Tata Motors Limited
Q1 2019 Earnings Call Transcript

Published: 31 Jul 2018

[Operator:]

Ladies and gentlemen, good day, and welcome to the Tata Motors Q1 FY '19 Earnings Conference Call hosted by Motilal Oswal Securities. As a reminder all participant's lines will be in 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. Jinesh Gandhi from Motilal Oswal Securities. Thank you, and over to you, sir.

[Jinesh Gandhi:]

Thank you, Raymond. Good evening, everyone. On behalf of Motilal Oswal Securities, I would like to welcome you all to the 1Q FY '19 post results conference call of Tata Motors. Tata Motors is represented by Mr. P B Balaji, CFO Tata Group, Mr. Ken Gregor, CFO, Jaguar Land Rover along with senior management and members of the Investor Relations team. I would like to thank the management for taking time out for the call. I will start the session with commentary from the management followed by Q&A. I would now hand over the call to Mr. Balaji for his opening remarks.

[P B Balaji:]

Yes, thanks Jinesh. Good evening everyday and apologies for the late start. We had a bit of a technical lapse here, so but now it's sorted. I also have with me Guenter, as well as Ralf on the line. So we have a full house from our side here. Let me quickly cut to the chase, you have already received the investor deck, I'm sure you've already downloaded from the website and let me just take you through some elements of it. For starters, this is the Safe Harbor statement, just draw your attention to that. And in terms of the new developments of the quarter it's been a quite an action pack quarter for us with IPL going on sale as well as the 18 model year Range Rover and Ranger Rover Sport including the [behaves] actually being launched. And domestically of course the relaunch of Tata ACE Gold going back to the original version of Tata ACE and the Nexon Hyperdrive were standouts for us and the full Next Gen Ultra range of trucks has also got launched during this -- a good 14 odd trucks got launched simultaneously, on track to start production as we shared with you in the Investor Day on the Slovakia plant as well as a software engineering center in Ireland got launched this quarter. Moving to the markets, it's been quite an interesting time for us while India continues to shine and we'll talk about the Indian domestic business at greater length later, we did face temporary headwinds in China because of the duty changes that came through. And at the same time be it Brexit, be it diesel uncertainty or higher incentives on market cyclicality in U.S., those continued this quarter as well. So our performance was impacted by these challenging conditions and what we believe as temporary headwinds as well, as a combination of the two. Moving to Slide 5, the consolidated results at a glance, Turnaround 2.0 have started off on a very strong note in the domestic business and we'll talk about it in slightly more detail later and JLR was impacted by the market situation including the China duty impact and planned destocking that we had undertaken. The revenue grew about 14.4% where the strong domestic growth offset the JLR growth and the reported EBIT at minus 0.8%, is a tale of two halves with TML standalone improving it by 1,220 bps and JLR declining by 490 bps. Profit after tax was fundamentally due to the very weak performance at JLR and as a comparative versus the last year this is the same period when we had the pension credit, that was a one-off credit that we had received. And the FCF for the auto business was a negative Rs. 18,000 crores and we’ll talk about it a little bit later as well. Just going down a little bit into revenue, bulk of the revenue growth of about 14.4% came from two pieces, one is volume and mix as well as the other was translation. And looking into individual companies bulk of the growth about 7.6% of this growth came from Tata Motors Standalone, with JLR declining 3.3% as an overall level. And if I just go down into JLR numbers a little bit more, the revenue -- while the revenue was down 7%, reassuringly the retails were up 6% and particularly happy to see U.K. coming back to growth very strongly at 14.3%, and as well as the rest of the world at 20%, and North America at 8.8%. So pretty strong retails coming through in some of our largest markets. The retail was low in China, fundamentally in the run-up to the duty change that's happening as well as Europe which continues to be a challenge for us. Wholesale on the other hand, of course, which is probably the impact of the wholesale decline we're seeing all through the P&L and right up to the cash flows, the down -- it was declining by about 7.7% fundamentally due to sales deferral in China post the import duty cuts as well as planned inventory reduction. And we see some part of the planned inventory reduction to happen in Q2 as well but that is well within our budgets that we have planned for the year. So this decline actually then took China down by about 25.4% and Europe down by about 16.3% negative and U.K. down at minus14.8%, so a pretty significant number coming through because of the pipeline corrections and the duty deferral. At the same time Tata Motors Standalone on other side was up 83% though the number is flatter to some extent to the extent of the base impact that was there and we saw broad based volume growth in CV and PV and as we have committed earlier that this time we're splitting PV-CV results and we'll talk about that later in the presentation. On EBIT -- going to the EBIT slide on Slide 7, EBIT was down 130 bps with JLR losses partially offset by a strong improvement in the domestic business and if I look at the 0.5% going down to minus 0.08% 3.6% out of it was the decline in JLR and 2.3% is the compensation that TML Standalone did to that particular P&L. So while it is disheartening to see the JLR EBIT down 490 bps it’s also heartening at the same time that the domestic business is coming to the party and actually holding up some of the numbers there. So moving on to the Fit for Future update, this is something that we'd said that we'll continue to keep you updated as the year progresses. We've now taken a decision on the Thailand business which lot of hired rates at various points in time. Tata Motors has decided to revamp the business model in Thailand. For people who don't know this business we entered this business in 2007 with a portfolio of pick-ups and with local manufacturing. The business from the word go had challenges, a lack of product competitiveness as well as weak channel delivery which has led to a sub-scale operations and consistent losses. And this has now been -- we have now decided to therefore completely reassess this model and to cease manufacturing operations locally. And we will meet the needs of the Thailand market with revamped product portfolio, so which will be viable for us as well as a CBU based distribution model. And this we benefitted -- last year this business lost almost Rs. 170 crores and we intend to stem this loss at a turn over level of about 70 odd [projects], quite a substantial loss that we incurred there and some one-offs as well. But that is something that we intent to stem going forward, so this is one of the tougher decision that we have to take and as we speak communications are going to employees, dealers, suppliers, et cetera. But we stay committed to the business in terms of whatever commitments we have made in this market in terms of product availability, spares, suppliers, et cetera, all that will be ensured that we retain it there. So moving on to the 6 cylinders of the Tata Motor Engine, we talked about it last time. Let me quickly hand you over to Ken and Ralf for taking us through the JLR side of the business. So Ken over to you.

