Tata Motors Limited
Q3 2017 Earnings Call Transcript

Published: 14 Feb 2017

[Operator:]

Ladies and gentlemen, good day and welcome to Tata Motors Q3 FY17 Conference Call. 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 would now hand the conference over to Mr. Yogesh Aggarwal. Thank you, and over to you, sir.

[Yogesh Aggarwal:]

Thanks, Dan. Hello everyone, good evening, welcome to the Tata Motors 3Q 2017 Analyst conference call. We are very glad to have with us the management of Tata Motors represented by Mr. C. Ramakrishnan, Group CFO of Tata Motors; Mr. Ken Gregor, CFO of JLR; and Mr. Vijay Somaya, VP and Head of Treasury and Investor Relations, plus all the other members of the IR Team. I’ll now hand over the call to Mr. C.R for opening remarks and presentation, over to you sir.

[C. Ramakrishnan:]

Thank you, Yogesh and thanks, HSBC for hosting this call. And good evening, good morning, good afternoon to everyone, wherever you maybe and thanks for coming on this call. Before I quickly run through the presentation that we are put together to be outset. It has been – for a financial performance point of view it has been a disappointing quarter, for variety of reasons with headwinds and some unexpected macro events in the domestic business, as well as certain headwinds and timing given some Jaguar Land Rover. As you will see, as I go through the presentations’ there are actions specific and addressing the many of these areas and we hope to improve from here the next quarter and in the coming quarters. There are number of initiatives underway in Tata Motors, transformational and strategic initiatives, which our MD has advice from time to time – picked up those in the media. Hopefully, we still help us significantly improve our performance as we go forward. Quickly going through the presentation, the consolidated turnover net revenue was about Rs. 67,000 crores down marginally from Rs. 70,000 crores in the previous year same quarter. EBITDA percentage drop to 8.9% from 13.8%. And the Q3 profit PAT about Rs. 112 crores compared to Rs. 2,900 crores in the same period last year. I will not go through all the detail numbers including the quarter and nine months et cetera, because the presentation will be available to you on the website anyway shortly after this call – sorry it’s already on the website. Tata Motors, standalone operations, I’m just to remind you all, the standalone in the last two, three quarters includes effect of joined operations mainly the JVs, that we have in India. Including joint operations, the net revenue was flat at about Rs. 10,100 crores compared to Rs. 10,000 more than thesame number in the same quarter last year. EBITDA percentage dropped significantly to 1.5% from 6% of the same period last year, and a result PAT was about Rs. 1,000 crores lost compared to Rs. 100 crores lost in the same quarter last year. Jaguar Land Rover, these are pounds. Net revenue was about £6.5 billion, an increase from £5.8 billion for the same quarter last year. EBITDA percentage however, came lower at 9.3% down from 14.4%. And PAT was about £167 million compared to £440 million in the same period last year. In terms of overall balance sheet, Jaguar Land Rover continues to have a net cash positive position. We will see some details on it in the subsequent slides. Therefore, debt to equity ratio leverage doesn’t really apply to Jaguar Land Rover, being net cash positive. In Tata Motors, standalone, automotive operations, the net debt to equity touch about 0.93% – 0.93% to 1% at the end of the quarter. In terms of the operating profit performance for this quarter, as I said, the EBITDA margin for the standalone business was about 1.5%, mainly impacted by a de-growth of about 9% in the medium and heavy commercial vehicles. LCVs were flat with growth of highly about 0.2% year-on-year. Car segment, however, grew for us growth at 31% and we had good exports growth of about 34%. The de-growth in M&HCV is 9% in volume terms of it’s just significantly the margins along with the discovers and other factors we’re play in the marketplace. Jaguar Land Rover on the EBITDA which was £611 million at 9.3% mainly reflects the lower wholesale volumes in the quarter compared to year ago. Less favourable product mix and partially offset by favourable market mix. The effect of this market, wholesale volumes and product mix and market mix that was almost 2% including the runout cost of the Discovery. Marketing expenses continue to increase and affected the margins by about 1.7%. New model launch costs and pay negotiation settlement payments also impacted the margin, both together by about 0.7%. If you have to relook at EBITDA margin differently, the realized losses if you had to added to the revenue – remove it from the revenue, the equivalent EBITDA margin would have been about 10.1% instead of 9.3%. Standalone business, commercial vehicles, the industry witnessed to significant demand shrinkage in the months of November and December following the demonetization that came into effect in the early part of November. Our domestic CV volumes of the company declined by about 4.1% in all, within which M&HCV segment as I mentioned before declined by about 9% in this quarter. However, strangely, it is the M&HCV, the Construck and Buses segment, witnessed strong growth upwards of 30% respectively. As mentioned