Tata Motors Limited
Q1 2017 Earnings Call Transcript

Published: 26 Aug 2016

[Operator:]

Ladies and gentlemen, good day and welcome to the Tata Motors' Q1 FY17 Earnings Conference Call hosted by Macquarie Capital Securities India Pvt. Ltd. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Mishra from Macquarie Capital Securities. Thank you, and over to you, sir.

[Amit Mishra:]

Thank you. Good evening everyone, apologies for this delay in start and many thanks for standing by. We have with us on this call, Mr. C Ramakrishnan, Group CFO of Tata Motors; Mr. Ben Birgbauer, Treasurer of Jaguar Land Rover; Mr. Vijay Somaiya, Head, Treasury and IR of Tata Motors and other members of the investor relations team. I will hand over the call to Mr. Ramakrishnan now for opening remarks and presentation. Over to you, sir.

[C Ramakrishnan:]

Thank you, Amit for the introduction and thanks for hosting the call. Good evening everybody. Once again, as Amit said, my apologies for the delay in the start of the call. I can only blame it on the weather and the rains and the traffic in Mumbai, my apologies. Before I start, just to put the context in terms of this quarterly announcement for 2016-17, Tata Motors as required regulatory is adopting Ind AS accounting standards from this quarter, so Tata Motors standalone and Tata Motors consolidated are being presented to you at the Ind AS accounting. There will be some figures you will see in some other slides, particularly pertaining to Jaguar Land Rover standalone which currently we are continuing to provide under IFRS but when it's consolidated in Tata Motors it is under Ind AS. So bit of a complexity in terms of understanding the numbers later on, I'll try and refer to this as we go through the slides. Coming to the financial highlights for the quarter, Tata Motors consolidated net revenue was about Rs.66,000 crores, up by about 10% from Rs.60,000 crores in the same quarter of last year. EBITDA margin was about 12.9% in this quarter compared to especially high quarter last year of about 19.4%, I'll come back to this 12.9% in a moment. And profit after-tax consequently with the lower EBITDA margin has had another impact it was lower at Rs.2,200 crores, down from Rs.5,200 crores. The standalone Tata Motors India operations being under Ind AS we are also including the financials of our joint operations which includes our 50-50 joint ventures with Cummins and Fiat. So including the joint operations, Tata Motors standalone business in India, net revenue was about Rs.10,000 crores, up from Rs.9,300 crores. The EBITDA margin further improved to 6.6% from 6% of the same period last year, and profit after-tax at Rs.26 crores, down from Rs.290 crores over the same quarter last year. However, you will recall the Rs.290 crores in the first quarter of last year included some income by way of sale of certain investments of profit of over Rs.300 crores. The standalone operations were benefited from continued growth in medium and heavy commercial vehicles as well as growth in the light commercial vehicle segment. In our business, car segment also witnessed a very strong growth in this quarter on the back of the recently launched Tiago car. If I remove the effect of the joint operations, the EBITDA margin in the standalone business was 5.7%, up by 100 basis points of 4.7% in the same quarter last year. Our comparison as required, the quarter one of this year and quarter one of last year both are under Ind AS. Coming to Jaguar Land Rover, just to clarify, these numbers are under IFRS as naturally report for the JLR. Net revenue was £5.4 billion, up from £5 billion of same quarter last year. EBITDA margin was 12.3%, down from 16.4%, and profit after-tax £300 million compared to £492 million over the same quarter last year. We saw solid sales volume and revenue growth in JLR but the EBITDA margins were affected significantly by an unfavorable FX impact, both pre and more particularly, post-Brexit, and certain lower market incentives we received in our regional markets in quarter one of this year compared to quarter one of last year. If I remove the effect of foreign exchange revaluation, the EBITDA margin is actually around 14% for this quarter which is more comparable. In the presentation that you will see there are certainly [ph], we've also added a slide in terms of the foreign exchange impact and the unfavorable revaluation impact of the two quarter separately. Referring from going through that in detail here but you will be able to look at it little later in typed material [ph] at our website. I'll give you the highlight. Just to pause a little bit, the next slide, it's more on the specifics of the Ind AS accounting changes. I've taken the previous year, April to June 2015 quarter, both at the standalone and consolidated levels, and to give a flow in terms of what is the profit reported last year under Indian GAAP and what is the profit under Ind AS that we have restated now. At a standalone level in Tata Motors, profit reported under I-GAAP last year for the quarter was about Rs.257 crores. In summary, that increases to about Rs.290 crores at our Ind AS. The main components of this improvement, the major ones are; improvement in basically the profit from joint operations as I mentioned the early year, effect of reassessment of certain deemed cost of certain plant and equipment which is about positive Rs.48 crores, negatively impacted by exchange movement of foreign currency