[Ken Gregor:]

Thank you, Balaji. Let me take you through to Slide 12, and get a little bit of more detail behind the headlines Balaji's has just giving you all. On slide 12, we've got the revenue on the lower -- wholesale volume was down to £5.2 billion compared to the £5.6 billion in the same quarter a year ago. We had a loss in the quarter of £264 million compared to a profit in the same quarter a year ago. And the EBITDA margin stood at 6.2% somewhat lower than the 7.9% we had in the same quarter a year ago. And then you see the EBIT minus 3.7, compared to the plus 1.2 that we had. Really there is three big things going on in the quarter that drove the loss. The first thing, was the impact of the China duty change, which was announced at the end of May, came into being on the 1st of July but during the quarter what that led to us in -- also with competitors reducing prices ahead of the duty change and that led to higher variable marketing that also led to lower sales in China in the quarter as we saw some customer hold-off. We estimate that around about £100 million as the impact in the quarter. Second big thing, which Balaji has already alluded to was we had a destocking and what I mean by that is whilst our retail volume was up 6%, our wholesale volume was down a similar amount and what that means was broadly the amount of stock that we have in retail has reduced in the quarter, which is good from the point of view of taking away some of the pressure on the markets and the retailers but obviously it's painful for us because we have to accept lower wholesale in the quarter. And we estimate -- so that in principal effect of the difference between wholesale and retail it's worth about a £100 million also. We also had a little bit of effect again in common with the rest of the industry related to changes at 19 Model Year related to wholesale timing connected with WLTP testing and I think that was for around 3,000 wholesales, or £30 million, versus retail. And the third thing, beyond the duty change and the destocking is foreign-exchange revaluation. Sterling was weak in the quarter for example, against the dollar it reduced from round about $1.40 to the dollar to round about $1.30 to the dollar in the quarter with similar movements against other pairings. And that drove a negative revaluation of our foreign currency payables and other liabilities that was worth also around £100 million in the quarter and produced actually quite a large year-over-year swing because in the same quarter a year ago, we had a positive revaluation. Those three things are getting at us. Also from a year-to-year point of view, something that's been a trend and will continue to be is we will continue to see higher depreciation, amortization quarter-by-quarter as the investment in the new models that we've made comes back at us through the income statement in the shape of depreciation and amortization. Those are the big pieces driving the tough Q1 figure that I have just described. Turning to Slide 13 just gets a little bit more textured by region around the retail results with some memos on the wholesale. You can see the retails we are up about 6% with growth in U.S. -- growth in the UK, which was good to see. More modest growth in China, growth overseas, but with Europe down round about 2,000 units year-to-year. And you see the wholesales were the opposite of the track as the wholesales broadly were lower in most regions apart from overseas for the reasons I just described. By model you can see on Slide 14, the new models' growth, volume growth Velar and E-Pace in particular which was pleasing to see as we started to roll those out. With the I-Pace early days for the I-Pace, I’ll come back and talk a bit more about that in a second, but really pleased by the market reception for the I-Pace although the figures in this quarter in retail terms alone. Slide 15 has the bridge compared to a year ago. We start from £133 million, which is the profits of the prior quarter excluding the one-time pension credits adjustment we had in Q1 FY '18. And then you can see the impact of the various things that I described in the various parts, the lower wholesale, the China duty related net pricing impact. We have two more extra manufacturing facilities this time this year than we had at this time last year and that brings some operating costs with it. In the contribution cost bar commodity costs are somewhat less favorable and there was also a credit in the prior year income statement on warranty reserve revaluation that doesn’t recur. And all of those three things adding up in about equal measure to the £90 million negative year on year on contribution cost. On the structural cost or the fixed cost if you like, it's all explained by depreciation amortization growth. Actually the other SG&A costs were basically flat or slightly lower year-on-year, but that's been -- which is good but that’s been offset by the continued growth in the depreciation amortization. And on the foreign exchange and commodities you have got the revaluation effects I already talked about. That is actually been partly offset by lower -- more favorable foreign operating foreign-exchange as our hedge losses roll off. But one way or another that rose through to the £264 million loss we had in the quarter. Slide 16 has the investment spending. Broadly we remain on track and spent just about the £1 billion with our model investment program, split between R&D and capital investment in the proportion shown and just to reemphasize we do see full-year spending in the £4.5 billion region for the full year. Slide 17 has the walk between profits and cash flow for the quarter. The cash flow with a cash outflow in the quarter of £1.74 billion after the investments and this describes the various pieces of it. Obviously the loss didn’t help in the first place of new add back to noncash depreciation amortization, the investments I have already talked about. The piece that we saw in the first quarter that we expected to have and we did have because of largely seasonal factors is an unwind of the working capital largely due to the amount of production we have in the quarter compared to the prior quarter. And the amount of wholesale we have in the quarter compared to the prior quarter resulted in the £960 million outflow in working capital to get to the £1.7 billion. I would expect in the normal course of events, just like in last year and the year before in the second half of the year, we should see positive cash flow -- positive working capital. But clearly we have to absolutely keep on top of this and manage the pieces within its such as the inventory, the payables, the receivables to make sure that that happens. On the joint venture Slide 19, we saw volume growth in the joint venture in terms of retail and in terms of wholesale. However, our share of the profit in the joint venture was lower this quarter than the same quarter a year ago and there's three or four items that are within that. The profitability on Slide 20 was impacted by unfavorable model mix, with the launch of the [indiscernible] taxi. We did see higher fixed marketing spending to support the higher growth. We had higher variable marketing to reflect market conditions that we experienced in China and also higher depreciation and amortization. So a number of factors combining to cause lower profitability, albeit what to I would say is the profitability we had in the quarter a year ago with an EBIT of 31% was never going to repeat. But that said, lower profitability in the quarter, plus there was a 13% EBIT margin. Turning to Slide 21. Clearly, we do remain very focused. We don't like the present financial performance and we are committed to improving it and this talks to the levers -- the pressures of course, the business challenges slide 21, between the economic impacts in the U.K. in particular with Brexit worries is definitely having an impact. The electrification, the diesel uncertainty also likely having an impact for us in Europe. And all the other trends and the market forces that are causing relatively more competitive market conditions that we are facing this quarter. Those are all the challenges that we face. Some of those have intensified in the quarter as I've talked about. Clearly in the short, medium and longer-term we are very focused on turning this around. And we do see the possibility still for growing premium segments. We are very committed to our delivering more exciting new products in order to provide profitable volume growth and thereby improve the operating leverage. Meanwhile, of course, driving cost efficiencies and our architecture strategies so those new models are as efficient as they can be and driving therefore towards a longer-term EBIT target between 7% and 9%, albeit within the short to medium-term we do expect to see EBIT margin as we said before, in the 4% to 7% range. The model range Slide 22 continues to grow. I think we have talked about most of these already, but the big addition for us this year is the Jaguar I-Pace which