Tata Motors Limited
Q2 2017 Earnings Call Transcript

Published: 14 Nov 2016

[Operator:]

Good evening, Ladies and gentlemen. I am Nirshad, your moderator for this session. Thank you for standing by. And welcome to Tata Motors Q2 FY17 Earnings Conference Call. [Operator Instructions] I would now like to hand over the conference to Mr. Kapil Singh. Thank you and over to you, sir.

[Kapil Singh:]

Thanks Nirshad. Hi, everyone. Thanks for joining the call. Today we have with us Mr. C Ramakrishnan, Group CFO of Tata Motors and Ben Birgbauer, CFO of JLR, Mr. Vijay Somaiya, VP, Head of Treasury and Investor Relations, and the IR team of Tata Motors. Without much delay I hand over to you, sir.

[C Ramakrishnan:]

Thank you, Kapil. Thank you for hosting the call as well. Welcome to all of you. Good evening, good afternoon, good morning, wherever you are. The call -- let me clarify at on the set is on our results for second quarter 2016/2017. I would appreciate question and answers are restricted to the financial results that is published. Coming to the presentation, it is already hosted on the website now. Tata Motors Group consolidated revenue and net revenue for the quarter was about Rs. 56,000 crores, up marginally from Rs. 61,000 crores compared to the same quarter last year. EBITDA margin came at a little lower at 10.7% compared to 12% in the same period last year. We will come back to that in greater detail later. And profit after tax was about Rs. 848 crores compared to a loss of Rs. 1,140 crores in the same quarter last year. We'll discuss this profit moment also little later. As for the standalone operation are concerned, Tata Motors India, net revenue was almost flat or marginally low at Rs. 10,351 crores compared to [Technical Difficulty] in the same quarter last year. EBITDA came in at Rs.376 crores, down from Rs. 874 crores in the previous quarter -- in the same quarter in the previous year resulting in EBITDA margin of 3.6% down from 8.2% a year ago. Profit after tax was negative at Rs. 631 crores, slightly up from about Rs. 300 crores in the same quarter last year. Jaguar Land Rover reported a net revenue of £5.9 billion, compared to £4.8 billion in the same quarter last year, sales and revenue during the year. EBITDA came in at £615 million, up marginally from £589 million in the same quarter last year. EBITDA margin came at 10.3% down from 12.2% last year. And profit after tax was positive £2.4 million compared to negative of £92 million in the same quarter last year. At Tata Motors standalone level, the net debt to equity ratio was about 0.82 and JLR continues to have net positive cash flow -- at consolidated level net automotive debt to equity was 1.26. On a standalone business performance, Tata Motors India, as I said earlier the EBITDA margin came in at 3.6%, broadly reflected by significant decrease in medium and heavy commercial vehicles of 16.5% year-on-year compared to same quarter last year. If you all recall, last year September month in particular in the quarter was particularly strong for medium and heavy commercial brand vehicle with some elements of in advance of pre-buying in advance of the 1 October of safety and other launch switch came in on 1st October of last year. So second quarter and more particularly September was very strong. So we had year-on-year de- growth of 16.5% in medium and heavy commercial vehicle industry. This however partially offset by good growth in light commercial vehicles about 11% year-on-year. Our car segment growth at 26% and export growth of about 20%. So little bit of color on Jaguar Land Rover business performance. As I said the EBITDA was £615 million, margin at 10.3% EBITDA margin, volume and mix were favorable for Jaguar Land Rover, however, the favorable operating exchange in terms of our sales realization were offset by a evaluation and realized hedges on our head book. Unfavorable foreign exchange revaluation of current assets and liabilities and we also had a one time provision for continue customer and quality initiatives. Excluding the FX revaluation and one time provision for this customer quality programs and adjusting the revenue for realized foreign exchange hedging losses, the EBITDA margin in comparable was actually at 12.9% even though the reported margin is 7.3%. Little bit more color on commercial vehicle, it's India business. Overall, CV industry witnessed pressure on account of demand cost in the medium to heavy commercial segment in Q2 in particular. If you all recall, it started somewhere towards end of the first quarter towards June and that position continued, it is more aggravated in Q2. Domestic CV volumes for the company did grow by 2.9% year-on-year in Q2. LCV segment growth had about 11.4% offset by M&HCV segment growth of about 15.5%. Variable marketing expenses continues to remain high in the industry. We bagged an order for about 5,000 buses from STU's across India. Commercial vehicle exports were up 21.6% year-on-year. Other key life and export markets were forays into Bolivia, launch of Tata Super Ace in Vietnam and launch of new CV commercial vehicle Indonesia. Brazil vehicle business, the Brazil vehicle industry witnessed a growth of about 18% year-on-year in Q2, almost equal volume of Tata Motors and passenger vehicles grew by about 20.5% slightly better in the industry. Within that passenger car industry grew by 11.4% and Tata Motors the car segment outperformed the industry with the growth of 26.4% compared to industry growth of about 11.4%. Tiago has received very strong response and continues