instruments which were yearly taken to balance sheet and amortized over the period of the loan which now require to be charged off in the quarter, that is about Rs.36 crores lower. And there are sale of investments of equity in the first quarter last year which we have taken to the P&L which had to be the worst to comprehensive income under Ind AS that was a negative movement of about Rs.80 crores. If I add up all, there was some further gains, roughly about Rs.10 crores to Rs.13 crores, net impact without getting into the details. So net-net for standalone results for April to June of 2015, Rs.257 crores profit reported under Indian GAAP improved about Rs.290 crores under Ind AS. At a consolidated level, the I-GAAP profit, Indian GAAP profit reported last year in the quarter was about Rs.2,800 crores which improved significantly to about Rs.5,200 crores under Ind AS, mainly positively impacted by the exchange movement of the previous year in that quarter where the exchange movement was very favorable, that's almost Rs.2,000 crores after this improvement and further by smaller items. One item I would like to call out separately, it is also the effect in JLR mainly, of accounting for cross currency hedges which is a different approach under Ind AS which is also a positive in that quarter last year of about Rs.742 crores. And there is a negative impact under consolidated level for reassessment of the future credit losses in our financing business which is about Rs.313 crores. Just to clarify, the financing business, Tata Motor Finance, does not have to adapt Ind AS at this point of time. For them the regulatory period for Ind AS adoption is post-2018. However, since we are reporting consolidated, Tata Motors requires report under Ind AS, we have given effect of that change for Ind AS for that business as well in reporting for consulting. Little bit more color on the operating profit performance, standalone business as I mentioned earlier, the EBITDA margin improved by about 100 basis points, mainly triggered by medium and heavy commercial vehicle growth which was at about 7.8%, a double digit 11.6% growth in our LCVs. Car segment grew for us by about 15% year-on-year, and of course the effect of ongoing cost reduction and other margin improvement initiatives. In Jaguar Land Rover, the EBITDA -- I already talked about the foreign exchange impact, particularly on our Europe it was at the end of the quarter and the lower market incentives. Coming to the businesses, in commercial vehicle the overall CV industry in India grew by about 11% year-on-year. Domestic CV volumes for the Company grew by about 9.9%, M&HCV 7.8%, and the LCV segment about 11.6%. However in the industry, the variable marketing expenses continues to remain high. Our exports are up by about 2% year-on-year and some of the key highlights in our export businesses were order of over 500 units of Tata Xenon pickup from Malaysia, launch of the Prima in Bhutan and launch of Ultra in Kenya. In our passenger vehicle business, the -- my apologies, the passenger vehicle industry in the country witnessed a growth of about 7.4%. For Tata Motors the domestic volume grew by about 6.3% in the same period. Within the passenger vehicles, passenger car industry declined by 1% whereas the car part of our business had a growth of about 15.1% compared to an industry decline of about 1%. And this was mainly due to the recently launched Tiago. If you recall, the company had launched the much awaited Tiago with the new impact design language, the standards of, higher standards of fuel efficiency and some of the features which are best in class and industry leading. Jaguar Land Rover wholesales and retails. In retails including the China joint venture also. Wholesale and Retails stood at $120,000 and $118,000 respectively within which our China joint venture, the wholesale and retails stood at 14,000 almost the same as retail. We have significant growth in all the regions for our products, mainly supported by the sales of F-Pace, XE and Discovery Sport. North America for us was up by about 17%, UK up by about 18%, China including the JV was up by about 19%, Europe 16% and rest of the world about 6%. It is uniform significant growth across all markets. Capital expenditures and product development expenses for the quarter was £692 million. After this capital expenditure spend, free cash flow was negative at £603 million driven mainly by the seasonal which happens in the first quarter of every year increase the inventory buildup. If you recall the same quarter last year, April to June 2016, the free cash flow was negative by £834 million however, the full year ended with a positive about £800 million for the whole year. Cash and bank balances and JLR shredded about £3.7 billion and the committed bank lines of credit about £2 billion remains unutilized. We have that liquidity additional back-up as well. During the quarter another highlight I wanted to draw your attention is further recovery of about £50 million. Anything from the GNG port explosion for which we made a full provision last year and the third step of the recovery happens in this quarter. We have received a mix of recoveries from the last financial year as well. In addition we have now recovered about further £50 million. And this has been recognized as an exceptional item in this quarter. China JV profits over the quarter; our share of the profits of the JV were about £45 million. The exciting new product