we are incredibly excited about and have a super section. Slide 23 talks to this year just focusing back a little bit more on the short term. And the items that we are clearly seeking to drive in the second half of the year in order to improve on the performance in the first half. And there's a number of factors which we are clearly seeking to drive. There are some nonrecurring items such as the revaluations, such as the negative impact of the price adjustments in China and in principle the destocking once we get behind that -- that behind us and in the first half in principle should mean that we can wholesale in line with the retail volume. We have got new and refreshed models which we can build on including the I-Pace for example the E-Pace, the 18 Model Year Range Rover Sport. In principal the China duty change in the medium term should be favorable for us, so that all to be a positive factor. Our business is seasonal, but we do see each year a stronger second half than first half due to timing of the U.K. registration plate change in March, due to the selling season in China ahead of the New Year and due to the model year changeover in the U.S. those things in principle we remain focused on making sure we reap the benefits of those in the second half of the year. And of course we are very focused on driving cost efficiency and material cost reductions in the second half of the year, that also should help us. So now we are all in one directions of course, I think we will also see continued higher depreciation, amortization based on the investments we've already made, and higher marketing costs in the second half of the year to help drive the volume that lies behind most of the other bars, I have already talked about to you on that chart. But I wanted to go into a little bit more detail to give you a sense and shape for the items we are driving in order to improve performance in the second half of the year. Other items Slide 24 talks to trends in industry, volumes across the various regions, most regions are fairly flat it's fair to say with the exception of the Overseas region and with diesel demand really impacting Europe and Brexit uncertainty impact in the U.K. and the import duty changes have started to see an impact in China. Slide 25 talks to the changing mix of our sales in the U.K. and the EU from diesel where this -- in 2017 we saw diesel mix north of 90% today it's lower, albeit that our customers still do choose diesel because it does offer very clean emissions as well as 25% more efficient CO2 and therefore we do see diesel mix still at 85% of our volume. And as we talked about when we had our Investor Day in the medium-term, we do see the continued development of course of partnering on a global basis between diesel, between petrol and of course between battery electric vehicles and plug-in hybrids. Exactly what the percentage of that is, one would need a crystal ball to guess but that's why we are investing in architectures to enable us to meet those electrification trends which is really what Slide 26 is talking about through the introduction of plug-in hybrids such as Range Rover, Range Rover Sport, and the introduction of MHEV, PHEV or battery electric vehicles beyond the I-Pace that we've just launched this year and from 2020 all of our new models coming with one or other form of electrification option. On the I-Pace, really pleased by the reception its had, super reviews and we've got some decent sized order bank. We are going up the launch ramp-up curve in the production facility so I think we're really pleased with the reception and we will see that developing in the year. Also the case with the plug-in hybrid models on Range Rover and Range Rover Sport, the 18 Model Year, we are very pleased with the development of those on Slide 26 -- Slide 28 sorry. Turning to the cost side, we are focused on driving initiatives across the entire value chain. Material cost is our biggest single cost item and we are absolutely focused on driving cost -- negotiated cost reductions, design cost reductions, utilizing global sourcing and supply base to drive cost savings, including in crew sourcing in a lower cost location such as China, Hungary, Slovakia. Utilizing the focus on architectures to ensure that we reduce material cost in the longer term, as well as the short-term in order to get the lowest cost for our new models to make sure they are competitive in the marketplace through utilizing techniques such as should -- a or should cost approach. Working out for example, what a part should cost and then using that information to leverage the negotiation with us suppliers, so we buy it for what it should cost. Really good approach there. On the engineering side using our architectures to really utilize scale and give us the possibility of driving lower cost per unit through sharing of commodities and architectures across multiple vehicles. On the operating cost side in manufacturing we utilize the Harbour benchmarking productivity report to challenge ourselves to identify the most efficient ways, so that we can manufacture vehicles given our scale and facility infrastructure. And of course, we launched or are launching our new manufacturing facility in Slovakia that really enables us to design the facility for efficiency and for quality, and will enable us to drive cost reductions for the vehicles that will be built in Slovakia compared to what they would've cost to build in the U.K. We have been through a process of insourcing our engines and that is one that we will continue and enables us to reduce cost compared to the cost of buying those from externally. Cost reductions don't stop at material and manufacturing also through the marketing and sales activity. I think a big lever is the continued rollout of dual branded distribution facilities for our retailer network, which they are investing in which really facilitates synergies for them in terms of being able to support all the brands through one common site with a shared back office and service capability. It's quite a big driver, as well as being a much more modern and inviting place -- retail experience for our customers. And on the corporate side we have taken and we will continue to take a number of actions to manage our selling and general administration cost, below our revenue growth and gain operating leverage as we do so. And we gave a couple of examples of the things that we have done. For example a big one was reducing the cost of our pension cost, which is an ongoing benefit beyond one time reduction that we had in the deficit that we booked in the same quarter a year ago. In addition to that shorter-term focus on cost, we are also focused on pulling the levers between the medium and the longer-term, address the -- transform the business, become fit for the future if you like across a number of levers and group policies behind our business performance. I talked to material cost for example. So we're very focused on how we source, how we design to cost, how we leverage the scale through the lifecycle through architecture planning, driving professionalism and improvements in our marketing sales activity and promotion effectiveness and distribution network. For example, through the rollout of the new distribution network that I just described. We are very focused on making sure that we launch our new vehicle programs on time, through better planning, consistency, commonality, modular approach. Of course in the premium business we absolutely want to deliver the very best quality for our customers. Our mission in life is to create experiences our customers [love for life]. So making sure we deliver on the very best product quality is absolutely at the heart of the mission, and utilizing the 45,000 people that we have in the business to leverage as best we can those people in order to deliver everything we need to in terms of new models, more cost-efficient business and the other things I have talked about is critical. So that's also a focus that accelerates project for the medium and longer-term. Slide 32, we are also focused just coming back to cash management on making sure that our investments are as efficient as they can be. We pay attention to every project as we approve it having the right return on investment, being affordable within our spend versus our operating cash flow and we pay attention therefore to the investment as a proportion of revenue and also the CapEx to D&A ratio. Our efficiency drivers were committed to pulling levers for committed to pulling in order to help drive more investment efficiency. Our architectures in particular, the modular longer chip mill architecture that can -- or several products will help drive efficiency in execution of investment. And I've just said for this year we're targeting -- continuing to target in the region of £4.5 billion investment and before we should expect it to come down as a proportion of turnover as we see the volume growth. And with that Balaji, I think I hand it back to Guenter to talk to Tata Motors. Thank you.