to receive -- continues to have a very strong orderbook. We also launched Tiago in Nepal in the quarter. Jaguar Land Rover, wholesale and retail volume for Q2, 124,000 units and 129,000 respectively and for China JV CJLR wholesale and retail volumes stood at about 15,000 and 17,400 respectively. In all regions, retail sales reflect strong sales of F-PACE exceeding Evoque and Discovery Sport. North America retail sales were up 39%, UK about 28%, China retail; since we are talking retail it includes the JV. Overall retails in China up about 49% and Europe 39% and rest of the world is about 1%. CapEx and product development spend for the quarter was about [₤70 million to ₤4 million] for the quarter, post this CapEx spend free cash flow was about ₤70 million. As I said earlier, cash and financial deposits of the balance sheet was about £3.8 million, in addition to the undrawn bank lines of credit of close about £2 million that we had which remain undrawn. Profit before tax was £280 million, up from the loss of £157million in Q2. Again reflected by the favorable volume and mix offset by one time provision for the customer quality program, revaluation of unrealized FX and commodity hedges, and last year if you recall which I referred to you earlier, we also had £245 million which was then exceptional provision for the Tianjin charge we had taken in the quarter. Share of China JV profit for Q2, our share was about £33 million and China JV in quarter also declared the first dividend of an equivalent term of about £0.6 billion also during the second of June. Jaguar Land Rover, we have other development in the quarter. Launch of exciting new products, the all new XF long wheel build in the China market. First Jaguar produced in the China JV had retail sales about 600 units in September. All new Discovery was launched light weight aluminum construction which is about -- close about 500 kgs lighter. Co2 emission about 159 gram per kilometer, flexible interior provide for seven full sized adult seat, wholesale to start in Q4 of this financial year. Going forward, Tata Motors Group in the standalone business, company will continue to explore capital optimization for better operating efficiency and working capital exception and monetization of non core assets and some of its investment. In commercial vehicles, on the backup infrastructure, spending and good monsoon, we expect M&HCV to grow at the second half of fiscal 2017, leaving to full year M&HCV growth somewhere to single teen. In case of pre-buying before countrywide adoption of BS4 schedule from 1st April, 2017 overall M&HCV grew this year at the highest. Similarly, we expect the buses and LCV segment will continue to maintain the positive growth rest of the year. Continue to have wide and compelling product range with several new launches in FY17 which provides a strong foundation for our growth in prescience of the overall commercial vehicle strategy we have finalized We have several market and key accounts and service offering initiatives which we will aggressively execute. Just like the intense competition, we are geared to further strengthen our market leadership and committed to striking right balance between sustainable growth and profitable growth. M&HCV in particular, we will see the expansion of Prima LX and the new Signa range across challenges and applications. We aimed to get back to position of more than 50% market share over the next two years in 15 tons and above segment from the current level of 55% to 56%. LCV and ILCV and I said you earlier expansion of the new ultra range of across different tonnages and applications, small commercial vehicles and pickups, refreshes and variants to further complement and strengthen the Ace and Super Ace family. Export growth in FY17 is expected to be in the range of 20% to 25% and over time for the next couple of years, we aimed to take the export contribution to the total CV revenue to above 25%. Company continues to have good pipeline of defense orders both which are been received as well as expected. As far as passenger car India business is concerned, we continue to launch new projects; the launch of new Tata Hexa will be in January of 2017. It has received very positive reviews and accolades from the auto media, journalists and associate. The launch of product code name Hex 5 and Hexa [Technical Difficulty] The focus on dealer network expansion and customer eccentricity will be continuously aimed for because also reflected in the significantly improved ranking as a third name in the racing JD Power CSI, in the second rank for the sixth third name. Coming to Jaguar Land Rover, our investments will continue to drive profitable growth. JLR strategy continues to be investing in new products, technology and manufacturing capacity to grow profitable. Investment spending in the current year is likely to be somewhat below than the prior indication which was £3.75 billion we expect to make --. We continue to build our recent successful product launches, with continue sale ramp up of the Jaguar F-PACE, XF long base wheel in China, Evoque convertible and future new models including our new Land Rover Discovery and others to be announced. Increasing sales of these new products and plant start up Discovery wholesale are expected to drive profitable growth and support the solid second half in this fiscal year. We continue to have a balance sales profile and we'll continue to closely monitor and assess market conditions in key regions. We'll stop here with the presentation and floor is open for Q&A.