earlier, variable marketing expenses continue to remain high in the industry somewhat even more accentuated following in the November and December. More recently, we see some trend in material cost increases and we have also taken some price increases towards the end of the quarter to mitigate. Passenger vehicle business in India from an operational point of view was good quarter for us. This industry – passenger vehicle industry posted a growth of about 1.9% in Q3. A Tata Motors, we saw the passenger vehicle business grew by about 25%. Within this Passenger car segment for the industry, we grew by 2.4%, in our case the car part of our portfolio grew by about 31% supported by the strong performance of Tata Tiago. Tiago also won several awards, they believe it is double-digits, know, we have collectively got about 13 awards. They need to check whether there is something of a landmark. Tata Hexa was unveiled in the quarter with strong responses and high acclaim from all stakeholders including media, auto critics, and auto enthusiast based on its features, design and technology. Jaguar Land Rover, wholesale volumes stood at about 130,000 units and retail was about 139,000 almost the same. In China – in the China JV the wholesale and retail volumes came in at around 21,000 and about 19,000 respectively. In terms of retail sales, we saw our North American market grow by about 20%. China, since I’m talking retail, this includes the JV sales into the retail. China as a whole the retails went up by about 38%, Europe 7%, but however, UK saw a decline of about 3%, and overseas even more slow at about 21%. For the quarter, the capital expenditures and product development spend was about little lower £900 million part of the annual indication we had given upwards of £3.5 million. After this investment in the quarter of £926 million on CapEx and product development, the free cash flow for the quarter was about £54 million positively. I mentioned about the strong cash and liquidity position on the balance sheet, in cash and liquid investments we have about £3.8 billion and for that we have another almost £2 billion of undrawn – unutilized committed bank lines. Little more color on the profit before tax, which came in at £255 million for JLR for the quarter, that’s down from £499 million in the same quarter last year. Broadly impacted by the lower EBITDA which we talked about earlier, higher depreciation, amortization charge of about £52 million which is a trend we have seen in the earlier many quarters. Unfavourable unrealised FX and commodity hedges on revaluation as well as U.S. dollar debt revaluation about £42 million offset somewhat by higher China JV profits compared to year ago about £13 million and lower net finance cost of about £5 million. We also recovered further recoveries related to Tianjin fire loss of about £55 million. We had comment with this recovery in this quarter for Tianjin almost whole of the law that we had once provision for, when the accident – when the incident took place more or less of being fully recovered with something more to come trucking. Share of China JV Profits of the quarter was about £35 million. The next couple of slides are mostly car pictures, I can’t dig him to describe them [indiscernible] I was skip that. You can have a look at them little later. Going forward, as I mentioned earlier in Tata Motors, we are focusing on six strategic initiatives and a transformational journey, which touches upon every aspect of the business and fundamentally reshaping the business to be ready for the future. Centering around, intense topline focus, agility in our cost management, structural improvements, customer focus and centricity, new business models and new technologies, and a lean and accountable organization structure. These six fields have been rolled out in several project and make you to initiative internally and of the head impact improvement by action, impact project and many of all these projects are significantly underway, we thinking at re-changing as it is executed the way we do our business. They’ve also made several announcements touching upon each of these. The new business models, new technologies, we have announced the sub-brand called TAMO, which will incubate new technologies for introduction in the future. A lean and accountable organization, we’re going through a major organizational realignment initiative and our organization’s effectiveness for our program to rethink of the number of levels of hierarchy in the management, head count and where we are organize in terms of accountability and responsibility. More focused on it, greater accountability and empowerment is in the business units with the strong control functions in terms of central services. I can keep on talking about many of these initiatives, I’ll stop here in terms of dismissed outlook going forward in commercial vehicles, we expect infrastructure spending and pre-buying before the adoption of BS4 in April will result an improved medium and heavy commercials in particular demand for the Q4. And we believe come back to the declined we had seen in one or two quarters in the current year, we will end the year at least on a flat basis compared to the previous year, in terms of medium and heavy commercial vehicles, which in turn would translate to hopefully a much stronger fourth