[Guenter Butschek:]

Thanks a lot Ken. As we can well appreciate JLR is undergoing a few challenges at this point in time but as Ken would have I hope clarified to you that the team is well [seized] to the issue and urgency with which to fix the issue and we're quite clear that the plan that they have put in place in terms of delivering the 4% to 7% range is very much something that we would love to meet as the year progresses. So that's JLR for you. Moving onto Tata Motors Standalone, moving on to Slide 35, happy to report back to the Turnaround 2.0 has started off on a very strong note with revenue up 83% yes the number does flatter a bit in terms of the base effect that is there, but the EBIT is up 1,220 bps which is a very, very strong improvement you would agree. And EBITDA today is around at 8.3%, while EBIT is 4.1% compared to the range of 3% to 5% that we had called out in our plan for the period between '19 and '21. PBT of course does include the dividend income of Rs. 1,310 crores but despite that it's a very strong start to the year with respect to the PBT piece as well. Moving on to Slide 36 giving you the breakup of where the profitability improved from, close to about 160 bps of this improvement in 1,220 bps came from what I would call as variable contribution margins, all related to volume, mix, pricing, as well as commodity impact and the individual break up of that, and a significant amount of savings in ImpACT projects went through in this particular area. At the same time fixed cost leverage having held at just 31 odd crores increase, meant that fixed cost leverage came at almost 11%. And that is the two big ones that actually contributed the number. Moving on to cash flows Slide 37, the cash profit after tax is more than sufficient to meet the investment needs that it there. There's a story of -- there are two distinct stories in the working capital, one is some element of stock increase was a planned one because if you recollect that we were not able to supply full supplies to the market in the previous quarter with the supply chain issues that has now been fixed and therefore we have the full stock level that we need. And yes there's some amount of work that we need to do on debtors which is something that we are committed to bring back and that in full. Moving on to investment spending at about 5.7% of revenue slightly behind plan in terms of our expense revenues and investment spends but we will ensure that we'll deliver there. Moving on to the big, big shift as far as Tata Motor Standalone is concerned is the segmental reporting, where we have now starting this quarter as committed, we've now split the commercial vehicles and passenger vehicles segment into two and reporting numbers against it. The basic trigger for doing this is the organization OE program that got launched last year which created P&L responsible business unit organizations and this has been fully completed in FY '18 therefore we're now ready to report back. And secondly we have three distinctive strategies as we have called out in terms of what is CV trying to do and what is PV trying to do, CV winning decisively and PV winning sustainably. And that is what we have now tried to replicate in the [other] segments as well. You see these new segments that are out there and the consolidated segments and the consolidated report there'll be five segments, Tata Branded Commercial Vehicles, Tata Branded Passenger Vehicles, Jaguar Land Rover, Tata Motors Finance and Others. And you also see the subsidiary that will get added up into that particular segment. What we've done on the accounting and reporting side so that we are absolutely clear there, wherever we are able to identify the P&L credits and debits those have gone into the respective segments and basically domestic corporate expenses that we have not able to identify we've kept them as unallocable. So there's a very, very clean P&L that you see between CV and PV. As far as the balance sheet is concerned the main assets which is property, plant and equipment, intangible assets, inventory, trade receivables, all these have been allocated to segments but the entire liabilities have been kept as corporate because of the basic loans and creditors that's something we have decided not to split simply because it’s difficult to identify the suppliers are common. So with this in mind let's get into the CV piece, as I had called out we had aimed to win decisively by driving all around execution that's what we had in mind. So happy to report back a strong volume growth of 63%. Even more reassuring is a share increase from lower 44.4% now to consistently now improving to 46.8% and particularly delighted that every sub segment of that actually increased share, so which means we are now starting to go in the direction that we would love to do. And to move a bit deeper into profitability the first time I'm sure you are seeing these numbers I'm sure that there will be a lot of questions and we thought we have -- we will try and address this comprehensively. EBIT margins are now sitting at about 8.8% with an EBITDA of 11.7%, better than broad shape of this business and you will notice that we are broadly averaging at about 12% EBITDA for this business over the last period, leave the 5.5 out that's a one-off because of the BS3 to BS4 migration and the delivery that happened last quarter. By the way just suffice to say that it's broadly steady at about 12% odd on an improving trend which we would love to see there. As far as the PV business is concerned its mandate for was to win sustainably by getting its basics right. So for starters it got a strong volume growth of 49% and market share increasing, particularly in all the new vehicles that is there, don’t like the minus 0.1 in Hexa but that's something that we will fix it going forward. But this is the success story to continue as to beat the product, beat the design, beat the quality of the product that is coming through as well as the network expansion plans. So all these are firing the right way. And probably the numbers that you are most eagerly awaiting for is the PV profitability which has a 63.4% revenue and EBIT margin of minus 8.6% compared to the minus 34% that was there earlier and in EBITDA almost nearing a breakeven at minus 0.7 is tantalizingly close. So we will push it up further and a trend of improvement that is quite reassuring. So we love the strong sequential improvement but we are not satisfied with where it is currently there and we will continue to work on it to improve that. So moving to the sequential balance sheet, you are seeing the numbers there. All I can say is that CV has about 21,000 crores to 22,000 crores of assets sitting again the CV business and the PV business has about 16,000 crores broadly speaking, which is all the assets being split and as I said earlier liabilities have been kept as unallocable at this point in time. So moving on to the EV side which is something which we are not starting to get traction. As we announced at Investor Day we have now announced a new vertical on EV which is business vertical. Just to clarify this gets subsumed into the PV business segment because the consumer is the same and we don’t intend -- and it's very, very small at this point in time. And we believe the key differentiator for Tata's at this point in time will be the One Tata approach with other group companies also working together to provide complete ecosystem solutions. That we believe is going to be a key differentiator. And we will also be working -- JLR and TML teams will be working very, very closely in this area to ensure that we are sharing the learnings on electrification from both our sides, from two different directions that they are coming at it. And the real standout this quarter has been the first batch of cars that have been delivered to Cognizant, these will be the first batch of commercial fleet segments that we have introduced. So to summarize the Turnaround 2.0 is well underway as you were -- as we had called out before. So moving on to Tata Motors Finance, the first message there is they have now moved on to IndAS. With this I am hoping that all the accounting changes that are happening in our portfolio is all done and dusted and very happy to see the 35% AUM growth which is in line with the plan that the market -- the team had chalked out. Market share continuing to increase at 130 bps and GNPA is particularly heartening to see them, they were at 4 if you recollect and now going sub-4 at 3.7 with an ROE of 22.3. Just on the ROE side there is a huge amount of data that we have provided on the data bank which gives you -- IGAAP to IndAS migration. I'm more than happy to clarify off line for people who really would need to understand it. But just one point there because of the IndAS migration three things happened. Number one the debt equity ratio shoots up because what we call as cumulative pref shares, convertible prefs get reclassified as debt in sort of equity that's a key one there, as well as some of the creditors. So the data that we have in our books is something we need to do as per expected credit loss. So the accounting treatment changes the [better] of two impacts have come and because of that your equity goes debt equity goes up ROE goes up and also but it doesn’t have an impact as far as GNPA piece is concerned. I am again happy to confirm that all the regulatory ratios that are there as far as even after IndAS we are compliant with. So moving to net debt, probably towards the end of the presentation and then moving onto Q&A thereafter. I think the big, big development on debt and the disappointing there is ratings downgrade due to the operation challenges that we face in [JLR] as well as challenging global market conditions. So despite improvements in the domestic business which has been well received by the rating agencies, they believe this is a reason why we will need to go down one notch. But reassuringly it’s a stable outlook and therefore we are very, very clear that this is not something that we like and would love to work our away backwards into the investment grade in a sensible time frame. So that’s what we have in mind. So the finally the last one is the outlook. As far as the global markets are concerned they are likely to remain challenging. The positives being that the lower import duty in China kicked sense on the onwards so that will improve going forward. As far as concerns, our concerns Brexit, diesel, and the diesel taxes in the U.K. are the concerns as well as higher incentives in the U.S. These remain our concerns. As far as India is concerned we remain positive as far as medium to long-term is concerned. There could be some near term concerns because of new axel load norm that has come through. And our response to that I’ll just talk about in a minute. As far as inflation is concerned we expect it to remain high and continue but we believe we are well equipped to manage it at this point in time. And investment needs likely to remain high given the various challenges that we face. On JLR you heard Ken talk about it in length. We plan to invest about 4.5 billion in new products this year and there are intensive efforts on the way as you would have well understood during the course of the conversation today to step up growth, drive cost efficiencies as well as management investment spending to improve cash flows. And we did not see any change to what we had outlined earlier. We expect higher sales growth as improved profitability in FY '19 and the performance improve as the year progresses. This statement is exactly in line with what we said last time, and we are planning to land between 4% to 7% EBIT between FY '19 and '21 and 7% to 9% thereafter. As far as Tata Motors is concerned the key brief right now is to ensure that Tata Turnaround 2.0 continues to fire all cylinders and we have an immediate here and now point of action on the new axel launch so we will respond with speed. That’s what the teams are working towards. And no change as far as planning EBIT is concerned or the fiscal future portfolio is concerned. So with this let me now turn you over to Q&A and happy to take.

