Tata Motors Limited
Q3 2014 Earnings Call Transcript

Published: 10 Feb 2014

[Operator:]

Ladies and gentlemen, good day, and welcome to the Tata Motors Q3 FY '14 Earnings Conference Call hosted by Motilal Oswal Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Mr. Jinesh Gandhi of Motilal Oswal Securities. Thank you and over to you, sir.

[Jinesh K. Gandhi:]

Thanks, Imba. Good evening, everyone. On behalf of Motilal Oswal Securities, I would like to welcome you to this Q3 FY '14 post-results conference call of Tata Motors. Tata Motors is represented by Mr. C. Ramakrishnan, CFO, and the Investor Relations team. I would like to thank Mr. Ramakrishnan for taking time out for the call. I would now hand over the call to Mr. Ramakrishnan for his opening remarks, which would be followed by Q&A. Over to you, sir.

[Chandrasekaran Ramakrishnan:]

Thank you. Thank you for hosting this call. Good evening, everybody, or good morning or wherever you are joining from. Thanks for taking the time to join us on this results call for Q3 for this year. The financial performance in this Q3, as it has been in the last few quarters, has been one of contrast, a continued underperformance in India business and quarter-after-quarter a very successful and very good performance at Jaguar Land Rover U.K. It's a repeat in this quarter of the same phenomenon we have seen for some time now. First of all, at the consolidated level, the net revenue for this quarter was about INR 64,000 crores, up from INR 46,000 crores in the same period last year. EBITDA margin consolidated was 16.5% compared to 13.3% a year ago. Profit after tax, INR 4,800 crores compared to INR 1,600 crores in the same quarter last year. Similarly, for the 9 months period, April to December, revenue came in at 1 lakh, 67,000 crores, up from 1 lakh, 32,000 crores; EBITDA margin at 15.9% compared to 13.7% and profit after tax, INR 10,000 crores compared to INR 5,900 crores. At the consolidated level, in terms of the balance sheet, the net automotive debt to equity was 0.19% -- 0.9

[Operator:]

[Operator Instructions] Our first question is from Binay Singh of Morgan Stanley.

[Binay Singh:]

My question is on the JLR margin side, like if you see this quarter at end has the [ph] same currency, what it was [ph] [indiscernible] margin 550 [ph] 560 [ph] to this point. Despite that, you've posted a very strong margin mainly on account of better production. Going back to the work experience, how can -- how should we look at the model cycle of Range Rover and Range Rover Sport, because in the work, we had 1 or 2 quarters with very strong high derivatives sale happening, and then very sharply, it came down in the following quarters. How would you see the experience of Range Rover, Range Rover Sport in terms of the derivatives that you are selling now versus what you expect to sell a year down the line be different?

[Chandrasekaran Ramakrishnan:]

In any product for any manufacturer, I think for the first -- depending on how successful the launches and how exciting the product is in terms of the consumer response, there will be a curve where for the first 2, 3, 4 quarters, the mix is likely to be richer for 2 reasons. The consumers also would like to experience the product in its full content and features and so on and also the manufacturer because the high demand waiting period, they sort of have the ability to allocate production to more enriched product offerings, medium-term offerings and also, in terms of geographical distribution, in terms of business -- global business like JLR. That's a phenomenon you will see in most manufacturers and most brands across the world. I will expect Range Rover and Range Rover Sport also will go through the same experience, which is likely to be richer for the next couple of quarters, after which, it will level off or come marginally down in favor of lower content and lower features. There is a natural curve.

[Binay Singh:]

And could you also talk a little bit about the momentum that you're seeing now in both the model...

[Chandrasekaran Ramakrishnan:]

The momentum has so far been good and we expect it will continue for some more time. I don't want to predict either 1 quarter or 2 quarters, et cetera, but considering that both the Range Rover, Range Rover Sport, et cetera, still have a very long waiting period -- by the way, one is not too happy about the length of the waiting period, which can stretch to about 4 to 6 months also in some of the markets. But that apart, considering the waiting period, I think the momentum is likely to continue for some more time. And the length of this momentum is depending on how exciting and how successful the launch has been. In our case, I think the momentum is likely to be longer than average.

[Operator:]

Our next question is from Chirag Shah of Axis Capital.