[Operator:]

[Operator Instructions] So we take the first question which is from Mr. Pramod from CIMB. Mr. Pramod, please go ahead and ask your question, sir.

[Pramod Amthe:]

Yes, hi. Two questions. One with regard to the quality and new customer acquisition programs that you talked about. What's the cost involved in the quarter? How much of them are historical ones and related to quarter?

[C Ramakrishnan:]

So you are talking about Jaguar--

[Pramod Amthe:]

JLR quality and customer acquisition programs.

[C Ramakrishnan:]

Overall the impact on the EBITDA would have been slightly less than 1%.

[Pramod Amthe:]

Okay. Are they historical or all are lumpy in 2Q itself?

[C Ramakrishnan:]

It is one time professional including second catch up.

[Pramod Amthe:]

And what's the JLR year till date has been on a very weak wicket, because of very slow single-digit growth or even declining. What do you attribute the reason for the same excluding the discovery run down? And what are the plans to recover and when do you see that to come back to double-digit growth rates?

[C Ramakrishnan:]

As I said earlier, these ups and downs in the quarter would also coincide with ramp up of volumes our product recently launched and the launch of the all new Discovery. So we expect to refer to the growth -- the full availability of both the markets. It is a more timing issue.

[Operator:]

Thank you very much, sir. Next question we take from Mr. Chirag from Edelweiss. Over to you, Chirag.

[Chirag Shah:]

Thanks a lot for the opportunity. Sir, I have a question on this margin on the FOREX? Can you explain what would be QonQ sequential movement on the FOREX?

[C Ramakrishnan:]

Just give me a minute.

[Chirag Shah:]

Of realize FX hedges as well as current assets and liabilities?

[C Ramakrishnan:]

Q1 to Q2, the realized FX hedges of Q2 was about -- close about £280 million negative. And Q was about £123 million which is an increase of about £153 million in the current quarter compared to the immediately visiting quarter. Its effect is insignificant.

[Chirag Shah:]

So around a GBP150 million sequential negative impact.

[C Ramakrishnan:]

£153

[Chirag Shah:]

One five zero, right.

[C Ramakrishnan:]

Yes, approximately.

[Chirag Shah:]

And second is, if I try to reconcile with the -- to indicate

[C Ramakrishnan:]

Sorry reconcile with --

[Chirag Shah:]

The reported EBITDA margin was 10.3% for JLR and you have indicated it is 12.9% -- FX revaluation and one time customer acquisition. So the differential between -- is completely attributable to one-time customer acquisition, right. Because FX you have indicate is GBP58 million.

[C Ramakrishnan:]

No, FX I said 58

[Chirag Shah:]

So the difference is completely attributable to this one time program and can you explain what exactly are these programs like, what do you mean by customer enhancement program?

[C Ramakrishnan:]

This is a close of customer reach program which is comprehensive and full time customer engagement in terms of the car that come for servicing. It is much more rigorous and a more comprehensive program that they have already crossover model at across market. EBITDA margin explanation I gave you is partly consisting of the FX impact and partly the provision for this program.

[Chirag Shah:]

And this is a reoccurring program, right. It will keep on reoccurring in subsequent quarters also.

[C Ramakrishnan:]

Maybe to a lesser extent because it is also include certain catch up provision.

[Operator:]

Thank you very much, sir. Next in line we have Mr. Robin from Bernstein. Over to you, sir.

