Tata Motors Limited
Q2 2018 Earnings Call Transcript

Published: 13 Nov 2017

[Operator:]

Good day, everyone. And welcome to Tata Motors Limited Earnings Call Q2 Fiscal Year '18. Today’s conference is being recorded. At this time for opening remarks, I’d like to turn the conference over to your moderator today, Mr. Jamshed Dadabhoy. Please go ahead.

[Jamshed Dadabhoy:]

Hi, good afternoon and good evening everyone. And thank you for joining the Tata Motors 2Q results call. From the management side, we are very pleased with us Mr. Günter Butschek, CEO and MD of Tata Motors, Mr. Girish Wagh, Head of the CV Business, Mr. Vijay Somaiya, Head of Treasury & IR and other members of IR team at Tata Motors. And then representing JLR we also have Mr. Ken Gregor our CFO and Mr. Ben Birgbauer our Treasurer. So with this, I’d request Mr. Somaiya to go through for his comments for a few minutes and then we can move into Q&A. Over to you, Vijay.

[Vijay Somaiya:]

Thanks, Jamshed. Good afternoon, good evening to all the people who have joined the Investor Presentation for Q2 FY 2018 results. The investor presentation is already being uploaded in the Web site, and I’m sure you would have time to go through it. In the interest of time, I will just briefly take you through the financials and then leave the floor open for question, answer which is that. This quarter was a very strong quarter, and we have seen a significant improvement in the financial performance, starting with Tata Motors consolidated financial highlights. In Q2 FY 2018, the net revenue grew by 10% to 70,156 crores as compared to 63,577 crores in the previous quarter same period. EBITDA grew at 19% at 9,703 crores with an EBITDA margin of 13.8% as compared to 12.9% EBITDA margin previous period. The EBIT grew to at 36% of 4,667 crores with an EBIT margin of 6.7% as compared to 3,429 crores in the previous quarter last year. And if you look at the profit after tax, we have seen a trebling of profit after tax from 848 crores to 2,500 crores which is there. Moving over to Tata Motors standalone financials, this is page 12 of the presentation. On the back of the stronger sales in commercial vehicles, we have seen growth of 26% in volumes in Q2. We have revenue, which has grown by 30% to 13,400 crores as compared to 10,300 crores in the previous period. The EBITDA has grown by almost 190% to 971 crores with an EBITDA margin of 7.2% as compared to 336 crores with an EBITDA margin of 3.3%. The most important thing is we have seen turnaround in the EBIT, wherein we have move from negative 307 crores to a positive 251 crores on the back of the turnaround story, which Guenter has been speaking and briefing you from time-to-time. The profit after tax is much lower at 295 crores as compared to 631 crores in the previous period earlier. Moving on to the JLR financials, page 16 of the presentation. On the back of the increasing wholesale volumes of 5.75%, we have seen the revenue grow 11.5% to £6.3 billion as compared to £5.7 billion in Q2 FY ’17. We’ve seen a 21% growth in EBITDA to £746 million with an EBITDA margin of 11.8% as compared to £615 million of EBITDA with an EBITDA margin of 10.9% in the previous quarter. The EBIT has seen a growth of 38% to £329 million with an EBIT margin of 5.2% and the profit after tax has come stronger at £308 million as compared to £244 million. If we look at the way forward for Tata Motors standalone business, sorry for taking you back and forth in the presentation, please refer page 13. If we look to way forward, we'll continue to focus on customer engagement and satisfaction. We are concentrating on network expansion to build, reach and sales effectiveness. We are driving a rigorous cost reduction to boost the bottom line. We are also carrying out the structural improvement of supplier base. Our impact design is reading to the change in our success for passenger vehicles and we have new corporate identity connecting aspirations of our customers. Moving forward to the JLR way forward, page 21 of the presentation. JLR strategy continues to achieve sustainable profitable growth by investing proportionately in more in new products, technology and manufacturing capacity. The FY18 investment spend is expected to be in the region of £4 billion to £4.35 billion. JLR planning target is to achieve an EBIT margin of 8% to 10% in the medium term. The automotive environment has now become more challenging with the shift to electrification, greater political uncertainty, example Brexit, and softer markets in UK and U.S. with more competitive conditions generally. As previously antiquated, we do expect higher incentive levels and launch and growth cost to continue in FY18 similar to what we have seen in FY17. There is seasonality in our product launches and consequently, we have a very strong pipeline of exciting new products, which are expected to ramp up in Q4 and beyond. With this, I would stop and invite question-and-answers.