[Chirag Shah:]

Just have a question on the capacity at JLR. If you can help us understand on, a daily basis what is generally the production run rate that you can do because we have been seeing your guidance getting up every time. So can you throw some light -- what is your capacity in terms of -- and assuming demand remains very strong, what is the best you can produce as of this and how the roadmap is going there?

[Chandrasekaran Ramakrishnan:]

Before we get to the numbers, as we are increasing the guidance, every time we talk, you should be happy about it, I suppose.

[Chirag Shah:]

Yes, but it's you're -- is it that you're adding capacity? Or is it you had -- because number of holidays have -- you reduced number of holidays that are there in -- by paying overtime and that you are increasing capacity? So can you just help us understand on productivity how much you have the capacity?

[Chandrasekaran Ramakrishnan:]

I think I had mentioned even earlier that in the current location that we are in, in U.K., between the new factories, we have started with maybe a year -- a couple of years ago. I have given an indication that we can go up in up to about 500,000 to 550,000 in the locations that we have in U.K. Reaching that number will be a function of investment in manufacturing facilities. And this in pickup in capacity has been with both technical capacity for the investment on the ground in terms of plant machinery , building capabilities, paint job throughput capacity, et cetera. That's one part of it. And the second part of it is also manning and people. To some extent, people and manning can add by contract workforce. It can add by some of the measures that you talked about, working on holidays and opening up a third shift or a fourth shift, et cetera, overlapping shifts and so on. So it's a little difficult question to answer, but in substance, I will say, around between 450,000 to 500,000 should be possible at this current location. And theoretically, it can go up to 550,000, 600,000 in U.K. over a period of time. And in addition, in this period of time, you will also have the benefit of China capacity coming in, which is another 1 lakh, 30,000, which will provide some relief or better utilization for U.K. capacity for rest of the world.

[Chirag Shah:]

Would be it right to assume that by end FY '15, your average volume could be in the range of 520,000 to 550,000, that is the kind of capacity you would have at the existing U.K. locations given the strong demand that you have? Because from 450,000, you are easily highlighting only 500,000 units. That indicates hardly a 10% growth. Given the volume momentum you are having, there could be a much higher demand. So I was wondering how much you can stretch it further. Can you go it up to a 540,000 kind of a number before the China entity starts shipping it?

[Chandrasekaran Ramakrishnan:]

I want to stop sort of trying to predict the number for next year because many times when I respond to your capacity question, later on, it is quoted back to me saying that this is the volume you forecasted, what happened, et cetera, et cetera? So just...

[Chirag Shah:]

Given that demand remains strong, I understand that demand, you cannot forecast. But how is your internal capacity lineup? Are you geared up to go up to this kind of number or no? There is a technical capacity restriction beyond which you cannot expand at least until end FY '15. So I wanted to understand up to what level you can expand the capacity for next 12 months.

[Chandrasekaran Ramakrishnan:]

Just give us a minute.

[Chirag Shah:]

Sure, okay.

[Chandrasekaran Ramakrishnan:]

I just -- commenting on the -- we're just thinking on some of this timing of some of these capacity investments. That's also an important factor.

[Chirag Shah:]

Fair point.

[Chandrasekaran Ramakrishnan:]

By end of FY '15, as of 31st March '15, I think a capacity in the region of about 500,000 should be -- theoretically should be possible. But some of this capacity capability from about 450,000 for -- to 500,000 can come due in the course of the year or maybe even towards the third quarter or fourth quarter of the year. So they might not be [ph] available for the full year. So the answer can be interpreted in many, many ways. That's why I want to be really cautious in what I'm saying. But yes, by end of the year, theoretically, on that day, I think the capacity of 500,000 thereabouts should be possible.

[Chirag Shah:]

Perfect. Second question was pertaining to other expenditures in JLR. We have seen a staff reduction over there. So is there any specific thing or it's normal business operations, if you can just shed some light?

[Chandrasekaran Ramakrishnan:]

It is normal business operations, Chirag. It is also a function of fixed marketing expenses, how many are auto shows you -- and you...

[Unknown Executive:]

It's a timing issue.

[Chandrasekaran Ramakrishnan:]

So if you look at the launches, which were there not many launches in last year and has -- the other expenses are almost flat.