pipeline continues in Jaguar Land Rover. The F-Pace launched in April, XE in U.S., the All-Wheel Drive launched in May, Evoque Convertible launched in June, and China JV Long Wheel Base XF is expected in the hedge two this year. Jaguar Land Rover inaugurated its new technical center of special vehicle operations with an investment of about £20 million in this quarter. In this quarter we also opened the plant in Brazil in June currently producing Range Rover Evoque and Discovery Sport. In the quarter again, Halewood plant of JLR received two prestigious manufacturer of the year awards in June and the plant has received as much as 13 awards since 2011 and this quarter also marked major milestone in terms of IVS of the production of Range Rover Evoque with accumulative production of half a million vehicles. Looking ahead, in our India business, our commercial vehicles, we did see some market headwinds in June, particularly the medium and heavy commercial vehicles. However, we continue to expect growth momentum for the full year in medium and heavy. It may be somewhat uneven but we expect the growth to be there for the full year manly triggered by post good monsoon demand, continued replacement demand and fleet expansion and towards the later part of the year, a certain amount of pre-buying before the BS4 adoption in the country. Similarly, we also expect positive growth in the buses and the light commercial vehicle segments in this year. As I shared with you before, our wide and compelling product range with several new launches in the system. We believe in providing a strong foundation for our growth opportunity. The medium and heavy will expand the Prima LX and Signa range. In light commercial vehicle range, we will expand further the ultra-range and small commercial vehicles and pickups will have refreshes in variants to further complement the Ace and Super Ace. X Force will continue to be a matter of high focus for us and in defense we have strong order pipeline both received and expected. Passenger vehicles business in India; we'll continue to focus on launch of new products consecutively into the market and we have a well-defined robust product plan medium to long-term. We will continue to focus on existing products in growth and volume. As said before, dealer network expansion and customer centric and quantity improvement activity are receiving for the momentum. And we saw at a very satisfyingly third place in the JD Power rankings last year. We hope to improve it further. Jaguar Land Rover, looking ahead, we will continue to invest in new products, technologies and manufacturing capacities to grow profitably. For this fiscal year, we expect the investment spending; CapEx and product development as I shared with you before, to be in the region of about £3.75 billion. We will continue to build on recent successful product launches and chase the ramp up of these products. And new models effectively announced. We will continue to closely monitor and assess market conditions in the UK and EU post Brexit, as well as China. As the target GDP growth rate in China comes under some challenge and may come. The new product pipeline both recently launched, yet to launch will drive solid profitable growth for JLR going forward and maintain positive and strong operating cash flows to und the ongoing investments. There is a few words on the Brexit. As far as JLR is concerned, Brexit will have two or three major implications for us. One of course is the currency, the extent to which pound continues to remain weak. Second will be on the tariff rate that might result following the exit from EU across the portion and impact, if any, on the overall economic growth, both end-consumer confidence, both in UK as with the EU. Touching briefly upon these in terms of currency implications we all know very well, we have shared with you before. JLRs revenue more than 80% comes outside the UK from Europe, China, US and other markets. We do source about 40%-50% of our components from EU. Therefore, if we take a combination of these, JLR overtime would benefit from a continued weaker pound as a result of the Brexit. Even though it is partially offset by the higher import cost on what we import from Europe, overall the manufacturing and revenue distribution being what it is, with 80% of revenue coming from overseas turnover. A weaker pound will definitely benefit JLR over a period of time. However, this will be a repeat for a period of time in lieu of the hedging bond that we have so the hedges unwind, we will see them dislocating stronger with the current exchange scenario. As far as tariffs are concerned, UK vehicles exports into the EU roughly about 24% of our total could become subject to tariffs depending upon the trade agreements. So the vehicles getting manufactured in the EU which gets sold in UK, our competition products could become costlier in UK. Components sourced from EU could also become subject to tariff, however these would be recoverable because we export substantial part of the production in UK since we re-export. The component import duties, if any on there, will be somewhat muted because of the large exports JLR has. With this, I will end this presentation and open the line for Q&A. I am aware that we started the call a little late but since we have one more engagement and commitment after this, I would request if people can keep their questions brief and not more than 2 questions per participant. Thank you.

