on the dollar portfolio is in the mid-1.30s, descending to the low 1.30s after this year. The hedge rates on the euros is around 1.13, 1.14 in FY '21 and a little bit lower than that in the years further out, as an example.

And the renminbi? The Chinese currency?

The average -- on the renminbi, the average hedging rate is in the low 9s in FY '21 and FY '22. But I guess, I'd just point out that on the renminbi -- because the hedging market doesn't go out as far, we only hedge out 2 years on the renminbi.

I think we have time for maybe one last question before we wind down.

Sure. We take the last question from the line of Sri (sic) [Priya] Ranjan from Antique Broking (sic) [Antique Stockbroking].

My question is for Girish. You have been gaining market share in the last 2 years, too. I mean, as you have said, it's around roughly 57% in MHCV and in ILCV. So what's the aspiration there? I mean, how do you look at it? Say, we were at some point of time at around 60%, 65%. So that is our aspiration.

And then the second part is on the BS VI products? I mean, how do you -- I mean now the products, probably you know even the competitive products, et cetera, also. So how do you see -- I mean, are you confident of jacking up of the market share again?

Right. So I think on the first question regarding market share, yes, I think we would like to continue with this trend. But it's very important to note that you have to take a balance between market share as well as the realizations. I think in the previous year, the realizations have taken a hit because of the inventory which was piled up and then the market collapsed suddenly. So this year, we have a target to get both market share as well as realizations up. So that is the response to the first question.

On the second question, I think we have done pretty well in terms of our BS VI range. So right almost 3 years back when we conceptualized these products, we were clear that we are not going to use this milestone as for just regulatory compliance but actually deliver more value to the customer. And that kind of planning and conceptualization happened across the entire range. So we see almost the entire range where we have better total cost of operation being delivered to the customer.

In addition to that, we've also come out with a lot of value enhancements across the products, which is something that the customers were looking forward to, and we've also improved our performance across most important attributes that the customers value during the purchase decision-making.

So if you look at it, I think, therefore, we have a very good product range. We've also selected the technology most aptly depending upon the segment and the usage. So we have, for example, in medium and heavy commercial vehicles, 2 engines from Cummins and 1 of them, of course, is the largest selling engine in the commercial vehicles globally. We've also used the technology expertise in after equipment, both for their engines as well as some of our engines. So I think both from technology point of view as well as from value proposition point of view, we are very well placed in the commercial vehicles and addressing the entire range. And with this, we will even improve -- dial up our communication to ensure that we gain market share across the segment.

Yes. And just lastly, I mean, on the small commercial vehicle side. So how do you see the future? Because, I mean, there are a couple of 3-wheeler players who are also thinking that some of the products will not be available, so the small commercial vehicle market will probably shrink. So we will be actually getting -- I mean 3-wheeler will be gaining at the expense of 4-wheeler small commercial vehicle. So what's your thought on that?

And one more question to the passenger vehicle side. So how the products are ready? I mean, most of the products we have filled the white spaces broadly. But in terms of features and all, I mean, like we have seen in case of Harrier, we have launched many new features after, say, for -- after a year or so. So how do we see -- I mean, so can we think of, say, launching all the variants, all the features at the same time so that we don't lose out in terms of the customers, which has happened, particularly in Harrier?

Right. So let me take the first one. As far as small commercial vehicles are concerned, this segment will also degrow during this year as it did last year. But the rate at which it degrows is always less than that of medium and heavies and intermediate and light commercial vehicles. And that's the kind of trend we are seeing this year also. So the demand generation that I spoke about, I think the pipeline is healthier on small commercial vehicles as compared to the larger vehicles. That is number one.

Number two, I think 3-wheelers getting into small commercial vehicles, the actual trend that we see is exactly opposite, and I'm talking of the goods carrier segment. So over the past few years, actually, customers have been moving up the ladder and moving more towards 4-wheeler, like an Ace, because that gives them better total cost of operation as well as better earnings during the month. And I strongly believe that especially in BS VI, with the kind of range that we have even in Ace, so starting from gasoline, which almost retains the BS-IV pricing point, the CNG version as well as the diesel version, we have a very strong lineup. And, in fact, we are actually poised to take away market from other 3-wheelers.

Passing on to Shailesh for the next question.

Sure. So I think it's a pertinent question as far as Harrier is concerned, but I must qualify that our attempt has always been to do a proper featuring study of what are the features which are going to be relevant 3, 4 years from now, whenever we develop a product and try our best to ensure that those are incorporated in the product definition itself. We -- also, especially when you talk about Harrier, it is basically the option of automatic that we could not deliver coinciding with the manual transmission, and therefore, this had to go a bit delayed. But henceforth, as I said that, as a process, we would definitely -- our attempt will always be to ensure that we are bringing a comprehensive set of options as well as all the features which are relevant in that particular segment. And if you recall in the slide which I presented, also talked about the topic of a strong focus on product delivery. And this team is exactly going to focus on the same aspect that even if there are certain features and options which are left out, they're able to speedily bring it to the market. But henceforth, the attempt would also be that our featuring study is robust, and we are able to coincide all the options and features altogether in one launch that we do at any point of time in the year. So that would be attempt. But a pertinent point I would say and can't deny, that in Harrier, we have missed that opportunity, but this would be our effort and endeavor going forward.

Sure. And lastly, on the...

I think that maybe my suggestion, just take it off-line. It may be, I think, we are running behind here. We have to run into another call as well. Therefore, request if this can be taken off-line. Do come back. I or Prakash will be happy to answer it.

So thanks, everybody. Thanks all of you for staying on for another 20 minutes. Appreciate that and look forward to speaking to you soon. Stay safe, and catch you soon. Take care. Bye-bye. Thanks all of you.

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