[Operator:]

Our next question is from Jamshed Dadabhoy of Citigroup.

[Jamshed Rustom Dadabhoy:]

So, first question, could you please explain this sale of assets in the parent's books and the tax reversal that has happened?

[Chandrasekaran Ramakrishnan:]

Number one, if you recall, the -- when we acquired Jaguar Land Rover, we had created a holding company structure in Singapore, which in turn was holding the Jaguar Land Rover company. What had happened was whatever acquisitions our company restarted in overseas prior to that were all held directly in the parent Tata Motors Limited in India. This included TDCV Korea, which were quite directly in Tata Motors. It included the company we started in Thailand for manufacturing operations, again, directly held in Tata Motors India; and couple of other places like Indonesia, South Africa assembly company, et cetera. So that's creating a structure where one subsidiary company, namely Jaguar, is held to Singapore, and others are directly to India. We hold the current debt and bring everyone under the same umbrella. And Singapore, as a holding company, also offered greater flexibility in terms of managing the affairs, capitalizing or fund flows, et cetera. So we have brought all the other companies like TDCV Korea, South Africa, Indonesia and Thailand under the Singapore holding company, which really gives us holding Jaguar Land Rover from inception. So that is the divestment we have made. As for Tata Motors stand-alone is concerned, that's the divestment we have technically made into our Singapore holding company. The Singapore company has raised independently, without any parental guarantee or anything -- that Singapore company has raised funding on its balance sheet, which is being used to acquire these companies from Tata Motors. One part of this, which is the major part of it, is about 80%, 85% of the total value, Tata Daewoo Commercial Vehicles Korea, the transfer has taken place already and the others are in the process of happening as we speak. And those are -- real balance, maybe 10%, 15% of the value, which will happen in the fourth quarter. With this, at the end of this exercise, all overseas manufacturing operating companies of Tata Motors will be held through Singapore. This, from a Tata Motors' point of view, has created a sale of investments, so therefore a profit on sale of investments. Good part of it in this Quarter and a much smaller part of it in the fourth quarter. The second part of your question was -- which is the tax credit, it's arising out of the tax provisions we had created earlier and the actual performance has been much worse than what we had anticipated and create -- when you create tax provisions in the accounts, you create tax provisions based on the annual full tax expectations -- not tax for that particular quarter, it is based on part of the taxation for the full year. So our expectation at the beginning of the year and also the continuing tax credit we get in terms of weighted deduction for our R&D expenditure, which because of the business performance being what it is, gets carried over. The tax credit -- the tax provision had to be reversed, which has also happened in the third quarter.

[Jamshed Rustom Dadabhoy:]

Sir, doesn't this have like a time period of like 5 years or 7 years, something you can carry it forward?

[Chandrasekaran Ramakrishnan:]

No, this is a provision reversal. What you are referring to is the MAT payment, which even if there's a taxable loss because of depreciation or R&D tax credit or whatever, if in the books you are showing a certain profit, you'll have to pay a minimum alternative tax of a certain percentage. That has a carryover limitation of about 10 years. Just to clarify on the restructuring, the divestment of Singapore companies, that is impacting in terms of profit only in the standalone and consolidation gets eliminated anyway. The consolidated results do not reflect the profit.

[Jamshed Rustom Dadabhoy:]

Understand, sir. Second question pertains to, actually, JLR.

[Chandrasekaran Ramakrishnan:]

Third question.

[Jamshed Rustom Dadabhoy:]

Okay, fine, third question. Given that the pound has strengthened and against the dollar, how do we think about competitiveness of JLR over the next 2, 3 years? And in your forecast of projections, what outlook have you all factored in on the pound-dollar rate?