quarter. Within M&HCV Buses & Construck segment, which I mentioned earlier, we will continue to maintain the positive growth momentum, which also August well for the performance going forward. And we expect this growth momentum to pickup in FY2018, even though post introduction of BS4 across the couple of months maybe somewhat muted. As they were shared with you all before, wide and compelling product range with several new launches in the coming months and in this year. In all segments medium and heavy commercial vehicles expansion of the new Signa Range across various tonnages. On the product side, we’re very well prepared for the BS4 launches shortly, happening in Q4 shortly and in April. And it could be our aim and strong commitment to get back to the position of more than 60% market share for the next two years in the M&HCV segment from the current level of about 55% to 56%. Similarly in light commercial vehicles and intermediate vehicles, we will see an expansion of the product range Ultra across different tonnages and applications, including introduction of new high performance 3 liter and 5 liter common rail engines. Same with small commercial vehicles and pickups, we will ramp up the production of Xenon Yodha, which we launched recently. And strengthen the ACE platform across different applications and tonnages. We except export growth to continue in the range of about 30%, they continue to grow at this rate into the next two years and was certainly increase a share of our international business and commercial vehicles within the overall commercial vehicle portfolio. They’ve launch Prima and Ultra in many of international markets. We also have a good pipeline of Defense orders, which I shared with you earlier, both received is being executed, as well as expected. Passenger vehicles we launched, the Tata Hexa in January 2007, it has received – as I mentioned received very, very positive reviews and strong accolades from the auto media, journalists and enthusiasts. The strong response has been so positive. It’s also reflected in the strong order book of more than two months even before the launch of the Hexa in January. Tata Tigor and Nexon will follow later in this year – in this calendar year. Other areas of focus like dealer network expansion and customer focus and customer service improvements will continue to be emphasized. As a result, we have also improved our ranking to the third rank in the recent JDP CSI study. We also launch as I mentioned earlier of sub-brand – TAMO, which is an incubating vertical to drive innovation and future mobility solutions demonstrating our technology capabilities. As well as Jaguar Land Rover is concern, looking forward will continue to invest in high profitable growth. Our strategy continues to be to invest in new products, technology, capacity all of which seem to grow profitably. We will continue to build on recent successful product launches, which continue to have a very strong demand full in the marketplace. And sales ramp up of the Jaguar F-PACE, XF long wheel base in China, and the all new Discovery, and other products to be announces later this year. More particularly on the current quarter, that is the fourth quarter, the start of sale of new Discovery wholesales, the annul March peak season sales in UK and other seasonal factors we expect to support a solid final quarter. We continues have a balanced sales profile and we will continue to closely monitor and assess market conditions in key markets. Before I end, there’s a couple of comments on some of the balance sheet related corrections particularly in India, following the introduction of Ind-AS accounting standards, which mirror mainly the IFRS with certain [indiscernible] exceptions. We have done fair valuation of some of our access notably land to the extent of about Rs. 4000 crores, including certain re-statement of foreign exchange loans et cetera, as required by the standard. They’ve also have taken this opportunity to fair value some of the assets and product development and other engineering expenses, in some of the programs which may not continue to be relevant in the future. As well as incremental provisions or some of the financial key words, which continue to perform not according to the expectations, but lower than expectations. That taking the account all these adjustments in terms of Ind-AS, we also have the effect of equity method of accounting for certain joined ventures. Combined in all these at the standalone level, we see net of the fair valuation upward and downward we see a net impact positive in the equity of about Rs. 500 crores, Rs. 600 crores in the standalone. You’ll see more details of it in the presentation, as it available on the website, standalone grew Rs. 990 crores. I will stop here with my presentation and a brief context in terms of the performance of the quarter. As I said in the beginning, surely a disappointing quarter, but series of headwinds and somewhat crowding of, some of one time and speaking of some expenses, as well as the domestic economy disturbance in terms of demand fluctuations and I think from some of the legislations. We hope and expect that there will be a recovery in the fourth quarter and in the periods recover with the all the actions that are being initiated. I will stop here gentlemen and operator for your question and answer.