[Robin Zhu:]

All right, thank you for taking my questions. Just three questions please. First of all, if we look at the move in the pounds. And I think last quarter the management said that, the margin would benefit from the larger -- so far we've not seen that. Even if we add back the realized FX hedges to the underlying margin seems to be roughly the same level as Q1. I just wanted to understand how much of this is because of product start up cost from the Discovery, or if you could quantify just how much the quality provisions actually were during the quarter. Secondly slightly longer-term, we've seen in the news with Nissan seems to have committed to building some new models in the UK on basis; they've gotten some assurances I think that's the word that was used. Do you have any understanding of what those assurances were in nature and yet, could we expect similar impact for JLR, benefits for JLR, if we do get Brexit scenario that's its affecting the auto industry. Thank you.

[C Ramakrishnan:]

Okay, I'll may be request Ben to take the second question particularly on the Nissan assurances, maybe better Ken to answer and in the meantime on the first question, the question about two three small questions put together. As I explained to you in the past in terms of our hedging strategy, for more nearer quarters the immediately quarter, the second or the third quarter at any given point of time our hedge will run at 75%-80%, 70% and so on and so forth in a declining percentage. So by time you see the full benefit of the weaker pound on our operating margins it will update over a period of time. And it will bound to happen but it is going to play out over a period of time. The effectiveness of the hedge is in terms of stabilizing the foreign exchange portion of the company and the compact of the logger that I have indicated, the underlying realization also have started improving but that is somewhat offset by the losses that you incur of the hedge book. A year from now at any point of time fourth quarter or fifth quarter the hedge ratio there will be much lower that's when it will start benefiting from up to date exchange rate given the current exchange rate position. And definitely benefit since Jaguar Land Rover offer substantially in pounds and realization are substantially in dollar and other currency. But because the hedge book which is basically insurance for the company to stabilize its year ending, benefit of the weaker exchange will definitely happen over time. If you want to quantify -- if I can finish - if you try to quantify approximately if I say the 10.-- reported margins the 12.9 which I mentioned earlier, it will be more or less equally distributed between one person each between the revaluation of current asset liabilities of foreign exchange and the one time provision. In addition there is also strategical difference of about 0.5 or 6% which is because of netting out -- adjusting the realization in the revenue expense instead of showing it is as expenditure. That's more strategical one; the real impact is almost equally distributed at 1% each between the one time provision for the quality initiative and the revaluation of current assets and liabilities in foreign currency. I'll stop here for a moment, maybe Ken can answer the second question about the Nissan program and the assurances you talked about. Ken you are on the call; would you be able to take it up?

[Ken:]

Yes. I mean I think I'd say this that we are not party to any discussions or assurances that may or may not have been given to Nissan. On our part, all I can say is we are actively engaging with the UK government on reinforcing what we wish to see UK achieve following Brexit and specifically importance of tariff free trade between Britain and the EU, the preservation of present labor rules to enable cross border movement of labor and then also continuation of present European wide framework of industry regulations and the associated customs you need. So we've been very clear that we believe those interests in the best interest of our customers and Jaguar Land Rover and the automotive industry not just in UK but also in Europe. So we have been very clear about that. But I am not party of any discussions that are taking place with Nissan.

[Robin Zhu:]

Thank you. Sorry, just on -- as I explained -- if I may follow-up briefly. If I take your 10.3% EBITDA margin, I add back the one time impacts both on the quality side and on the mark-to-market FX and then if I add back the realized FX losses or the realized FX hedging losses, I get to a margin of something around 16%, that quarter-on-quarter is about the same level as Q1. Given the trajectory of the pound from Q1 to Q2, shouldn't we expect the pre-hedging loss line to gone somewhat and given the apple-to-apple realization is about 77.

[C Ramakrishnan:]

Ken, since you are on the line you can also take this, either you or Ben? If you add back the realized hedge losses, yes, the margin would look at 13% some percentage.

[Ken:]

I complete -- the math that you are doing and the arithmetic you are doing, so yes, I can and I have to do same sort of adjustments felt or think, what I would say about a year is we don't run the business quarter-to-quarter, we manage it on the course of full year. And as we look forward we've got the product launches which CR mentioned we've got continue ramp up of the assets we got the launch of the all new Land Over Discovery and other products that are coming that I think in the fullness of time will give us the opportunity to grow and clearly we are very focused on driving the profitability of the business as well as the volume of the business. And therefore more cautiously optimistic about assets we look forward. But, yes, that's your math that's all Q2.