[Chandrasekaran Ramakrishnan:]

At the beginning of the year, this fiscal year, about 9 months ago, when we had prepared our budgets, et cetera, our budgeting has been on a more conservative basis at about $1.65 to a dollar -- $1.65 to your pound and the actual rate so far has been more favorable to us than this budget-assumed rate. As we speak now, the actual in the market is hovering close towards that, between $1.61, $1.62, $1.63, touching $1.64, in that range. So it's not outside of our expectations at the beginning of the year. But yes, it's coming close to what we thought was a conservative assumption at the beginning of the year. As we prepare our plans for next year, I think we'll have to factor this trend very clearly in our plans. Yes, over a period of time, it is not favorable for JLR. We would definitely -- from a bottom line performance point of view, we will definitely prefer a stronger dollar, which helps our export the earnings, this is something which I have highlighted from time-to-time, our vulnerable -- our sensitivity to foreign change. In terms of immediate competitiveness in the next 1 or 2 years, et cetera, at least for the next 1 year, it's not much of a concern because we also have done a huge hedge book, where our receivables or our dollar inflows in the immediate future, at least for the next 3 months, 6 months are fairly well-covered. On a rolling basis, current quarter, plus 1 quarter, that's the next quarter, we cover nearly 70%, 80%, of our dollar inflows. One quarter later, and plus 2 quarters, we cover maybe lesser percentage, et cetera, and that coverage goes down as we go into the future. But yes, as an underlying business, I say I have cautioned earlier, it is indeed sensitive to exchange fluctuations, exchange moment of dollar-rupee -- dollar-pound in particular.

[Operator:]

[Operator Instructions] Our next question is from Rakesh Jhunjhunwala of Rare Enterprises.

[Rakesh Radheyshyam Jhunjhunwala:]

Sir, I want to ask you that after your investment -- next year you are going to invest a GBP 3.5 billion, right? And after that, what would be the capacity that will available for you as a group? This includes the investment in Brazil also? And therefore, we have capacity of 650,000 or more or less?

[Chandrasekaran Ramakrishnan:]

As I said, by -- in the next 1 or 2 years, I think capacity in U.K. will touch somewhere between 500,000 to 550,000, around 515,000. We will also have the capacity created in China, which is about 130,000. Brazil -- compared to all this Brazil is relatively small, while Brazil investments are included in these numbers. Brazil -- the capacity will be relatively small, I think if I remember right, it's about 25,000 annually.

[Rakesh Radheyshyam Jhunjhunwala:]

That means you are planning for effective capacity around 7 lakhs?

[Chandrasekaran Ramakrishnan:]

Sorry, there's a bit of an echoing at your end -- are we on your speaker phone at your end? Can you repeat the question?

[Rakesh Radheyshyam Jhunjhunwala:]

Sir, that means effectively in the period of 18 to 24 months, on the period of 15 months, you'll have a capacity of about -- about near by 650,000 to 7 lakhs?

[Chandrasekaran Ramakrishnan:]

Yes, about 700,000 plus.

[Rakesh Radheyshyam Jhunjhunwala:]

700,000 plus. And sir, how are you allocating it between Jaguar and Land Rover?

[Chandrasekaran Ramakrishnan:]

Can I hold this? We will come back to you before the call.

[Rakesh Radheyshyam Jhunjhunwala:]

Just -- I have another question. Sir, is your margins, better margins also reflecting the fact that you are utilizing the same plants for higher production?

[Chandrasekaran Ramakrishnan:]

Obviously, in our industry, higher operating leverage adds very healthily to the bottom line.

[Rakesh Radheyshyam Jhunjhunwala:]

Sir, but I have not seen any analyst report which highlights this, although realizing of the fact that higher utilization was seen in manufacturing, should give you much higher margins.

[Chandrasekaran Ramakrishnan:]

Yes, sir, it does. The industry functions on significantly on high operating leverage.

[Rakesh Radheyshyam Jhunjhunwala:]

And sir, you're seeing very good demand at the ground level?

[Chandrasekaran Ramakrishnan:]

Yes, we continue to have for JLR very good market pull for more -- all our products, particularly, the more recently launched one. Evoque continues to have a good run. Range Rover, Range Rover Sports continue to have long weeks of queuing and waiting in the -- for the -- from the consumers.

[Rakesh Radheyshyam Jhunjhunwala:]

So sir, what are you doing to correct it? Are you trying to raise capacity fast?

[Chandrasekaran Ramakrishnan:]

We have to balance it. Just capacity increase by itself may not address fully the issue. We also run neck to neck in terms of our engine availability. So some part of the capacity, we also like to be solved by better availability of engines, partly from our own plant, which has come onstream by end of this calendar year. I think I had spoken that -- if you remember, I have spoken about our investing in our own engines, smaller engines 4-cylinder, 2-liter engines. That the faster -- the vehicles with the engine will come by the end of this calendar year and engine manufacturing plant also will ramp up its capacity over a period of next 3, 4...