[Operator:]

Thank you very much. We will now begin the question and answer session. [Operator Instructions] The first question is from the line of Jinesh Gandhi of Motilal Oswal Securities. Please go ahead.

[Jinesh Gandhi:]

Hi sir, couple of questions from my side. One is with respect to JLR, can you indicate what's the adjustment to their EBITDA margins in terms of quantum because in the presentation it's mentioned somewhere about £200 million and in other places about £110 million, so can you clarify on the number and secondly with respect to local market incentive, how much was it in this quarter?

[C Ramakrishnan:]

When it comes to FX, particularly when you compare the last year first quarter and this year first quarter, we are almost talking about contrasting period so the effect if you aggregate becomes very sharp particularly if compared to the previous year's first quarter. That said, in the current quarter April to June, end of the quarter revaluation of assets and liabilities was of the order of negative £84 million which was £34 million in the last quarter and the hedges which have been realized in the quarter accounted for about negative £123 million in this quarter. That's a total of about £207 million if you keep the realized hedges aside for a moment, if you look only at the revaluation at the end of the quarter. Both of these come under EBITDA but if you take only the revaluation of the assets and liabilities at the end of the quarter which was negative £84 million, the EBITDA margin improves to about 14% from 12.5%.

[Jinesh Gandhi:]

Understood.

[C Ramakrishnan:]

As per your question on local market incentive, I am speaking from memory and Ben can correct me if I am wrong. Last year the same quarter if I remember it was of the order of about £50 million to £60 million, just below 10 in the current quarter.

[Jinesh Gandhi:]

Okay sir, understood. And one clarification with respect to standalone volumes given in business reviews, those volumes also include volumes of Fiat and other companies including joint operations?

[C Ramakrishnan:]

No.

[Jinesh Gandhi:]

Okay sir, thanks. I'll get back in queue.

[Operator:]

Thank you. Next question is from the line of Robin [ph] of Bernstein. Please go ahead.

[Unidentified Analyst:]

Hi, thanks for taking my questions. I had two questions. One if we think about the £123 million negative realized effects of hedges and the idea that as we progress at the time these presumably get smaller hedging adjusts, could you give us some color just how much or how long that process may take assuming the pound stays steady? And then the other question just really is, what are you seeing in terms of the China JV. It seems like you printed 20% net margins, could you just go into a bit of detail about how long you expect that to be sustainable and at what point should we see a moderation of margins in the near future Thank you.

[C Ramakrishnan:]

Okay. On your first question, I'll not be able to put a timeframe because it is on a period of time. Our hedge policy and our hedge move stretches across 4 years to 5 years. However, in the near terms if we take twelve months from now, the average hedge position would be of the order of 65% to 70% within which the first quarter, the first 3 months could be higher and on a declining percentage, second year the hedge position would be lower and so on and so forth. By the time you reach it will be not more than 10% to 15%. So it is a declining percentage in terms of net exposure that we have as a hedging policy so as these hedges unwind, definitely you will start seeing the business, if the pound stays where it is, you will start seeing the business a much stronger over a period of time. I don't know whether it provided some clarity in response to your question. As far as the JV margins are concerned, both the immediately preceding quarter and this quarter the margins have come out rather strong. As I have explained in the last quarter call as well and in response to many of your questions, I think we need to give it a little time. I think the margins are moderate, mainly because it is a startup activity, the full capacity is not kicking in, in terms of shifts and workings and additional costs. I think we need to wait for another one or two quarter and I think the margins will moderate.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. The next question is from the line of Rakesh Jhunjhunwala of Rare Enterprises. Please go ahead.

[Rakesh Jhunjhunwala:]

I don't understand. You said, the profit -- why should we -- why do you consider only the £84 million as a loss to increase your EBITDA percentage not the other portion. You have two portions of loss of £207 million; one is £81 million -- £84 million and one is some £116 million.

[C Ramakrishnan:]

£120 million.

[Rakesh Jhunjhunwala:]

£120 million. Then why don't you consider that £120 million also as part of your EBITDA?

[C Ramakrishnan:]

Both £120 million and £84 million are accounted above the EBITDA line.

[Rakesh Jhunjhunwala:]

Right so both of them are reducing your EBITDA? So if we are increasing your EBITDA margin, why do you take only £84 million, why don't you take the other £120 million?

[C Ramakrishnan:]

If you had to take both into account, the margin actually would come at about 16% but that will be an arithmetic and not perhaps a very logical deduction.

[Rakesh Jhunjhunwala:]

No, but that means you take £120 million as part of the regular business cost and £84 million you treat as an exception, am I right?