[Operator:]

You’d like to open questions, is that correct?

[Vijay Somaiya:]

Yes, please.

[Operator:]

[Operator Instructions] We will take our first question from Kumar Rakesh from BNP. Please go ahead.

[Kumar Rakesh:]

My first question is, how do you see contribution margin of electric vehicles in the early part of the cycle in the coming years?

[Vijay Somaiya:]

Kumar, is this addressed to JLR or Tata Motors India?

[Kumar Rakesh:]

JLR…

[Vijay Somaiya:]

Ken or Ben, could I request you to…

[Ken Gregor:]

I’m getting an echo. But let me just try and drive through the echo. Definitely the margins on the list -- we’ve got a horrible echo. I think I've solved it. Let me start again. Margins on electric vehicles, how do we see them? They bring challenges, I think, that’s undoubtedly the case because the cost of the batteries, in particular, are expensive. And therefore, relative to fuel tanks and engines. And the unknown factor of courses is how much and to what extent customers will be willing to pay for the costs of those batteries. And I think quite a lot of that is still in front of us. Equally at the same time, it’s also the case that in general combustion engine technology gets more expensive in order to meet the machine’s regulations and give customers the fuel economy that they want. So that is also a cost pressure for us. So those things are in front of us. And we know it. And therefore, a couple of years ago we launched a internal corporate efficiency program, which I’ve talked about once or twice in our investor calls late, which really in the face of twin challenges; one of cost of electrification and two the likelihood that margins in China would normalize overtime. And therefore, we set it by finding cost efficiencies across our business material costs efficiencies and other efficiencies, as well as hoping to benefit from the efficiencies and scale as our business gets bigger; or for example deciding to build the factory in Slovakia that enables us to have a lower cost manufactured units. So we set the barrette, developing a plan to drive as much efficiency in the business as we could. Because we knew that these cost pressures would come. I think a fair amount of that is still in front of us to see how those electrified products land in the marketplace and the customer reaction. But we’re aware of the pressure and that some of the response is what I’ve just described.

[Kumar Rakesh:]

My second question was on the gross margin of JLR. When I’m looking at sequentially 2Q, it has moved only by 40 basis points while your volume was significantly higher, sequentially. So what was the reason behind that, and if I’m looking at it directly?

[Ken Gregor:]

I mean, I think, on the plus side, sequentially, the profit has moved forward, the PBT has moved forward. So I’m pleased with that and I’m also pleased with the volume growth that we’ve had sequentially running quarters. The margin is in EBIT term margin. It’s actually fair bit higher. In Q1, we had 1% EBIT margin and in Q2, we had a 5% EBIT margin for sequential quarters. So I’m actually fairly pleased with the results compared to the first quarter year-over-year. And year-over-year, again I’m talking EBIT margin here. The EBIT margin has moved up from 4% EBIT margin in quarter two of FY17 to 5% in quarter two of FY18, still lower than we would like, if I am honest. But a step forward year-over-year and quarter-to-quarter.

[Kumar Rakesh:]

But my question was on gross margin sequentially. There we have seen largely flattish margins, and the reason behind that?

[Ken Gregor:]

I think, probably the effect of the volume and the mix relative to -- so, yes, we've seen growing volume and the product mix has broadly kept the gross margin similar. But I don't pick up so much to drag to be honest. So I think we've got profit growth, volume growth, but the margin is similar, similar volume, similar mix, similar market and product mix.

[Operator:]

We will now take our next question from Sunil Gupta from UBS Securities, but again as a reminder, if you can all limit yourself to a maximum of two questions.

[Sunil Gupta:]

Just to begin with -- just can guide us and tell us what was the FX hedges -- hedge losses, which were taken in the top line for JLR for this quarter, which is included in the revenues?

[Ken Gregor:]

Yes, I’ll ask Ben Birgbauer, my Treasurer who is with me to talk to the FX hedges. Ben?