[Rakesh Radheyshyam Jhunjhunwala:]

And sir, will it be reasonable to assume that post FY '15, your capital expenditure will then fall-off very -- in a big major way?

[Chandrasekaran Ramakrishnan:]

Not necessarily because post FY '15. Next year our capital expenditure, we have given an indication we'll be likely to be in the region of about GBP 3.5 million to GBP 3.75 million.

[Rakesh Radheyshyam Jhunjhunwala:]

Sir, a major part will be for the new plants, no?

[Chandrasekaran Ramakrishnan:]

No, no. Let me just come back to this. Major part of this will be for almost -- nearly 50% or higher will be for new products introduction, new variance, new platform vehicles coming up. And some part of it is also going to creating this manufacturing capacity, engine plant, investment in China, et cetera, Brazil and so on. More important than the absolute number, I think it's important to look at it as a percentage of revenue. Right now, we are running at least 200, 300 basis points, 2 to 3 percentage basis points higher in terms of capital spending, compared to our revenue, compared to our competition. I think this higher level may be around 15%, 16% of turnover will continue to be there for the next 2, 3 years. And over time, I think it will fall-off more nearer to the segment competition, which is more like 10%, 12%.

[Rakesh Radheyshyam Jhunjhunwala:]

Right, that means your big investment plans?

[Chandrasekaran Ramakrishnan:]

Yes, we have shared with you from time-to-time the type of platform and new product and new segment that we are not present today. The type of plant that we have, both for the Jaguar brand and for Land Rover, Range Rover brands.

[Rakesh Radheyshyam Jhunjhunwala:]

Sir, but you are not afraid that you're going to [indiscernible] segments, your brand may be affected?

[Chandrasekaran Ramakrishnan:]

It's a question of which segments you are talking about, both Jaguar and Range Rover vehicles will maintain their product appeal and the brand and the value they stand for. And we are not getting into massive volume segments or lower-level segments. Evoque is an example, we have maintained the values that Range Rover brand always have carried and we have come out with a slightly smaller Range Rover, which is the Evoque and you have seen what type of response. I think it's a question of which segments you carefully choose and how you present the vehicles in that segment. We are launching the Mercedes C-Class or BMW 3 Series equivalent vehicle in Jaguar brand that will come up later this year, towards the end of this calendar year. That, again, is a premium luxury segment, but the low-end of the luxury segment. And you know that we have no plans of entering mass or volume segments.

[Rakesh Radheyshyam Jhunjhunwala:]

Ma'am, one last question. Do you expect your -- that your debt may not increase even after this kind of capital expenditures?

[Chandrasekaran Ramakrishnan:]

In the Jaguar Land Rover?

[Rakesh Radheyshyam Jhunjhunwala:]

Yes.

[Chandrasekaran Ramakrishnan:]

Jaguar Land Rover, yes. There will be some shortfall in funding, and free cash flows maybe from time-to-time in some of the years. I think we have significantly strengthened the balance sheet position in Jaguar Land Rover by raising money. In the last 2, 3 years continuously, all of them have been 5-year, 8-year, 10-year instruments. As we speak now, Jaguar Land Rover is sitting on GBP 3 billion of cash in its balance sheet, solid cash in the balance sheet. And we also have another GBP 1 billion of committed lines of credit, 5-year lines of credit from banks, which are not utilized at all. So we're talking about liquidity pool available in JLR, both cash and available credit of nearly GBP 4 billion. As the business continues, we hope to perform the way it has performed so far. I think funding this expenditure should not be a challenge.

[Operator:]

Our next question is from Robin Zhu of Bernstein.

[Robin Zhu:]

My question is as follows. First of all, congrats on a very strong set of results. One of the investor's concerns coming into this quarter has been foreign exchange headwinds, particularly in your emerging markets like Brazil, Russia, which are, obviously, quite significant for the company. Currency stalled in both countries, but you don't seem to show much evidence of FX headwinds in your results. Could you just comment on how much, overall, FX had on your results? And specifically to Brazil and Russia, how you manage the currency in those markets?