[C Ramakrishnan:]

No, it is not so much regular business and exceptional. What happens is that £120 million relates to the hedges we have taken in the past which have unwound during the quarter, corresponding to that, the trade exposure that we have covered would have come in at a higher exchange rate. So you would have earlier had the benefit of the EBITDA so we though it is not appropriate to take the double benefit.

[Rakesh Jhunjhunwala:]

So that means you booked the bill at £110 million and you have hedged at £130 million, so the difference you've taken as a loss, am I right?

[C Ramakrishnan:]

That's right.

[Rakesh Jhunjhunwala:]

But as you did a fine business but what you mark as part of the what outstanding as on that day appropriately?

[C Ramakrishnan:]

Correct, that is a more fad [ph] way to report that. If you had to add both, being foreign currency hedged transactions, the EBITDA margin would look at 16% but may not be the completely correct way of looking at it.

[Rakesh Jhunjhunwala:]

And another thing I wanted to say is, why don't you give us, tell us an exact figure what your hedges and foreign exchange are because the foreign exchange component has now become such an important part of your profit so therefore, to guide us as to how you have hedged your profit, in numerical terms will give us a better assessment of your future profitability. And you know Infosys and a lot of other companies are giving their quantities in vehicles which they are hedged.

[C Ramakrishnan:]

Rakeshji, this year we have added a slide presentation. We have added a slide at least in terms of the impact above EBITDA and before EBITDA foreign exchange transactions which in response to many of the questions we have received.

[Rakesh Jhunjhunwala:]

No, not about the current quarter, sir. What about the future?

[C Ramakrishnan:]

I understand, we will try and improve the details.

[Rakesh Jhunjhunwala:]

You know, because what happens is, this is something which is very complicated and generally something not undertaken by Indian companies. Such complex revenues, you accounted pounds, you sell in dollars, and you buy in euros. Is that right? You are accounting in pounds, 80% sale is in dollars and you are buying in euros. That is the thing.

[Ben Birgbauer:]

You can normally have one functional currency.

[C Ramakrishnan:]

No, I understand the complexity.

[Rakesh Jhunjhunwala:]

If you tell us in the paper and explain the complexity and also give us some idea because we are at loss to understand what will happen in the future quarters. Unless these are known.

[C Ramakrishnan:]

I think we have been sharing with you the currency exposure mix in JLR, I repeat about 80% of the operations are exported out of UK. In terms of currency, 60% of the revenue will be either dollar dependent or dollar linked. Euro falls about 20% to 25% of our revenue and about 50% of our cost. These are the 2 or 3 major currency.

[Rakesh Jhunjhunwala:]

Do you hedge the euro out for sale or you set it out against the component reports?

[C Ramakrishnan:]

That's right. For the components we import where we have to pay in Euro, we hedge the euros.

[Rakesh Jhunjhunwala:]

You hedge the euros but you also get revenue on the euros?

[C Ramakrishnan:]

Correct, so we hedge the net position.

[Rakesh Jhunjhunwala:]

So you hedge the net position. That means net euro, net pound you get 60% in dollars?

[C Ramakrishnan:]

That's right.

[Rakesh Jhunjhunwala:]

Okay sir, I won't disturb you. And how is the market in August and September?

[C Ramakrishnan:]

Market in?

[Rakesh Jhunjhunwala:]

How is the sales in August?

[C Ramakrishnan:]

You are talking about India or…

[Rakesh Jhunjhunwala:]

I am talking about Jaguar.

[C Ramakrishnan:]

Jaguar Land Rover continues to roll the product by plane. I think we have mentioned in the calls earlier also in many of our interactions, I think the product pipeline and the demand full in the market continues to be quite heartening for the April to June quarter, you saw some of the double digit growth reposted across almost all markets so be it Europe, US, China or UK.

[Rakesh Jhunjhunwala:]

Do you expect the growth to continue because you are making such a big investment in Slovakia?

[C Ramakrishnan:]

Yes we do expect the growth to continue, sorry let me change the sentence, we hope the growth will continue.

[Rakesh Jhunjhunwala:]

India as well?

[C Ramakrishnan:]

India, overall I would say for the commercial vehicle industry will see the growth notably in medium to heavy commercial vehicles and since January as we have said before, we have also seen growth coming back in light commercial vehicles and small commercial vehicles.

[Rakesh Jhunjhunwala:]

Sir, one last question. What do you think the government is talking about wrapping up old trucks?