[Operator:]

We will now begin with the question-and-answer session. [Operator Instructions] We take the first question from the line of Amyn Pirani from Deutsche Bank. Please go ahead.

[Amyn Pirani:]

Good evening sir. Thanks for the opportunity. So my first question is an accounting question on the results. If I look at the JLR reduction in EBITDA on a YOY basis is around £220 million, which his around Rs. 1,900 crores. Similarly in the standalone it is around Rs. 450 crore of EBITDA decline. But on a consolidated basis, it’s close to a Rs. 4,000 crore EBITDA decline from Rs. 9,700 crore to Rs. 5,900 crore. So is it just a accounting difference or is there any other businesses and with the losses of expanded, which you can just clarify on that.

[C. Ramakrishnan:]

One factor you need to taken to account in the consolidated, when you translate the JLR profit into the consolidated.

[Amyn Pirani:]

Yes.

[C. Ramakrishnan:]

On the y-o-y basis, there’s a exchange translation impact also that’s comes in.

[Amyn Pirani:]

Okay.

[C. Ramakrishnan:]

Year-on-year last year, the pound, rupee parity was different in Q3 of last year compared to Q3 of this year.

[Amyn Pirani:]

Okay.

[C. Ramakrishnan:]

That alone would account for major portions of the different that you are talking about.

[Amyn Pirani:]

Okay, okay. So there are no like expanding losses any of the other business that’s not…

[C. Ramakrishnan:]

No. Its substantially, in fact almost all of it is the translation of JLR profit in rupees in the consolidated accounts between Q3 of last year and Q3 of this year.

[Amyn Pirani:]

Okay, okay, that’s helpful. So my second question is on the hedging losses in JLR. Now, obliviously, difficult to pinpoint, which quarter the losses will come off, but at least we would have expected that in 3Q the losses would have more or less been stable compared to 2Q, but they are actually expended. So directionally, based on the hedging that you have done in the last 4 to 5 quarters, I know, you can’t give the quantum, but which quarter could see a slight reversal or at least stabilization in the lost quantum of the losses.

[C. Ramakrishnan:]

I will just offer a couple of comments and may be a request Ken, who is also on this call to supplement.

[Amyn Pirani:]

Yes.

[C. Ramakrishnan:]

As we’ve said before JLR runs fairly large hedge book.

[Amyn Pirani:]

Yes.

[C. Ramakrishnan:]

Exchanging into almost 4 to 5 years.

[Amyn Pirani:]

Yes.

[C. Ramakrishnan:]

Arguably, there are 5th year out or 4th year out the percentage covered will be a much less.

[Amyn Pirani:]

Yes.

[C. Ramakrishnan:]

And over the next to one or two quarter, the hedging ratio amongst almost 80%, it was a 90% of in case coming down to 70% to 60% and so on.

[Amyn Pirani:]

Right.

[C. Ramakrishnan:]

So I would expect the hedge and we continue to hedge maintain this cover because, as it turns out, we believe that’s a right strategy to deals the business.

[Amyn Pirani:]

Yes.

[C. Ramakrishnan:]

Business for which a substantial amount of production and cost are in pounds sterling and almost 80% of the revenue is in other currencies.

[Amyn Pirani:]

Yes.

[C. Ramakrishnan:]

It’s necessarily to deal with the business with firm raise on the exchange front. So it’s a currencies remain constant from today, it’s very difficult to predict the command based on currency movement…

[Amyn Pirani:]

Fair enough.

[C. Ramakrishnan:]

Into the future, if currency is remain constant as they are today. I would except over the next 4 to 5 quarters, you will see an diminishing – more and more diminishing impact to the wallet change. Hedge factor coming into the revenue line, into the P&L line. Ken, in case you want to supplement anything further.

[Ken Gregor:]

No, I think you captured the essence of it CR. Thanks probably, what should – may be just two additions, I mean, one would be remember that the hedges are being offset every quarter by more favorable operating foreign exchange than was except to the time when we – the hedge is out. So for example in this quarter we have – if you look year-to-year, we have over £440 million good news of operational exchange, that is being offset by the nearly £400 million of year-to-year, incremental hedge losses. So net FX is actually the good thing for the business, but its undeniable we have the some hedges losses around us. And, yes, I would expect them to be over the next four quarters or so to run it’s a similar level amend start to reduce thereafter.

[Amyn Pirani:]

Okay, okay, okay. Fair enough. Thanks for the opportunity.

[Operator:]

Thank you. We take the next question from the line of Pramod Kumar from Goldman Sachs Asset Management. Please go ahead.

[Pramod Kumar:]

Yes, thanks a lot for the opportunity. My first question put into this consolidated cash flow for the quarter side. So you can just throw some light you highlight of the JLR cash flow bits. But if you can kindly highlight what has been the consolidated position on cash flows at this quarter and how much of the CapEx is kind of run rate what we looking at in the standalone business.