[Operator:]

[Operator Instructions] We have the first question from the line of Kapil Singh from Nomura Securities. Please go ahead.

[Kapil Singh:]

Congrats firstly on the performance of domestic business particularly heartening to see the domestic passenger vehicle performance. Is said something that is sustainable and do you see further improvement going ahead?

[P B Balaji:]

Yes, thanks Kapil. Sustainable and more importantly are we happy with the number, I think it's good that we have come to this level but definitely not happy with where it is today and we will have to get breakeven at all levels. It's that just tantalizingly close EBITDA breakeven leading to EBIT breakeven and leading to a cash breakeven. So we are absolutely committed to it and that’s what we will drive towards.

[Kapil Singh:]

The second question is on Jaguar and Land Rover. So there are quite a few onetime things going on here. So just if you can explain on the P&L side how much was the impact of say, the cuts that you had to take on pricing in China? Because I think 108 million that you are showing on Slide 12 includes both the volume and the price cut impact. So could you call those out separately? And similarly WLTP who mentioned some impact, so what exactly is that? And also on the China JV you know there's too much volatility in numbers, so on a full year basis should we expect profitability to remain where it was last year or broadly in the same range?

[P B Balaji:]

Ken, can I request you to take that, given you have all the details.

[Ken Gregor:]

On the P&L impact of the China duty change the majority of the impact is in the form of lower net pricing in other words higher variable marketing, so where you see that is actually it’s within the revenue line on the income statement. There is an element of wholesale volume being lower to the tune of about a 1,000 units of volume so you would also see that in the revenue line but the biggest piece is the net pricing. WLTP relates to some new timing of wholesale volumes that we had from between quarter one and quarter two, re-phasing in order to complete test work for new emission test legislation in the EU that all manufacturers are doing right now. To take the book of testing and completing the paper work so we're replanning some vehicles from Q1 to Q2, that's a wholesale volume impact so the effect is substantially in the revenue line. On the China JV, yes it's fair to say, you're right the results especially quarter by quarter do have volatility in them connected with timing of local marketing centers, although in the past, although that should be something that's a bit smoother now going forward given that we've changed the accounting methodology for that. But broadly the EBIT performance that we have in Q1 is more like, its more within the normal range of the EBIT performance that we would expect to see for the JV as opposed to the 31% EBIT that we had in the same quarter a year ago.

[Kapil Singh:]

Can you just explain why there is such a big change taking place because broadly last year we were close to 20% sort of EBIT?

[Ken Gregor:]

In the same quarter a year ago we had a 31% EBIT.

[Kapil Singh:]

No, I'm talking about full year.

[Ken Gregor:]

Yes, I'm here talking about the Q1 results, but broadly in the full year last year we also had the impact of changing -- a favorable impact to changing the accounting methodology for local marketing centers and that helped our full year results to be higher than the normal running rate. To help the results have a 20% -- 20 something percent EBIT margin as opposed to what I would expect going forward which is the EBIT margin more in the teens.

[Kapil Singh:]

Okay, thank you.

[Ken Gregor:]

Sorry, just to add one more thing, I already said it but I'll just to repeat, what we do see in the China markets is we have seen relatively more competitive market conditions and that has driven somewhat higher level of variable market in the marketplace this year compared to last year. So that's another thing that's driving compared to how you saw the EBIT margin last year to a lower -- somewhat lower EBIT margin this year.

[Kapil Singh:]

Okay, thank you so much, thanks a lot.

[Operator:]

[Operator Instructions] The next question is from the line of Vinay Singh from Morgan Stanley, please go ahead.

[Vinay Singh:]

Thanks for the opportunity, just following up on the following question and a bit more. So firstly when we look at destocking you know you're talking about 11,300 units of destocking, what exactly is destocking? How much of it is already done, how much of it will happen in Q2? Because you've mentioned WLTP separately. So firstly on destocking and secondly on WLTP, what will be the impact of that in the Q2 and Q3 quarter, if you could talk a little bit about that?

[Ken Gregor:]

Just to be a bit more specific about the destocking broadly this is where -- when market conditions become somewhat more competitive one can find oneself with -- or the retail rates doesn't meet what one is previously expecting with more inventory as vehicles that we have already wholesaled to dealers in the dealer showrooms that the dealers need to retail in order to -- for us to be able to wholesale more cars to dealers. That's basically so we keep a very faintly negative sides -- we keep a very close eye on the level of dealer inventory as well as the level of our own inventory of finished vehicles in the pipeline at all times. And what we saw as we got to the end of last fiscal year which we saw the level of the inventory and the dealer shifts been higher than we would wish and therefore have consciously sort to reduce production and wholesale through Q1 that rollouts will continue through Q2 in order to enable the level of inventory and dealerships to reduce and lessen the pressure on the markets in terms of the possibility of oversupply. And I think we plan -- I would see that continuing through Q2, and then I think I could update you after that.

[Vinay Singh:]

Just to follow-on that so when you say there is 100 million loss versus last year on destocking, this is mainly the operating leverage lost because volumes are lower on account of demand being weaker and also [indiscernible]?

[Ken Gregor:]

I'll be honest, it's an illustrative number associated with the difference between retail and wholesale. In other words, had we wholesaled as many cars as we had retailed then we would have had roughly 11,000 more wholesales that would have had the value associated of gross profits if you like, in the order of 100 million. So it's a real effect but the number itself, is somewhat illustrative in order to -- I mentioned the size of the effect for us.

[Vinay Singh:]

Secondly, on the WLTP like what kind of impact do you see in the coming quarters?

[Ken Gregor:]

I think in the coming months we are broadly on track with the testing, there is a lot of paperwork to be worked through vehicle-by-vehicle to make sure we homologate all of those vehicles in every market around Europe. And that's something that we will work through over the coming months. We may continue to see some timing effects with wholesales between months and quarters but in principle we should be through that through the next quarter.