[C Ramakrishnan:]

We need to see how it receives more comprehensive solution for the customers.

[Rakesh Jhunjhunwala:]

But sir, supposedly, this -- it should be a big kicker to demand and sales for us?

[C Ramakrishnan:]

Yes, it will be for all…

[Rakesh Jhunjhunwala:]

It will be a game changer actually.

[C Ramakrishnan:]

Yes, it will be a good -- first of all, from the country point of view, I think it will change the face of the trucks that play on the roads leading perhaps to lesser pollution, more efficiency in logistics and host of other benefits. And the newer trucks will also be -- from a driver point of view will definitely be much more comfortable, both driving and in terms of the cabin comfort. So from all points of view; from the logistics operators or drivers, and the manufacturers, I think it will be a very, very positive step.

[Rakesh Jhunjhunwala:]

And sir one last thing, how are the defense orders, sir?

[C Ramakrishnan:]

Defense orders, we continue to -- I think I mentioned before, we have received more than 1,200 vehicle order recently in the last three to six months that supplies are continuing, and we are already in discussions on further orders which are in the pipeline.

[Rakesh Jhunjhunwala:]

Thank you, sir, thank you. And congrats on a good quarter.

[C Ramakrishnan:]

Thank you very much.

[Operator:]

Thank you. We have the next question from the line of Yogesh Agarwal of HSBC. Please go ahead.

[Yogesh Agarwal:]

Yes, hi sir. Good evening, two questions. Firstly, over the last two years your revenue per car and COGS per car has come down which is understandable because of the mix but employee cost and other expenses have gone up quite sharply by more than 20% over the past two years. Is it because you are localizing more or is there anything else if you can explain?

[C Ramakrishnan:]

Yogesh, I suppose your question is on Jaguar Land Rover?

[Yogesh Agarwal:]

Yes, sorry.

[C Ramakrishnan:]

In the same period, you must remember Jaguar Land Rover is also investing heavily in capacity, production ramp up and in terms of the product pipeline and the CapEx and product development cost we have, we are also investing heavily in the engineering and other skills. Just to give you an example, if you recall if I go back about 6-7 years, when we acquired the company had a total strength of about 15,000 people out of which 2000 are overseas and over 13,000 in UK. Immediately post that 2007-2008 turmoil happened, we actually reduced the headcount by couple of thousand people so we are operating more at about 12,000 to 13,000 people somewhere in 2008 or 2009. Today on a comparable basis the headcount in JLR would be 30,000. Almost 40,000 as we speak. That's the type of ramp up and you would see in volumes and so on and so forth. So, you need to get the capacities and also the people's skills and capabilities in place to cater to the volume. So volume growth will happen post your ability to bring in the right people and the right skills in the production workforce. So that's the trend line. Hopefully you have to bring two to three foundations of growth. One is the product pipeline itself, second is building of capacities. Capacity is not start, normally building at least couple of years, two to three years in advance and you start bringing people on board at least year in advance and we also have the -- add people in the whole host of functions, be it purchasing or design engineering, finance or other support areas so the company is going through a massive expansion on all fronts. So you will see these trends happening from time to time. Hopefully, the growth will bring us better profitability and better bottom line as we go.

[Yogesh Agarwal:]

Okay, sir. Secondly, the EBITDA margins for JLR in the first quarter, if I look at the clean margins, the hedging cost and the reval, they are down 200 basis points year-on-year despite 8% fall in pounds. Sir, is it the entire impact or mix?

[C Ramakrishnan:]

My apologies, can you repeat the question. First quarter EBITDA margin?

[Yogesh Agarwal:]

Year-on-year is down 200 basis points ex of hedging losses and reval impact and this is despite pound weakness so is it a mix impact?

[C Ramakrishnan:]

Its mix region, I am trying to recollect the year-on-year first quarter. I think the first quarter of last year was an exceptionally good year for JLR.

[Ben Birgbauer:]

If we talk about the variance in the FX being a £118 million in reval, that plus the lower local market incentive explains almost the entire difference of the reduction in EBITDA margin from last year.

[Yogesh Agarwal:]

Okay. Alright, thank you.

[Operator:]

Thank you. Nest question is from the line of Chirag Shah of Edelweiss. Please go ahead.

[Chirag Shah:]

Yes, thanks for the opportunity. Sir, first question is on Discovery Sports and it's appraised with China. Can we share your capacity ramp up plans because it seems there are vendor shortages or shortages of components supply especially for Discovery Sports and Evoque combined line?