[C. Ramakrishnan:]

I will take the second question first. In the standalone business, I think we had mentioned before the CapEx range between Rs. 3,500 crores to Rs. 4,000 crores on an average in a year, for the current year and for the next few years. It could be slightly higher in the coming years depending on the timing of certain expenses and incurrence and commitment. This season we except with the CapEx will level of at around Rs. 3,500 crores, even though we had integrated earlier, it could be higher at Rs. 4,000 crores. I think will come off little lower at about Rs. 3,500 crores. That is for the entire business in India both commercial vehicles and passenger vehicles. And if I may had the passenger vehicle share of the capital expenditure, this year and going forward will be more like 60% to 65% and about 35% to 40% in commercial vehicles. In terms of cash flows, I had already mentioned you about the free cash flow marginal positive about £55 million to £60 million in Jaguar Land Rover. The domestic business for a couple of reasons both in terms of the EBITDA performance and in terms of CapEx the free cash flow will be negative and borrowings have increased in the domestic business. In addition, without expecting the demonetization, but planning for step up in volume of take in advance of BS4 introduction in April. You were anticipating a much stronger third quarter and possibly a fourth quarter. So the working capital impact has also been negative in domestic business, so it’s free cash flow negative, and has increasing the borrowings in the domestic standalone business. It give you a certain color as of December. The net automotive debt to equity in standalone business was about 0.93, which is up from about 0.8% or so if I don’t, but in just in the preceding quarter. In terms of net dept in the standalone business, yet about Rs. 20,000 crores, which is also up from about Rs. 18,000 or so if I remember right, as of 30, September.

[Pramod Kumar:]

And CR, just clarification, 0.93Xis after all the changes what you’ve done on the balance sheet because of the Ind-AS, right?

[C. Ramakrishnan:]

Yes, yes.

[Pramod Kumar:]

Yes.

[C. Ramakrishnan:]

The net impact that’s why said in terms of equity correction in days of about Rs. 900 crores plus in equity, which is an improvement. This 0.93 is after correcting that. So if we didn’t do the net impact of valuations and debt to equity ratio will be slightly high, more like one is two.

[Pramod Kumar:]

Understood. And my question pertains to JLR and this is a bit out in the future in the sense, it’s not very certain as to what will be the outcome, but what are your initial thoughts on border tax proposition and whether independent of that – we’re already kind of looking at the U.S. plant from a slightly medium-term perspective, given that it’s a major market and probably one of the biggest market, which can see potential growth as well going forward, given whatever was going to happen in that economy in terms of job creation. So how are you guys thinking about the U.S. plant?

[C. Ramakrishnan:]

We have looked at expanding manufacturing capacities beyond UK from time to time and there have been some specific initiative undertaken. We went to Europe and Slovakia. We have set up in assembly plant in Brazil. And there was a time also when we looked at the possible manufacturing footprint in Saudi Arabia, which we did not go through further. And we have a last capacity which we have set up and growing, and growing well profitably in China. Further manufacturing capacity expansion I think it will be a function of the potential market, sustainable volume, volume also should be sustainable in terms of investments on the ground, for the range of products and the high product of Jaguar Land Rover has, you need to have sufficient volume and depth in manufacturing and therefore have the investments. That has to be a balanced decision. We will look at these opportunities form time to time, but as and when we focus on something, it has to be justified by the opportunities in that market and in the region. This is a general comment without specifically talking about the U.S. plant. Coming to the border tax potential risk and any consequential action, my response would be I think it’s little premature to jump into any scenario of painting and premature, even more so to be jumping into specific investments or alternative plans or mitigation plans at this stage. In a business which is a mostly centered in UK and now expanded into China with 80% revenues coming from all over the world. The taxes and duties like this will definitely have an impact an impact on the business, but we need to wait and see how it pans out and what we could do about it. Right now I can’t comment it, so very premature to comment and what could have been and even more premature to commended what could be the mitigation actions.

[Pramod Kumar:]

Okay. CR in that case, is that right to assume that there is no new big greenfield assembly plant capacity, which is impacted in your CapEx guidance for the foreseeable future?

[C. Ramakrishnan:]

For me it near to short-term future, no. We’re investing quite heavily even the quarters –this quarter investment and this year investment bulk of it has grown in the manufacturing capacity setup in Europe. We’re not looking beyond that, then there will be some expansion of facilities here in India, where more product lines are getting added but beyond that in the immediate future or a short-term future we are not looking at any major investments of this nature. Ken, there’s anything else you would like to add or otherwise we can move to the next question?

[Ken Gregor:]

No I think you capture well. I do feel this quite amount of water to flow under the bridge on the border tax before we’ve been able to really access, what it meant for us or indeed what mitigation to place. And yes, also on the manufacturing capacity, our sites are very clearly sets on continuing to build in Slovakia, which we commenced last year. So that’s the focus we have right now.

[Pramod Kumar:]

Thanks a lot and best of luck for the future. Thank you.

[Operator:]

Thank you. Ladies and gentleman in order to ensure that the management is able to address questions from all participants in the conference, please limit your question to two per participant. We take the next question form the line of Rakesh Jhunjhunwala from Rare Enterprises. Please go ahead.