[P B Balaji:]

Vinay just for that I can step in here for a minute businesses the way we look at it is that pluses and minuses that will happen in various points in time within a time period et cetera. One of the things that we are trying to help you to understand us better is to still look at what are the total yearly number we are looking at and what's the kind of plan that we have put in place. And whether that's realistic and is it something that we are committed to deliver. So I would probably urge you to talk a look at it in a holistic sense as well but yes, there are individual line items that will move so these are best estimates that Ken is trying to put through to help you understand that as well. But what we actually will stick by is the fact that we are going for the 4% to 7% range that we had indicated and that is probably the pertinent point from a overall perspective.

[Vinay Singh:]

That's clear. The other thing is like while we have the margin range we don’t have to sort of the volume estimate so which is why?

[P B Balaji:]

Heard you, just to clarify that.

[Vinay Singh:]

And then just one last point like when we look at the 100 million loss from China it looks like sizeable given the fact that you probably would be having 5,000 to 6,000 cars in the market. So this is basically the write down of inventory and repricing cars, so or maybe the inventory in China was quite -- or was much more than month, month and half statement, is that the right way through?

[Ken Gregor:]

It is the impact of reducing price and supporting the reduction of price of vehicles that are already in dealer stocks as well as our own stocks in the quarter, so yes it's quite a sizeable effect given the importance of China to our overall business.

[Vinay Singh:]

I really appreciate the increased disclosures that the company is putting out. Thanks.

[Operator:]

Our next question is from the line of Robin Zhu from Bernstein. Please go ahead.

[Robin Zhu:]

Two questions please. One to follow-up on the last question on the 100 million of duty impacts in China. You mentioned its quite a sizable number. If I multiply your China outlook £80,000, £85,000 by a number of cars it seems like its several months of sales. Can you confirm that is the case? Or are you actually cutting the price to dealers more than the [600%] that you cut the MSRPs and that you put out? So that’s the first question. And then the second question is in terms of absolute inventory levels could you give us some guidance in terms of where we stand in the key regions not China in particular but U.S. and Europe?

[Guenter Butschek:]

On the inventory question to be honest Robin that's one maybe we should take it's a bit more of detail available to go through region by region in the inventory today. I think I will prefer to hand that offline via the investor relations team. On the China duty impacts basically, yes, it evolves a couple of months worth of sales but also remember that -- and no, we are not cutting the price by large -- by more than the wholesale production. It's really just reflecting that. But remember what I said within the 100 there is also the impacts of some retiming of wholesale volume within that as well. So 100 has got a couple of different effects and as well as the impact of the cars production.

[Robin Zhu:]

I will return to the inventory question. Can I ask is it exactly the issue here where if you look to the discussion here to last quarter compared to before. The thing we need to -- maybe big difference is net working capital and payables in particular going to be a lot more [indiscernible]. Can you just go through -- what is that you are doing that's going to lose more volume there that is happening different [indiscernible]?

[Ken Gregor:]

Good question. On the payables, no there is nothing really that we are doing differently. It’s a mechanical effect caused by the payment terms that we collect revenue on which is from our dealers given the wholesale financing arrangements that we have got covering 85% of our sales volume is passed within two three days. And the payment terms that we pay our suppliers for the parts that we build into cars, which is broadly 45 to 60 days. And what that means is that when in a quarter, such as the quarter that we've just done April through June we produced roughly 35,000 to 40,000 net less volume than we produced in the January to March period. Then we have less production and less wholesales and that drives some unwind of our payables, because in the quarter we are still paying for units that we built in the prior quarter. In other words 45 to 60 days away. And that's a normal effect that we get in the April to June quarter because there are always fewer production days in that quarter given the timing of holidays, Easter, shut down, compared to the January to March quarter that is unless Easter is early, generally threw our production days. And in combination, as I have described we have taken action to selectively reduce production in the quarter also to enable part of the destocking of what I have described. So the payables impact is a mechanical one and in principle once the production level returns to the prior production level and the wholesale volume associated with that production then in principle, the payable winds back up if you like. But clearly for that to happen we have to return to the prior level of production and wholesale.

[Robin Zhu:]

Understood, thank you.

[Operator:]

Thank you, the next question is from the line of Yogesh Aggarwal from HSBC, please go ahead.

[Yogesh Aggarwal:]

Hi, good evening just have couple of questions if I may. Firstly I wanted some views on Evoque and F-Pace in particular, so if we continue with the existing run rate the Evoque volumes will be just about half of what it was at the peak in FY '14 and we have started to see similar decline in F-Pace as well. So any views on such sharp fall in Evoque volumes and F-Pace?

[Guenter Butschek:]

No, I think broadly you have some of the effects of the normal aging curve on Evoque that is clearly launched back in 2012. So we would expect as part of the normal ageing and decaying curve if you like to see lower volume. I think it's in fact something and planned for. F-Pace also very strong here at first year but actually we still see solid consumer demand for F-Pace. So feel overall good about the direction of [indiscernible] there, albeit it’s a bit lower year on year than in its launch years.

[Yogesh Aggarwal:]

Okay. And secondly one, the capitalization ratio still seems to be higher this quarter around 80%, I thought you guys changed it lower last quarter and also the employee cost last eight quarters goes up absolute terms every quarter now, so is there a level at which in absolute terms it'll be flattish or start to decline?

[P B Balaji:]

Let me probably come in here. Okay, go for it Ken no problem.

[Ken Gregor:]

No, no, you go first Balaji, after you.

[P B Balaji:]

Sure, I think you've been talking for a while now, so I can stay help you out a little bit here. One of the things Yogesh, the way the capitalization policies work is that at a particular point in time in a particular stage gate onward we start capitalizing. So it is totally time dependent in terms of when a particular project you're actually ending up in which gates there, what kind of things are happening. But the policy is active as of 1st of April onwards, so that is just the way the nature of projects that we incurred expenditure on during the course of the -- at this point in time, so that is one. As far as people costs are concerned you will notice that Ken did allude to the kind of work that's happening on SG&A as well as other areas as well. It's a clear call out from our end saying that we'll be looking at all items of cost expenditure and therefore this will also be looked at very, very closely, very similar to what we've done in Tata Motors here.

[Yogesh Aggarwal:]

And Balaji, sorry I missed in your prepared remarks what did you say about the impact of new XL norms on the CV outlook?

[P B Balaji:]

Two things we've said, one is at this point in time we expect some temporary market challenges to be there because right now market is in confusion in terms of what are the implications of this now. So what we have now said -- from our side there are two actions that are currently underway. One is to work closely with the authorities to ensure that there is clarity on what are the implication of this on the existing park of vehicles that is out there. And second is to ensure that we get our products get ready for the new standard as soon as possible, so that what is happening on a war footing. At the same time this is something which we'll need to give clarity on the park of vehicles there. But at this point in time there's a bit of confusion in the market and therefore there is likely to be some temporary issues, but the inherent demand in the market is very strong so for that is something that should blow over as time goes by.

[Yogesh Aggarwal:]

Got it. Many thanks.

[Operator:]

The next question is from the line of Pramod Amthe from CIMB, please go ahead.