[Ben Birgbauer:]

So there is a slide that’s in the back of the TML presentation on FX and commodity FX. So I'll just first start by overall year-on-year commodities and FX were £64 million positive, which is largely explained by commodities, good news revaluation and then some revaluation of FX with operational FX and realized hedges, broadly offsetting one and other. Q-on-Q, a similar kind of thing £42 million, good news, total commodity and FX good news Q-on-Q, that’s more than explained by revaluation of commodities, because there was quite a bit of appreciation in the aluminum prices, in particular. It was the case that realized FX hedges were quite a bit lower than last quarter, sequentially, so £343 million versus £454 million in the prior quarter. It probably is worth saying that you should look at some of that was previously realized, so you could look at it be more like £30 million change. And in that period, sequentially, we actually had bad news operational exchange because it actually was the case that the pound actually strengthened somewhat. I think what I would call out on top of the £343 million that was realized in the quarter is just that we have put on the slide the total hedge reserve. So what are the pre-tax hedge losses on the balance sheet remaining and that was £1.1 billion at the end of the quarter. So that's actually down £600 million from the prior quarter. And what that reflects is the hedges that matured, as well as the fact that the pound appreciated somewhat to some revaluation of that. And within that £1.1 billion, about £800 million was current portion. So in other words, maturing over to next 12 months.

[Sunil Gupta:]

But could you -- will the whole 343 being the revenues or there would be some hedge losses in the cost side as well. So I just wanted to understand how much would be [43 million]?

[Ben Birgbauer:]

Most of it is in the revenues, but there would be some in the cost side. I'm just actually trying to look that up.

[Ken Gregor:]

Let's take that -- the answer for, I am correct if it leads to, thank you.

[Sunil Gupta:]

So just going to my second question then, I mean, Range Rover and Range Rover Sport, will see a major change over, including plug-in hybrids coming in. So could you just talk us through, I mean. So do we see a substantial drop in wholesales for these models in this quarter and then the volumes come back in queue fold. So just could you talk about how do you see this transition?

[Ken Gregor:]

I think we will see a transition effect in Q3. In our financial Q3, yes due to the model changeover to 18 model year which is a refresh official refresh inside and outside of both vehicles plus the addition of the plug-in hybrid. I don’t think we will see a substantial drop, but we will see somewhat lower wholesales in Q3 and they pick up in Q4 relating to those vehicles.

[Operator:]

We will now take our next question from Vinto Hu from Y Capital. Please go ahead.

[Vinto Hu:]

I had two. One, just looking at the other expenses line in the quarter it looks like growths actually there was not that high, and I think lower than what at least I was expecting in a quarter where you had. They launch and presumably some launch cost there. You could just talk through what drove the other expenses line in the quarter. And then the second question is just on your depreciation and amortization. Could you give some color on what to expect over the next two quarters and in terms of D&A trends?

[Ken Gregor:]

Yes, on the other expenses, it's far to say that through that line, the hedged losses that we've just spend just talked about is running through that line. And therefore, the lower hedged losses year-over-year that Ben just described is causing the other expense line to be lower year-over-year. And maybe hiding some of the underlying higher cost and launch cost and other related costs, so that feature is still there, I'm afraid, but masked a bit by the lower FX hedge losses. So your second question was…

[Vinto Hu:]

Depreciation and amortization, just the trend to expect over the next two quarters?

[Ken Gregor:]

I mean that continued year-on-year growth is what we should expect to see. So similar year-on-year growth to what we've seen in Q2 should we expect in Q3 because the drivers are there year-to-year versus this time last year we’ve launched a new Discovery versus the old Discovery that we launched in -- the old Discovery that launched in 2004, which will be depreciated by the time we launch the new one. We've launched an all new model the Velar, we've also launched -- launching the Jaguar EPACE and we’ve also got the 18 model year that will be launched on Range Rover, Range Rover Sports. So we’ve got lots of new products coming, which is great for the business and for the fullness of time, but it does bring with it launch cost and that also brings with it growth and depreciation and amortization. So we should look to see that in Q3 also.

[Vinto Hu:]

And just a quick follow up on the other expenses. If I look at the comparison, just quarter-on-quarter, because I think from the first quarter of fiscal ’18, you’ve also moved to the restated basis we’re netting most of the realized FX hedging losses out of revenue. So if you look quarter-on-quarter, there also seems to be a decline in other expenses as a percent of revenue about 100 bps. Is there any commentary that you could offer on the trend quarter-on-quarter?

[Ken Gregor:]

There is also some year-to-year reduction in warranty expenses running through that line, which as well as relating to changes in revaluation of some working capital, foreign exchange balances. So that you’ve have got some elements running through there. There is one or two accounting items running through there. Also, that it's given us little bit of good news. It’s funny that I mean it's not necessarily anything in it -- there is not one thing that I think is maybe particularly notable other than the favorable movement in realized foreign exchange.