[Rakesh Jhunjhunwala:]

Good evening. So my question is as you hedge about 80% for the year end quarter, I mean in general. So then the pound declined in June, July hedge 80% for the – September quarter 70% for the December quarter. Am I right, I mean in general that’s how you do it?

[C. Ramakrishnan:]

Good evening, Jhunjhunwala. Yes your basic premise is correct.

[Rakesh Jhunjhunwala:]

Thanks. So, that means, because extra fall in the pound, right you would have hedged for the next eight quarters on a slighting basis at a rate around 140 or 160 whatever. The point was between 140 and 160 primarily, so as the quarters come off in the second quarter about 60% hedged the higher rate, now in the current quarter 50% will be the higher rate. Am I right?

[C. Ramakrishnan:]

Yes but it is also a continuos hedge program right.

[Rakesh Jhunjhunwala:]

Yes, it’s a continuous hedge program. So obviously, until – for the June quarter as you’d have been hedge 80% for September quarter, 70% for December quarter and 60% for January quarter. So obviously you are heading with start from July, we had a much lower rate. Am I Right?

[C. Ramakrishnan:]

Yes, that right. That’s the sliding scale I was talking about if currency remain where they are today as we go into the future…

[Rakesh Jhunjhunwala:]

Every quarter your – realization of the amount is that the lower value of the pounds as compared to the rupees value previous year.

[C. Ramakrishnan:]

That’s correct.

[Rakesh Jhunjhunwala:]

Secondly, your amount of pound hedged at the rate around above 124, above 140, or above 130.

[C. Ramakrishnan:]

Yes

[Rakesh Jhunjhunwala:]

Would be also low, so every quarter where you’re realized hedges should go down know, you realized hedges. Could I…

[C. Ramakrishnan:]

I am sorry, I am not sure I understood the question but Ken I think I hear you stepping in please do that.

[Ken Gregor:]

Maybe what I’d say is in principle, I think what you’re describing is correct, but maybe the differences. Just to provide a little bit more texture, we are hedging, our hedge program doesn’t just hedge one-year out. We hedge one-years out, it’s up 80%, two years out it’s up to 60%, three years out it’s up to 45%, four years out it’s up to 25% and even a little to 50…

[Unidentified Analyst:]

For this quarter January to March, 2017, some part of it is hedged after June 2016 know, when the pound [indiscernible].

[Ken Gregor:]

Some part of it, but because of the nature of the process of averaging in over time then only a small part of the quarter, you take the quarter for January to March 2017, lets take the quarter that were in right now, only a small part of that very small part would been hedge since June of last year.

[Rakesh Jhunjhunwala:]

Not since June, post June.

[Ken Gregor:]

Yes, that’s what I mean, post June, only a small part of the quarter that we’re in now has been hedged

[Rakesh Jhunjhunwala:]

As time progress more and more of the hedging, so in the next quarter, the hedging for June will be greater.

[Ken Gregor:]

Yes, for the next quarter the hedging post will be greater but because of the fact that we are hedging in gradually over time 80% 1 Euro, 60% 2 Euro, 40% 3, then it takes time then we’re only talking about a relatively short period of time since June. So for the quarter that we are in, I would say it’s probably a very small proportion that has been hedged since.

[Rakesh Jhunjhunwala:]

One thing is very clear, because you have hedged beyond 1.25 you’re always going to have hedging loss?

[Ken Gregor:]

Certainly for, yes.

[Rakesh Jhunjhunwala:]

Right, only thing is the those [indiscernible] see your actual realization is that big profit, if you are not hedged, [indiscernible] 450 million pounds, am I right.

[Ken Gregor:]

Right, it’s the nature of hedging, we hedged in order to protect the business against the…

[Rakesh Jhunjhunwala:]

So, I think, I’ve to take this offline – it’s difficult, I will take it offline sir again.

[C. Ramakrishnan:]

Okay, let me know, Mr. Jhujhunwala we can meet up separately.

[Operator:]

Thank you. We take the next question from the line of Kapil Singh from Nomura Securities. Please go ahead.

[Kapil Singh:]

Yes, hi sir. Just a small clarification, in terms of the hedging losses, should we expect NIM to taper down as the quarter progress or you are saying that for the next one year they should be the same range of 415 million pounds, I think that, that’s what you don’t know – we are trying to get it.

[C. Ramakrishnan:]

Yes, I know. First of all, in the question there is a fundamental assumption into the next one year, what will be the going forward market exchange rate. That will be difficult to predict. I don’t think your question will be addressed from that point of view. In the race remain were there are today, the hedging losses or period of time next four to six quarters and there after should start tapering down, no doubt about it

[Kapil Singh:]

Okay. But can you at least give a sense that whether this quarter is the peak assuming rates don’t change or we can’t say that right now?