[Pramod Amthe:]

Thanks and -- thanks to the management for giving out more details on the car and the CV and PVs and profitability. Balaji first question is are there any one offs in the car margins which you have displayed for this quarter because there seems to be a substantial volatility over the last year? One. And second with regard to the same how soon you expect the car to come into profit zone in the coming quarters?

[P B Balaji:]

There's no one-off in the number as far as this quarter is concerned otherwise we would have called it out. Yes, there is a base impact that is out there because this is the same period last time when the market also for us was overall down, so that is something which is there. But having said that the PV business was less impacted compared to the CV business during the same time period. But suffice it to say that we are building momentum in the PV business as a share we are picking up as well we will show. So that is the only thing that is between last year to this year that is out there. As far as how soon we will want to do it, I would only say that we are all hands are on the desk to ensure that we get it as soon as possible. But we need to be realistic at the same time. We don’t want to get ahead of ourselves. We will win by making high quality products which are well received with the consumers and as long as we are doing it the right way we will get sustainable profitability. That's what -- the call out for the strategy has been sustainably it is not just some profits it's also about when it has to be at stake -- maybe if all [Indiscernible]. Apologies for that point in English.

[Pramod Amthe:]

And second question is with regard to JLR, the extent of destocking looks pretty high in the sense of almost you are talking about 11,000 units whereas in a quarter sales it was almost around 100,000 units. So you have cut down almost -- you lost almost a 10% of your sales. Which all markets these are specific to and how soon you expect them to come back to normalcy?

[P B Balaji:]

We don’t want to get into individual market level reasons for obvious competitive reasons, so when we go there on individual markets but fair to say that we have taken a large chunk this quarter and it is likely to overflow into next quarter as well. But impact in terms of intensity should be we lower compared to this quarter but with that I think we should be done and dusted on the corrections.

[Pramod Amthe:]

And a follow-up if I can ask I think the U.K. the Department of Transport has given out the policy on road to zero for the transition for car industry. What are your remarks about the same? Are you surprised by any of the observations made there for 2040 transformation and how you plan to play it forward?

[P B Balaji:]

Ken would you want to take that?

[Ken Gregor:]

I mean broadly we are supportive. I think Ralf and I were just talking about it. Anything to add Ralf?

[Ralf Speth:]

We are leading the items, leading in the technology and we are prepared also let's say to move up and with that comes a statement [indiscernible] we see our diesel share that the latest diesel engines are very, very good, the engines are [Indiscernible] we are going to see specially in the transport of groups for [Indiscernible]. So it's not that all of a sudden in 2030 everybody will be at the end of the day with electric vehicles. Two things which are very, very important the one is affordability and the other one is if it is convenient. As you know the batteries are still [indiscernible] if you want to have a certain range you have to expand the batteries at the end of the day and connect with vehicles in some time for a stretch [Indiscernible]. On the other hand we have to see a target to achieve the certain number of electrification vehicles. On the other hand convenience is a [indiscernible] about the interest venture. Our past 10 year levels and where and there is still a lot of work to do, in fact there is no OEM can do it by its own. Everybody has to come together and get involved, governments, cities and also academia and the industry across many sectors to make really a breakthrough to grow this year [indiscernible].

[Operator:]

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

[Sonal Gupta:]

My first question is on the VME levels so could you indicate where was it this quarter and specifically on China as well because you called out on China so and what we have got in terms of feedback is that discount levels do have been -- continue to be very high in China. So any thoughts there on how that will shape up through the rest of the year now that you are getting your inventory back on track?

[Ken Gregor:]

Yes, the VME level in the quarter was higher than the same quarter a year ago in the region of about 8 points of revenue across the business compared to the 6 points of revenue that we have in the same quarter a year ago. But that that does include the impact of the price adjustments in China that I described. So it is somewhat higher than I would expect to see in the remainder of the year and hope to see it more like the levels with we were previously and still running with more competitive market conditions still higher than we've seen in prior years. But actually overall not overly high in the overall context to the industry.

[Sonal Gupta:]

And just in terms of like now that -- I mean two related questions. One is do we have given that we will still have some inventory reduction going in the second quarter. On a full year basis you said a broad range of volume guidance that you can give, I mean like whatever you are comfortable with zero to 5 to zero to 10 or whatever, in terms of what sort of growth that you expect for the full year? And secondly again with -- do we expect now with the inventory being in control or coming under control that these levels will come off on the VME side say from the normalized level not the 8% but versus the 6% last year?

[Ken Gregor:]

On the VME I think I already said I’d expect -- I mean yes, the levels should [drop] from Q1 because we wouldn't see the same impact of China in the remaining quarters, but if I would expect it to see remaining at the 6% level just due to market conditions. On the destocking Balaji and I already answered, we hope to be through the bulk of that through the first half of the year. And on the volume guidance, no we don’t give full year volume guidance but I’d point to the 6% growth that we have in Q1 and obviously we want to continue to build on that with the new models that we have got through the balance of the year.

[Operator:]

The next question is from the line of Jamshed Dadabhoy from Citigroup. Please go ahead.

[Jamshed Dadabhoy:]

Just a couple from my side. So somewhere in the presentation I read that petrol vehicles as a percent of your sales you expect it to go from 15% to 60% in the near term. What exactly is driving that? And when you say near term how fast are you expecting that transition?

[Guenter Butschek:]

Good question and useful for me we need to clarify. One side of that chart, it was page 25 was the EU which is very heavily diesel, and the other side of the chart was our global sales where because the demand in the U.S. in particular and China is much more heavily weighted towards petrol gives our global mix of capital more like 60% today. And then we would see that over time, reducing somewhat spares and plug-in hybrids coming. But if I’d know exactly when that was I’d be better and fortunate telling the plan. I think it’s a trend that we will see develop as manufacturers introduce more that’s in plug-in hybrids like we are doing. We will inevitably see the mix of those grow, but it depends on how fast manufacturers introduce those new products and how fast we see consumers embracing those.

[Jamshed Dadabhoy:]

So just to clarify it today you are already at 60% globally.

[Guenter Butschek:]

Yes, globally because of the mix of our business across China, the U.S. the rest of the Middle East for example all heavily petrol dominated markets relative to the U.K. and Europe, which are heavily diesel dominated markets.

[Jamshed Dadabhoy:]

Second question, so if we look at your margins and add back all the sort of one-off's that came through, EBITDA was close to about 11% and then if you assume that your EBIT guidance remains in the low end that you all have given at 4% add back depreciation et cetera, the implied EBITDA margin for the next three quarters lands at close to above 15 odd percent? Just back of envelop calculations. Can you mention that you know you hope that VME has come down by about call it maybe 2% or so, you know first quarter was a little elevated because of what happened China et cetera. What's going to lead to the other uptick in margins, how much of that is going to come through just better mix and better product?

[Ken Gregor:]

I gave a…

[Jamshed Dadabhoy:]

Cost cutting element that is going to start kicking in from the second quarter, third quarter which you'd like to shed a bit more light on, I'm just curious to understand where the delta and margins is coming.