[Operator:]

We will now take our next question from [Amit Goel] from [indiscernible]. [Operator Instructions] Thank you.

[Unidentified Analyst:]

My question is that you will incur about revenue in the range of about £1 billion to £1.2 billion of foreign exchange hedge losses. Now, next year you have the rate at which you have hedged will come down and the pound has spun off in value. So just wondering you’re hedged and average it on 1.45. As the time passes the rate at which you hedge close down to 1.3, 1.29 and the value of pound goes up. So does it all means that next year if the currency rate has been what they are, your hedge losses will be substantially low?

[Ken Gregor:]

The short answer is yes. If I refer to you to the page that Ben was describing, which is the fact out page, it has some -- the bottom two lines on the page, not the exchange rates, but the lines that title total pre-tax hedge reserve and current portion of hedge reserve. What you see there is if you just -- what we see there is the total pre-tax hedge reserve is 1092, that’s £1,092 billion is the outstanding present value at today’s exchange rate all the hedge losses we have still to run through over the next couple of years. If you just move cross that chart to what it was one year ago, one year ago that number was £2.4 billion. So in other words, you can see that for two reasons, the size of the outstanding hedge losses is reducing, just as you described. And it has reduced for two reasons; one, because the passage of time means that we work through this hedge position quarter-by-quarter; and two, because the exchange rates have changed also compared to the prior year, which means that the value of the outstanding hedge losses has actually reduced also a bit because of exchange rate.

[Unidentified Analyst:]

So what rate have you mounted [multiple speakers] was it at 1.34.

[Ken Gregor:]

Yes, on the pound to the dollar, yes.

[Unidentified Analyst:]

So, that means…

[Ken Gregor:]

And we’ve also shown that -- just to finish, we’ve also shown that underneath the £1,092, we’ve shown the current portion and that £793 million is what we expect that these exchange rates to mature over the next 12 months.

[Unidentified Analyst:]

So which is substantially lower, was the previous year about far more than mature?

[Ken Gregor:]

Yes.

[Unidentified Analyst:]

So that means next year -- interest rate is being what they are, generally is the currency has been what there -- your rate of it should be substantially low?

[Ken Gregor:]

Correct.

[Ben Birgbauer:]

If exchange rates stay where they are…

[Unidentified Analyst:]

Yes, and that’s a very big plus for you, due to what profit or cash flows.

[Ben Birgbauer:]

Yes. But I think the one thing I’d just qualify is that to the extent exchange rates change, it can be bad news on the operating side as well. So it’s always been the case that the hedges are balanced out against operating exposure. So if the pound does strengthen, we’ll get good news on the hedges, but bad news on the operating exposure.

[Unidentified Analyst:]

But your operating income -- to the extent you’re hedged, whether you take just foreign grade or you take it out from the revenue, your income is the amount you hedged, suppose 70% at 1.35. So whatever be the real -- wherever are adjusted, the real revenue is at 1.35. So if the hedges are at low rates, the revenues have...

[Ben Birgbauer:]

Yes, you’re correct. In principal, we are approaching new hedges in place today and the new hedges -- and the new hedges we present are basically related to today’s exchange rates, yes…

[Unidentified Analyst:]

And you have double value, because as the time has come down, that time has pass-due rates but sometimes lower rates. And essentially that means this fall in the value of pound will really fully benefit you only next year when your hedges are all realized, most of them. Am I right [technical difficulty] So generally the increase in the value of pound and the fact that your hedges are at low rates of these pounds versus dollar, you should have a great advantage next year when exchange rates lie where they are, they can of course…

[Ken Gregor:]

Yes, in principal, the lower hedges is a positive factor for us next year, yes.

[Unidentified Analyst:]

At least, there are some broker reports about what your hedges are and what rates they are. At this rate [indiscernible] billion pounds next year compared to what you provide this year. I got some broker reports I don’t know how authentic it is?

[Ben Birgbauer:]

I think all that we can say is that the value of the hedges on the books at the end of the period and the numbers that are stated on the schedule.

[Operator:]

We will now take our next question from Robin Zhu from Bernstein. Please go ahead.