[C Ramakrishnan:]

You are talking specifically about the China JV operations?

[Chirag Shah:]

Yes, China JV and in general the Discovery Sports capacity.

[C Ramakrishnan:]

No, that’s not quite correct. I am not sure where you got the input from. Yes, the product lines particularly in UK are running finally full. 31 March 2016, I think our overall capacity would have been something 550,000 and last year, total wholesale was about 525,000, 530,000. Apart from that while we are ramping up capacities I can’t recollect any component shortage or any particular constraint on Discovery Sport either in UK or in China.

[Chirag Shah:]

And what are your plans of ramping up the volumes of Discovery Sports in China? How is the demand over there, anymore engine options to be introduced? If you can just share some light over there.

[C Ramakrishnan:]

In terms of our growth in China, the overall capacity we have stepped up in the joint venture is about 130,000 cars. Last year, sorry this year kicked it into the joint venture i.e. Range Rover Evoque which went in last year and the Discovery Sports a little earlier and XF which will be now, we expect all the products will be placed in the joint venture and we hope to fill up the capacities in terms of the growth, in terms of our capability to supply and produce. In terms of market demand, as I said earlier, China continues to be an important market whether you take the call or I take the call and we put a percentage in terms of overall GDP growth 5%, 6% or 7% or a large economy, it is still an impressive growth. We may see some bumps on the way but I think overall I think the trend line will be one of growth. And with the attraction of the strong demand pull for our products we expect our growth will be faster than the overall industry growth.

[Chirag Shah:]

Fair point. And sir, just a clarification on this £84 million current assets and liability revaluation, we would not be hedging this book, right. So -- and if the currency stays where it is, this is likely to be an actual loss in subsequent quarters because there are payables who will go upto that extent. So it's not necessary or extra ordinary or a long dated item? Are payment turnarounds 60-70 days if I understand correctly through vendors?

[C Ramakrishnan:]

The payment terms are typically between 30 to 45 days, I can't recall 60-75 days, some of them maybe 60 but mostly…

[Chirag Shah:]

On the engine front, we have an elongated slightly cycle, right?

[C Ramakrishnan:]

Sorry?

[Chirag Shah:]

On the engine procurement side, we have a slightly elongated cycle as far as paving to the Indian suppliers?

[C Ramakrishnan:]

No, no, that's also 30 days.

[Chirag Shah:]

Okay. But in that case this mark-to-market loss of…

[C Ramakrishnan:]

Let me just clarify. It's incorrect to say that we don't hedge our payables.

[Chirag Shah:]

Okay.

[C Ramakrishnan:]

I think I answered in the earlier question that Rakesh asked. We also received revenues in the euros for our sales into Europe. We also have payables in Europe, we hedge the net position.

[Chirag Shah:]

Okay. So this loss is likely to reverse because what I understand is that it's kind of a reoccurring loss that could happen if the currency stays where it is.

[C Ramakrishnan:]

But presumably low end.

[Chirag Shah:]

Fair point, that does help.

[C Ramakrishnan:]

The hedge cover also would be lower as we go into the future quarters and future years.

[Chirag Shah:]

Fair point, this was really helpful. And all the best.

[Operator:]

Thank you. Next question is from the line of Poornaa Venkatesan of Jefferies. Please go ahead.

[Unidentified Analyst:]

Hi sir, Govind here. I had two quick questions. One, what was the production of engine in the current quarter and last year? And second, if I recall correctly, your total payable position as of March 31 was like between £5 billion and £6 billion. £85 million of MTM seems very low in context of how large that is. If you could just explain that?

[Ben Birgbauer:]

Ben here. Okay, engine -- I mean on engine, I'm sorry, I don't have the production figures in hand, so I think that's one you need to come to us offline. I mean the simple -- the qualitative answer on that is, basically, its supplying most of the four cylinder two liter diesel engines now for most of our products at this point in time. So I think that's the simple answer. But I think if you wanted a more detailed answer, we probably need to cover that offline. And I think on your second question, you were talking about the £84 million of revaluation and I think what we said is it's mainly euro payables but there are other balance sheet items that are in there, we do have some dollar payables that get revalued and we also have things like warranty reserves denominated in euros that are also getting revalued. So all of those things are in that balance sheet revaluation figures.

[Unidentified Analyst:]

My question was -- see, the amount is -- the actual payable is about £5.8 billion or so, and the currency has moved from balance sheet date of March 31 to June 30, depending on which currency has moved to 5% to 7%. So the number should have been much larger?