[C. Ramakrishnan:]

It can we difficult to say, but able to comment on it right now, and if Ken has any comment. If rates remain same suddenly at the end of a quarter, I suppose that quarter would be peak anyway theoretically, if we’re able to repeat the validation also.

[Ken Gregor:]

[Indiscernible]

[C. Ramakrishnan:]

That would be highest quarter any case in terms of coverage.

[Ken Gregor:]

Yes, I don’t think this quarter is necessarily a peak, but I don’t think that the hedging levels change materially in an absolute sense over the next couple of quarters.

[Kapil Singh:]

Yes. Okay, okay. Secondly, if you could just help us understand in terms of – we’ve called out certain items for JLR business performance. So if you could help us understand what are sort of non-recurring type of items which in your opinion should see some sort of reversal. For example, product mix and what is different in terms of variable marketing spend this year compared to what we usually have, some color on that; and same thing for pain negotiation, what is different this year which maybe non-recurring.

[C. Ramakrishnan:]

I would be hesitate to call most of them as non-recurring because these are in the ordinary course of business. Number one, you will see some wholesale market volumes fluctuate from quarter-to-quarter, it’s obviously can’t be a recurring. Similarly market impact like product mix, et cetera, also something we have to eliminate in the course of our business. Unfavorable market variable marketing expenses, which I think have been cautioning for more than a year now. I have always being same that we expect variable marketing expenses to keep going up and we have seen this trend for quite sometime, again, not recurring. But in general, what I would say but this quarter is, I think combinational defectors, there were all occurred in one quarter. Sometimes the variable marketing expense will go out. You do see offset by higher, better product mix or it maybe a quarter where there may not be particularly any significant launch costs et cetera. When we talked about headwinds or whatever you want you to call in the JLR business. I think it’s a combination of all this happening in the one quarter tends to exaggerate the impact of that in a quarter P&L. This is something variable marketing expenses going up, you would expect to recover through wholesale volumes which are product mix – regional mix et cetera. But if all these are unfavorable in particular quarter, the impact can be quite significant, which is one of the reasons why I said Q4 we expect, many of these trend to reverse. We do expect strong Q4 and smart recovery from what you’ve seen in the Q3. The wholesale volumes are expected to be stronger. And with the launch and ramp up cost behind us – the launch of the new product also should give us in terms of the margin performance. So some of these we will definitely expect to see unwind in the next quarter and hopefully in the quarters there after. That is the combination that is more…

[Kapil Singh:]

Okay and then just one more question on the domestic business as well and we’ve given some roadmap in terms of improving market share. Any roadmap or – general what you have on profitability of the domestic business and also some color on, and we are talking about tweaking 60% market share is relate largely be through the new Signa Range, we are talking about. So, just some thoughts on both market share gains and profitability when we look in the medium-term.

[Kenneth Gregor:]

Surely the domestic vehicle profitability is not where it should and not aware we like it to be. There have been quarters in the past and even full years, where we have achieved double-digit EBITDA margins in the domestic business of the whole 10%, 11%, 12% et cetera. It’s not impossible to go back to those levels. Even if you’re since, you talk about EBITDA margins, even if you talk about a Q3 of last year, even that quarter that EBITDA margin was about 6%. And if you compare some of the best quarter, you had in the past they have been touched around 10%, 11%. So that’s the target one would look to work for in the coming quarters and coming years. We have seen significant turnaround, early stages at major upward trend in the performance of our passenger vehicle business, improving the volumes, market recognition and welcome for the new products, which gives us over a period of time a better pricing power and a better capacity utilization, which is at present still low in passenger vehicles. In commission vehicles, though more dependent on macroeconomic factors, the industrial growth in the country and so as far, in terms of overall profitability. Definitely we intend to be much more focused with series actions on the market share. Number one

[Kapil Singh:]

Thanks, that’s very helpful. Thank you.

[Operator:]

Thank you. We take the next question from the line of Robin Zhu from Bernstein. Please go ahead.