[Ken Gregor:]

Predominantly through operating leverage is the main factor as I talked through on Slide 23. We have a business which is seasonal, and because of our profile being very strong in the U.K. market that means that we normally have stronger sales in the U.K. in second half of our fiscal year compared to the first because of the timing of the registration plates changed on the 1st of March. The China business tends to see more sales in the October through [Technical Difficulty]

[Operator:]

We seem to have lost the line for the management participants. We're just calling to management.

[P B Balaji:]

This is Balaji here, so I think we lost London.

[Jamshed Dadabhoy:]

Yeah Balaji do you want to elaborate a bit on that? I mean I understand the seasonal bits but given that the markets are so volatile all your end markets.

[P B Balaji:]

If you look at last year the first quarter was 1.1% we ended the year at 4%, so here the lot of those reasons why this number went down this year is all one-offs and therefore when those correct that will change. And second the currency is also an important part of this loss that is there, as the pound selling moving from 1.4 to 1.3 and therefore we would need to see that even if it holds at this level that delta won't be there. So that's how we're looking at it. At the same time yes there is a very clear efficiency plan that Ken has already talked about that is already underway which will also be delivering results as the year progresses. So we would want the business given its cost structure as I have said time and again volume is an important part of it and therefore with the retails coming at 6% it gives us the assurance that the intrinsic consumer off take is there, it's about ensuring -- it is mixed slightly differently with U.K. has come in harder or much faster than what we saw earlier. And China slowed down compared to what it used to be earlier, so if that starts coming back into the equation things do change which is what I've called out in my outlook slide as well.

[Jamshed Dadabhoy:]

How much, how fast do you think China comes back?

[P B Balaji:]

I think we'll have to just wait and see and work our way -- execute as well, both ways.

[Jamshed Dadabhoy:]

Okay, all right thanks, thanks Balaji.

[Operator:]

Thank you.

[P B Balaji:]

Can you just get the JLR management as well, can you dial them in please.

[Operator:]

Sure, right. We are trying to dial them.

[P B Balaji:]

In the meanwhile go ahead.

[Operator:]

We'll take the next question from Shyam Sundar Sriram from Sundaram Mutual Fund, please go ahead.

[Shyam Sundar Sriram:]

Hi, thanks for the opportunities so you spoke about continuing WLTP changeover impact, which specific models are you talking about and will there be an impact on your cost both recurring and non recurring, any broad color there?

[P B Balaji:]

Ken has rejoined back in.

[Operator:]

Since we have the duty line connected.

[P B Balaji:]

Any demands to get that question.

[Ken Gregor:]

Yes, and apologies for disappearing of the line mid answer, on the WLTP it's really all models and in terms of costs going forward the broadly this new testing protocol yes we've had regulatory costs [indiscernible] to the business but that we just have to take in our stride.

[Shyam Sundar Sriram:]

Okay, so there will be more of one-off costs, understood. So despite our U.K. retail volumes incoming for JLR you have called out further challenges in U.K. and also continuing diesel uncertainty in Europe if you can elaborate on that please?

[Ken Gregor:]

I think the Europe piece we saw the volumes down year on year in the quarter and we do believe that part of that is driven by the reducing mix of -- and customer demand for diesel in Europe but just continues to have uncertainty over the market place in Europe. So that's definitely something that's impacting us. And in U.K. we see the impact of economic uncertainty, potentially related to Brexit, has been the factor as the industry and the economy continues to react and adapt to those challenges.

[Shyam Sundar Sriram:]

So just an add on to that in terms of absolute volumes say in U.K. and Europe are you seeing this 2H absolute volumes in U.K. and Europe to be lower than the 1H that we are seeing? So given the challenges that you are highlighting?

[Ken Gregor:]

So I didn't quite follow the question I apologize, perhaps you could repeat it?

[Shyam Sundar Sriram:]

So given the challenges that you are highlighting in U.K. and Europe in terms of absolute volumes are you seeing the 2H absolute volumes for JLR being lower than the first half volumes that we may see?

[Ken Gregor:]

No, I hope to continue to see volume growth in the balance of the year in both the U.K. and Europe. All I'm calling out is the fact that there are definitely pressures in those regions for the reasons that I described and for us our challenge and what we're driving is to realize the benefits with the -- not all that we've launched and leveraged that through the course of this year in order to seek to drive profitable volume growth despite the fact that certain markets are relatively more challenging than they were this time last year.

[Operator:]

Ashwini Kumar from Reliance Mutual Fund. You may go ahead with the question.

[Ashwini Kumar:]

I just want to understand when you forecast 4% to 7% EBIT margins in the near term and 7% to 9%. I am interested in knowing how do you really forecast your volumes because all these margin assumptions are based on certain volumes? So what is the basis of forecast and how much visibility you have got let's say today on 31st of July across those four to five big markets. How do you really forecast what is the real basis and how much far you can look into in terms of what kind of volumes did you do?

[Ken Gregor:]

It's a great question. And hard to do justice to in a short answer. And there are various approaches you take through forecasting volumes. I think if I will start with the longer term first. Clearly you take external inputs in the shape for example of market types provided by companies like [Indiscernible] to inform my view on how we see the long-term strength of the segments in which we compete and across the various markets around the world. So that's our key source of planning and then within that obviously we think about what market share we should be able to create given the new products that we are launching into those segments. So that's broadly the longer term approach and the shorter term by the way we also use that external approach to understand what's happening to segment volumes in which we are competing and what -- we look at the market share that we achieved segment by segment and then leave that to understand compared to the running rates we're seeing what we recently might think we should be able to sell in the second half of the year. And of course all of that informed by the expertise of the sales and marketing teams and teams around the world and informed by the levers that we can use to drive sales in terms of marketing promotion and variable marketing. But external insight leveraged with internal expertise to work out a summary.

[Ashwini Kumar:]

Just one more additional thing. As compared to competition let's say BMW, Mercedes, Audi, et cetera, what would be the percentage of your repeat customers basically essentially people? If you sell 600,000 vehicles how many vehicles in both the categories come from customers who already own your brands and how many come from outside?

[Ken Gregor:]

I think that’s quite a difficult question to answer especially for a business that’s growing -- has grown in volumes significantly over the past few years as we have done. If you think about three years we sold 450,000 units or so, this year -- last year we sold over 600,000 units. So by definition for Jaguar Land Rover we have to come quite I think the proportion of our sales from our competitors and from customers who are moving into the premium segments, within premium segments that are 2 million to 3 million units in demand for SUVs and Sedans. So in principle within very big segments. But for sure the country mix as we grow our business so leading to concurrent sales. As I say from competitors and from those new entrants into the segment.

[Operator:]

We think that was the last question. I’d now like to hand the conference back to the management for any closing comments.

[P B Balaji:]

Yes, thank you. First we appreciate the time and then the pointed questions that you had. I hope you found the interaction useful and expect to continue to stay in touch with you guys in the coming days as well. Thank you and have a nice day. Bye-bye.

[Operator:]

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