[C Ramakrishnan:]

The number should have been much larger?

[Unidentified Analyst:]

Yes. I mean, I'm just saying…

[Ben Birgbauer:]

I actually think that pay -- I mean, maybe we need to take this offline again but I think that payable figure that you're quoting sounds larger than I would recognize to be honest.

[Unidentified Analyst:]

Okay, I'll take those offline. Thank you.

[Ben Birgbauer:]

I mean, I'm wondering if that's our payables to picking up rather than just what our euro denominated payables.

[Unidentified Analyst:]

Yes, I'm taking up all but all of them need to be mark-to-market, right?

[Ben Birgbauer:]

Well, some -- a lot of them are in pounds, so they don't get mark-to-market at all.

[Unidentified Analyst:]

Okay, I'll take those offline. Thanks.

[Operator:]

Thank you very much. Due to time constraints, we will be able to take one more question. Last question is from the line of Jamshed Dadabhoy of Citigroup. Please go ahead.

[Jamshed Dadabhoy:]

Hi, just one question. So you'll have recorded almost of Rs.15,000 crore loss on the hedge results which has been routed through OCI. I just wanted to understand is this the last of the losses that we would see assuming currency remains at 1.3, 1.32. Going forward will there be some future recurring losses which will hit your net worth?

[C Ramakrishnan:]

That is starting with the assumption that the currency stays where it is, which is somewhat of a difficult assumption to accept. If the currency stays where it is, I don't think we should have further impact on the OCI at least -- the revaluation will not.

[Jamshed Dadabhoy:]

And further, it's fair to assume that a further depreciation will lead to another hit?

[C Ramakrishnan:]

Because both ways, if there is a depreciation of the other hit on the revaluation, if there is an appreciation there will be a gain.

[Jamshed Dadabhoy:]

Okay, got it. Because if you look at your -- and could you give us some sense in the hedge book like, I know you all hedge 70 and then 50 and then 30 but weighted average duration of the hedge book would be about 2 to 2.5 years from a time perspective?

[C Ramakrishnan:]

I wouldn't want to do that math for you. I mean I just think as a guide -- I've said this before, we hedged 65% to 85% one year, 45% to 65% two years out, and descending percentages thereafter. And I think that's given you a fairly good guide at how much of our exposures is hedged.

[Jamshed Dadabhoy:]

Is there some thought that you might want to curtail or bring down the size of the hedge book? I mean given that we seem to be in a depreciating currency scenario, it just seems that you'll are losing money year after year.

[C Ramakrishnan:]

I think these things are scenario-specific. We hedge through smooth volatility in currency and the reality is this; we've had a historically weak pound for about a year and a half, and sharply weaker after Brexit. So as a result, we've had -- the hedges have had losses but on the other hand, we have improvement on the underlying operating exposure and so it's delivering -- it's smoothing our overall financial results. I think it's wrong to focus just on the hedges without looking at the underlying and looking at running conjunction to one another.

[Jamshed Dadabhoy:]

You know, you'll haven't commented on the variable marketing incentives this quarter. Could you just give us a sense how they have moved versus last quarter or versus the first quarter of last year? I mean, just the trend.

[C Ramakrishnan:]

When you ask about variable marketing incentives, I just need to clarify you're talking about Jaguar Land Rover or commercial vehicles?

[Jamshed Dadabhoy:]

Yes sir, yes sir; JLR.

[C Ramakrishnan:]

I'm more concerned about the commercial vehicle variable marketing than JLR. No, I don't think -- at least from our point of view we have seen any significant attention to be drawn to this item. Yes, or if you take a period of last couple of years, I think they would have been generally inching upwards but nothing in terms of cost for culturing it here [ph]. I think one thing is, in our case at least I think the successful and successive launch of products I think has kept the brand highly with a good amount of pull, and the new products normally are able to manage the much, much lower incentive that could be necessary. So I think -- and also if you look at the product pipeline coming up in the future, while the overall trend if you take 3/4/5 year period, maybe of course, I think they are able to manage it.

[Jamshed Dadabhoy:]

Okay, got it. Thank you, sir, that's useful.

[Operator:]

Thank you. That was the last question. I'd like to hand the line back to the management for any closing comments.

[C Ramakrishnan:]

I'm sorry about this time pressure and the delayed start once again. Thank you very much to all of you for taking the time and joining us in this call, and Macquarie, Amit from Macquarie, thank you once again for hosting the call.

[Operator:]

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