[Robin Zhu:]

Just two questions please. Firstly, just wanted to get your thoughts on the cost of EV adoption or electrification of the fleet over the next couple of years; you may be aware that Daimler at a recent company events guided down their margins by 2% basically to reflect electrification. I think in the past we’ve discussed some of these costs maybe disproportionate for you or not standing what it's last year. But just wanted to get your thoughts on the margin progression and the impact of EVs over the next few years, one? Second question just specifically on the UK, I mean, we’ve seen couple of the big UK dealers report Q3 earnings that have been, let’s say, less than satisfactory that’s what market certainly expected. Does that reflect anything related to your views on the UK market, where do you expect the UK markets to go in the next few years and the sequence that you play in? Thank you.

[Ken Gregor:]

So, I mean, starting with the UK markets. Yes, the UK markets being down since April, which is being tough of October year-to-date, in Q2 it was down about 9%. In October, it was down about 12%. So unfortunately, the UK market reduction seems to have accelerated somewhat through October. That started off back in April and May with perhaps a bit of a hangover from vehicle exercise duty changes. But it does seem to have continued into a very solid trend. And our sales have been lower as a result in Q2 and in October, we’ve been affected by that, how do we feel about it going forward. I think, we expect that UK market to continue to be lower year-on-year for the next six months or so. And so that works out the full year reduction. Where it goes after that? I don’t know honestly. I think it clearly depends on how the overall economic situation in the UK pans out with all of the Brexit concerns, impact of inflation and interest rate rises on consumer debt, et cetera modest still those interest rates rise-falls. I think there is uncertainty for sure. The positive thing for us since we do have new products and therefore with the new Range Rover, the Velar, and the Jaguar E-Pace, I think those things do get us a possibility of seeking to maintain our market share, grow our market share, despite lower volume. But it more challenging, it’s definitely more challenging. So I think that is the case. And how it pans out, I think, for the next six months I think we should expect to continue to sit down year-on-year. For the electrification to be honest, I answered that maybe as best as I could earlier in the call. So I didn't want to repeat all of that. So surely the impacts of a growing proportion of battery electric vehicles in our portfolio over time based on the present cost of battery technology is likely to produce a drag on margins from that effect by itself; although, I wasn't actually going to put a figure to it. As I said, we knew that would happen. We know that's likely to happen. And therefore hence we've been working all the cost efficiency measures that I described internally to seek to find ways of offsetting that cost pressure. And I think the other thing is it will also depend on the pricing levels for battery electric vehicles going forward and consumer willingness to pay for the technology that's in the vehicles. And some of that's -- much of that is still in front of us, to be honest. But do I think it's a pressure? Yes. Are we aware of it? Yes. And are we seeking to take actions internally to offset it? Yes.

[Operator:]

We will now take our next question from Jinesh Gandhi from MOSL. Please go ahead.

[Jinesh Gandhi:]

My question pertains to India business. Firstly, what we have seen in this quarter has been a significant increase in RM cost, despite improvement in our mix towards MNF series. So is it just reflection of the commodity prices, or have we seen significant increase in discounting?

[Vijay Somaiya:]

Jenish, I think you need to -- because of the pre-GST and post-GST scenario, you need to look at the RM and excise duty as a line together. And if you add that all, you would see that there's a reduction in material cost by one percentage points because of the change in the indirect tax, you should not see the two lines item separately.

[Jinesh Gandhi:]

The negative excise duty line item needs to be adjusted in RM cost is what you’re suggesting?

[Vijay Somaiya:]

Even we comparable, if you look at Q1 numbers also, you need to add the RM plus excise duty line. Let me explain the negative excise duty, typically under pre-GST scenario when we were -- as you’re aware, excise duty is charged on the manufacturer of goods. So whenever you had finished goods and you are having that on the inventory, the inventory cost included the excise duty post 1st of July, there is no excise duty being applicable. So the line which you are seeing 463 crores is a reversal of excise duty, which was loaded in the inventory on 30th of June [multiple speakers] and the corresponding impact is in the change in inventory, which is there.

[Jinesh Gandhi:]

But overall, how is being the discounting for commercial vehicle business in this quarter versus Q1?