[Robin Zhu:]

Hi, Thanks. Just have couple of questions please. First of all, suffice to keep when returning to this and actually it is the biggest single moving parts in your earnings this quarter that we can see. First of all, can you sort of describe why we went from £270 million in Q2 to £450 million this quarter, is it because the delta between what you took the hedges out and the price they were realized was much bigger. Is it because there was just suddenly a lot more in terms of hedging instruments that sort of matured during the quarter? Which of those growth is the bigger increase. And from what I’ve been hearing on this call, you seem to be guiding for that loss – for that £450 million number to be sort of occurring over the next few quarters. That seems to contradict what you said on the last call. When you said, in FY2018 starting – the losses to come off more meaningfully. So just wondering where you stand on that. Second question, you guided for a 370 basis points of cost that contributed to the margin decline. Part of it was because of the Discovery run out, part of it was the MY16 run outs, if you could just go into different in those two. And within the 370 basis points how much of that do you think it was due to the Discovery changeover, in essence, and how much of that goes away in the coming quarters. Thank you.

[C. Ramakrishnan:]

Ken, you will have to step in and help me in this.

[Ken Gregor:]

All right, I’ll do my best. First off, on the hedging, I’d actually – for me enough to say that it’s not – FX is not the biggest moving parts in this quarter when looked at from a year-over-year basis. And the reason I say that is yes, obviously I see the 455 million pounds and I see the year-on-year effect of the hedge losses which have increased 384 million pounds over the year, but the operational FX benefit year-on-year is 438 million pounds. So net-net, actually FX is – the operating FX is about 50 million pounds positive benefit to the business year-on-year. What I would say is that, yes, I mean we’re talking sort of around numbers. The 455 million pounds, when I look at the schedule of how I expect the hedges to evolve if exchange rates carry on at these present levels, then yes, quarter-by-quarter into the second half of next year, it would be somewhat lower than the 455 million pounds, but for the next couple of quarters it’s in that ballpark, so I’m just giving a bit of texture. But the reason we’re kind of – if you like not wanting to give a very precise answer on it is that the thing that is going to move it around is foreign exchange rates and that brings me back to an answer to what you asked, why does it move from Q2 to Q3. It moved from Q2 to Q3 because Sterling, we can buy a further 5% quarter-on-quarter at average rates from Q2 to Q3 against the dollar, and therefore – and then by doing that against the dollar similar movements against the RMB and other currencies which are important for us. And therefore that caused the overall level of our hedge losses to be bigger just by itself. When I come to your question on the operating effects, I mean one of your questions was in relation to 2016 model year versus 2017 model year. What that relates to – in fact, there’s a nice – I’m going to turn into the car salesman here, a nice infotainment upgrade on Range Rover Sport at 2017 model year when we put in our next generation infotainment system into both vehicles. It’s fair to say that’s actually quite a big change from an electrical point – architecture point of view and features and – point of view, so that did have a bit of a changeover effect in the quarter and that did cause us, we had a couple of effects, it caused the 2016 model year in the U.S. to run out a little bit longer and it cause production of wholesales of Range Rover and Range Rover Sport to be modestly lower in the quarter year-on-year than the year before. And that caused an adverse product mix effect, which perhaps is worth a point of EBITDA and of the higher level of incentives level spending that we have seen CR said that it’s something we’ve been talking about all year. And it is something we’ve seen more modest levels in product quarters but that did happen an extra effects of the run our 2016 model year in the U.S. in particular that perhaps were half a points of EBITDA in the quarter itself on top of the underlying level of incentive spending being a bit higher generally quarter-on-quarter or also year-on-year.

[Robin Zhu:]

So within that 2% including the run out of the Discovery, could you quantify how much of that was the run out of Discovery versus whatever else it was?

[Ken Gregor:]

I mean essentially its most of the balance. I think it’s – I don’t really want to try to give a precise answer. Although, I’m trying to break EBITDA down into individual factories and then we can a discussion about which order to do varying season. But yes, I’ll say that the biggest next part is the impact of the run after the Discovery because if you look year-on-year, we’ve got the second of 10,000 fewer wholesales of Discovery in Q3 this year compared to Q3 last year. And Discovery earns as good solid margins. So that 10,000 units is quite a big effect for profitability point of view year-on-year. So yes, that’s the other parts of the EBITDA margin change that we call that related to volume.

[Robin Zhu:]

Okay, thank you. Thanks a lot.

[Ken Gregor:]

It’s a pleasure. Thanks.

[Operator:]

Thank you. Ladies and gentleman, that was the last question. Due to time constraints, we will end the call. As there are no further questions, I would now like to hand the conference over to the management for closing comments.

[C. Ramakrishnan:]

Thank you everybody for joining us in this call. There’s nothing much I’d like to add in terms of closing comments. I think we have, I’ve said the context and what we’re looking forward to with – for the future, in the coming quarter and in the quarters to come. Thank you very much for taking the time come on this call. Thank you, bye.

[Operator:]

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