[Robin Zhu:]

Can I understand that the fact that, there'll be an underlying margin having gone out is that essentially because of we start across weighted to imply new cars and Discover and you get on? Is that basically why?

[Ken:]

It is not basically why. Certain, all I'd say is certainly a contributing factor is that we are in phase of transition for the Jaguar Land Rover business which is a positive phase because we are launching new products quarter-by-quarter. This quarter we've been going through the launch of the -- or the early phase of the launch of Land Rover Discovery. So and I think these cost will continue for a number of quarters, we are very focused on delivering the promise of the investment we made in the business. So I do look forward over the coming quarters in years to seeing that profitable, sustainable growth.

[C Ramakrishnan:]

Just to supplement in the interest of full and fact disclosure, the start up cost or the launch related cost, I'd care to call it out especially for this quarter, it has been there in the earlier quarters or the previous quarters. And it will continue to do so. So I am not very sure that I can call it out special impact for this Q2.

[Ken:]

Yes. I think that's true.

[Operator:]

Thank you very much, sir. We take the next question from Jatin Chawla from Credit Suisse. Mr. Jatin, over to you.

[Jatin Chawla:]

Thanks for the opportunity. Just continuing on the previous question, is there any significant rise in incentives in on a QoQ which has kind of cancelled the FOREX improvement that one would have normally seen?

[C Ramakrishnan:]

You said incentive

[Jatin Chawla:]

Yes.

[C Ramakrishnan:]

No.

[Jatin Chawla:]

Okay. And on the JLR presentation you're called out that the favorable volume and mix was offset by manufacturing and certain one-time costs. So is there any one-time cost on the manufacturing side as well apart from this customer acquisition thing?

[C Ramakrishnan:]

No. I didn't say manufacturing. I said manufacturing at best you can say some of the launch related but I am not sure that you can sensibly call out as a significant growth of the current quarter. Apart from this quality initiative that we have launched, it will -- call out anything physically in terms of the cost.

[Jatin Chawla:]

I just take -- because it was mentioned on the JLR presentation. Thanks. That's all.

[Operator:]

Thank you very much, sir. Next in line we have Mr. Suraj from UBS Securities. Mr. Suraj you may go ahead with your question, sir.

[Sonal Gupta:]

Yes. Good evening, sir. This is Sonal Gupta from UBS. So just on again on the same question, basically where I'm coming from, if I look at your Jaguar Land Rover raw material cost of sales on a quarter-on-quarter basis, it's actually gone up 10 bips or whatever or roughly flat, while ideally, I mean I understand that the costs and the FX losses et cetera coming in the other expense line item. But even despite the very favorable FX impact, we haven't really seen any improvement in the gross margin. So to speak, so are there any costs related to FX, which are coming in gross margin also or I mean are there any other factor which are pushing up this gross margin -- is the mix effect, I mean could you just shed some light on that.

[C Ramakrishnan:]

I can request Ken to confirm on the cost side, I don't recall or need to call out any exceptional impact on the foreign exchange. Some of these material cost and other cost revenue is also impacted by several factors such as region, volume mix et cetera, it is difficult to explain it quarter-to-quarter. But trend wise I think our cost structure impact our revenue period of time. I am not sure I'll be able to comment specifically on such percentages on quarter-to-quarter, it is influenced by a number of factors. Ken, I don't know whether you care to elaborate further on this. Please feel free to --

[Ken:]

No. I think you captured yes in CR.

[Operator:]

Thank you. I'll hand it over the floor back to you for final remarks.

[Kapil Singh:]

Okay. First of all, my apologies for the rescheduling this call a couple of times. And causing inconvenience to everybody. But still thank you very much for joining and for your questions. And I also apologize at the end for cutting the duration from 45 minutes to 30 minutes since we are running short of time. And we have one more call to follow. So my apologies but I am sure we will have opportunities to continue this engagement as we always do from Nomura team and myself over a period of time. Thank you very much joining today.

[Operator:]

Thank you very much, panelist. Thank you very much attendees. That does conclude the conference for today. Thank you for participating. You may all disconnect now. Thank you.

[C Ramakrishnan:]

Thank you, Kapil.