[Vijay Somaiya:]

If you look at it, at the industry level, so we have started getting this independent assessment done on what is the kind of discounting which was happening. And if you compare with last year, the discounting has actually gone up by around 15% to 20% at an industry level and this is post -- for pricing increase. Now, as far as our position in that is concerned, I think we and this has come out of our study, as well as interactions with the customer. We are generally ending up paying less discount as compared to the competition. So from that perspective, in terms of realization, we do have a premium. And this is, if I may explain, is coming from better acceptance of our products and the technology in medium and heavy commercial vehicle. So as you know, we have come up with the selective catalytic reduction technology. And very clearly, the customers are looking at the total cost of ownership over the life cycle, and not only the initial cost, as also what other value-added services that we are providing. And when they look at to overall package, I think, they are preferring. And with respect to that, therefore, they are also giving the premium that we are earning.

[Jinesh Gandhi:]

But when combined the first quarter has discounts further no or has -- they will be stable at economic level?

[Vijay Somaiya:]

Yes, as compared to first quarter, the discounts have gone up to some extent in quarter two. Of course, as you know, quarter-one the volumes were pretty low. In quarter two, the bulk of the supply chain constraints have been removed and therefore we've come back to the earlier competitive situation. So the discounts have gone up a bit.

[Jinesh Gandhi:]

And lastly, are there expenses in standalone business or India business has seen a significant reduction on the percentage as a percentage I understand have been fairly stable expect increase in volume. So which areas have been -- we have been interesting to control cost or reduce cost, and how much of this is sustainable?

[Vijay Somaiya:]

I think, on the other expenses reduction, when we started this quarter we took a target to reduce the costs across all the heads. So the material cost, of course, forms the most important and largest cost head. So there is a significant amount of action, which is happening there in terms of cost reduction. But we also look at all other costs, the variable conversion element as well as the fixed conversion element, as well as other expenses. So across all the cost heads, there has been a lot of activity to reduce the burden, so to say. In terms of other expenses, it is about -- we have taken stretch targets and trying to maintain the overall expenses within that.

[Jinesh Gandhi:]

So there is nothing one off in this quarter, as such.

[Vijay Somaiya:]

No, it is not.

[Jinesh Gandhi:]

And our target of at break in for FY '18, is that on track? [multiple speakers] at breakeven for FY18, is that on track?

[Vijay Somaiya:]

Yes, we are, in general, well on track. We are, in general, well on track as far as our commitments on the turnout targets are concerned. But I would like to repeat what has mentioned when we met for the last time at least with some of you face-to-face that our turnaround is effectively built on two pillars. The one is the rigorous cost trade actions across the entire organization as already mentioned by Girish where he has covered all costs carried to these where we have started to focus on all of the products in order to structure and sustainably improve our cost competitiveness. The other pillar is actually the volume increase, so what we call the sales enhancement where with the lower cost reduction, the cost reduction it’s been able to improve on the contribution margin. And the volume commitment we have given in order to grow, but on the other side also in order to reclaim some of the market share to Tata Motors where we have been very successful in the second quarter. And we’ve really demonstrated the swing in volume market share as well as in the financials as we have seen. This is the combination, which we are going to further focus and price in the second half of the year; but as much as the cost development is under our control, where we have a rich pipeline of further cost reduction opportunities, in particular on the product level, to further improve on the contribution margin. The volume side is subject to the further market development. Before you ask the question, our general view on the market is pretty positive. Q2 the similar is provides by the government on construction infrastructure, and also by initiatives as much balance. So therefore, on the business of all our market activation and customer engagement in the last couple of weeks, we are pretty positive that the moment we have seen on the demand side also on the back of our refreshed product portfolio in CV as well as in PV is going to give us the opportunity to actually build on this market opportunity. And actually make a significant step forward. But at the end of the day, how far we get and how close we actually get to what you call the breakeven is largely subject to the further volume development where we need to see month-by-month and quarter-by-quarter how the market is going to respond and further develop. We are little bit cautious, as Ken mentioned on the basis of last year’s experience, because whenever we sought that we actually have and try some tailwinds, we were actually hit by other strong headwind cyclone, like hurricane, like a kind of event. And so, therefore, let’s be cautiously optimistic as far as the remainder of ’15 or ’17-’18 is concerned.

[Jinesh Gandhi:]

And lastly, have you taken any price increase in commercial vehicle business in 2Q or in October-November?

[Vijay Somaiya:]

Yes, in the month of October, we have taken increase in the commercial vehicle by around 1%.

[Operator:]

Due to time restrictions, we have only time for one more question. So we will take our last question today from Kapil Singh from Nomura. Please go ahead.

[Kapil Singh:]

My first question pertains to JLR. We have a EBIT margin outlook of 8% to 10%. So can you help us understand what are the factors that would lead us to that? And particularly, if you can throw some light on the fact that this would factor in some volume growth. So would it be double-digit volume growth that you expect over this period of medium-term. Second, have you already factored in the cost that you were talking about EVs where it maybe initially margin dilutive. And third, what is the potential of the cost reduction lead program that you are looking at. Have you identified any potential from which you can -- of this program over a period of time? Thanks.

[Ken Gregor:]

I think some of those are very big questions. I'm not sure, I can -- we've got time for all today to get into all the detail of. But let me just talk about a few factors. Yes. Our medium term aim is to have an EBIT margin in the eight to ten range, that’s of course our premium competitors do. And it’s therefore what we would wish to achieve -- we're getting interference on the line. The medium term also -- we just got a bit of interference. The what factors that will help us get there, clearly, volume growth -- clearly volume growth is part of it. And we're -- and the new model introductions that we planned to make should help us benefit from the leverage -- operating leverage that gives us the opportunity to improve margins. We also are working on the cost efficiencies. I'm not sure I can put a figure on it though, to be honest. But I can describe some things that we are doing. We are -- I mentioned, we're launching a plant in Slovakia, that enables us to reduce the per unit cost of every vehicle we produced there versus what we would have produced in the UK, or by circa couple of thousand pounds per unit, which may not sound a lot, but is significant in terms of the margin impact for those vehicles produced there. Now, we launched that plant in -- this time next year and it will ramp up its volume through 2019 through 2020. So that's an effect, a positive affect for us that we've built up over time. We made changes to our pension scheme where we made -- changed the basis of the defined pension scheme that reduced the cost of that relative to what it would otherwise being, so that's -- these are just examples. And we are targeting significant material cost reductions this year and setting ourselves very ambitious targets for our future material costs and our future vehicle programs in coming years. So those are things that we also hope will, in the fullness of time, help contribute to a stronger margin performance than we're presently achieving. Those are all the positive things. There are lots of headwinds. Fair to say a couple of our callers have also already talked about the impact of electrified vehicles, that's undoubtedly a headwind. And we've also seen, over the course of the last year, we've seen more competitive market conditions that’s just caused us to increase the level of variable marketing expense or incentive spending year-over-year. So I wouldn't want to just talk about the positive things. I hope to balance out and talk about some of headwinds aut our target remains our target. And driving profitable volume growth through those new product introductions is what we will continue to do.

[Kapil Singh:]

And this does include the cost increases for EVs as well?

[Ken Gregor:]

Yes, I mean all of that together is what we are wrestling with, yes. I mean, clearly we know we’ve got those EVs and the uncertainty that that brings. But it’s all part of the mix of the business that we are planning for.

[Kapil Singh:]

And are we looking at something like a double-digit volume growth for this year, or any thoughts on how that develops? Because some of the models, like Discovery and XUV, we’ve seen pretty soft numbers in recent months. So your thoughts on that, what’s the plan there?

[Ken Gregor:]

For this year?

[Kapil Singh:]

Yes, please.

[Ken Gregor:]

In terms of volumes?

[Kapil Singh:]

Yes.

[Ken Gregor:]

I think we’ve got the opportunity for a stronger second half relative to the first half in volume and profitability terms. In particular, Q4, seasonally that tends to be a stronger quarter for us. And we’ve got the model launch. We talked about giving us the opportunity for volume growth in Q4. So I would say that like winter, cautiously optimistic about a stronger first half. But in particular, I’m really talking about Q4, I would say. Up against that, undoubtedly just the case that we see more challenging market conditions around us, right now. We’ve talked about the UK, for example already. But I could have also talked about the U.S. market, which the overall industry in the U.S. market is down year-over-year, also. And the European market is facing challenges relating to the willingness of customers to consider buying detailed products. So we’ve got -- we can’t control the market. So that will throw at us what it's size to throw at us. From our point of view, we remain very focused on launching exciting new products that’s the best antidote to challenging market conditions. So that’s what we will continue to do.

[Operator:]

Okay. So I will now turn the call back to your host for any additional or closing remarks.

[Vijay Somaiya:]

We have no other comments apart from the questions. In case, we have not been able to take some of your questions please reach out directly to us and we will provide you the answers that you see. Thank you everyone.

[Operator:]

That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.