[Vijay Somaiya:]

Robin, Somaiya here. As you're aware, in JLR, we have currency impact of both above EBITDA and below EBITDA. Above EBITDA is the actual weighted average realization for the quarter. At the EBITDA level, because of the Pound, GBP adverse moment and a favorable moment for the Pound-Euro, the net impact on EBITDA was negative GBP 116 million, which is there. Below EBITDA, there was a gain on account of hedges and re-evaluation of loans, which was a gain of GBP 92 million. These are the impacts at a broad level above EBITDA and below EBITDA.

[Robin Zhu:]

Okay. So is it fair to say that if hadn't -- if currency hadn't gone against you, then the EBITDA margin would have been substantially higher than even the spectacular result that you posted?

[Vijay Somaiya:]

Yes, if you remove the impact of GBP 116 million, your margins on a net basis would've been higher to that percentage.

[Robin Zhu:]

Sure. And specifically to Brazil and Russia, I mean, my understanding is that these currencies are tremendously difficult to hedge. I mean, I was just wondering how the company can -- is able to manage your exposure in these markets?

[Vijay Somaiya:]

Robin, can we come back to you after the call and discuss that, on Brazil and Russia hedging?

[Robin Zhu:]

Okay, no problem.

[Operator:]

Our next question is from Pramod Kumar of IDFC Securities.

[Pramod Kumar:]

So my first question pertains to the consolidated FCF and the second one is on the Baby Jaguar. Given the fact that you stated that with the good performance of Range Rover, Range Rover Sport, your margins have naturally been favorably impacted. So how should one look at Baby Jaguar directionally as given the competition intensity and the price point at which it comes? So those will be my 2 questions, sir.

[Chandrasekaran Ramakrishnan:]

Sorry, what is the first question? The second one was regarding the smaller...

[Pramod Kumar:]

Yes, the first one is on consolidated free cash flow, sir. Because you talked about JLR free cash flow, but what would it be on a consolidated level?

[Chandrasekaran Ramakrishnan:]

JLR free cash flow positive for this quarter has been as a order of about GBP 300 million for the quarter. It's for the 9 months. Your question is about the 9 months, right?

[Pramod Kumar:]

No, sir, I'm talking about the consolidated free cash flow, including the stand-alone overall business?

[Chandrasekaran Ramakrishnan:]

No, I understand. I was just getting it in parts. In Tata Motors, of course, free cash flow is negative. If you remove the Singapore fundraising and the restructuring that we have done, that has contributed to some extent. In Tata Motors, we have also had the benefit of dividend inflow from Jaguar Land Rover in the earlier part of the year. If you either aggregate or disaggregate, considering the free cash flow positive in JLR has been in on the order of GBP 323 million, close about INR 3,000 crores-plus for the 9 months period. In Tata Motors stand-alone, the free cash flow is negative. Without taking to account the dividend and the restructuring fundraising that we have done would be of that magnitude. So at a consolidated level, there'll be a marginal free cash flow negative.

[Pramod Kumar:]

Okay. And sir, my second question on the Baby Jaguar and the impact on profitability?

[Chandrasekaran Ramakrishnan:]

Okay, I will not call it baby Jaguar. The smaller Jaguar here, as vehicle gets smaller and we get into more competitive segments, it is definitely a competitive segment. The individual margin of the product will be somewhat lower compared to our traditional product. Jaguar margins have always been lower than the Range Rover margins and the smaller Jaguar, the margin is likely to be lower. But if you look at the -- earlier in the call there was a question about operating leverage and volume's impact on that. If you look at the total market for that segment, which is still a premium segment, even if we talk about somewhere around 5% market share, we are still talking about Jaguar volumes on a stand-alone basis increasing 3x to 4x compared to what there have been operating in the last 2, 3 years. So I think the equation will balance itself out, and hopefully it should contribute well to our overall bottom line.

[Operator:]

Our next question is from Kapil Singh of Nomura.

[Kapil Singh:]

Sir, I just wanted to check, there were some comments regarding the China capacity getting delayed. So if you can just give some color on that, and whether it effects your overall production line as well?

[Chandrasekaran Ramakrishnan:]

Not really. It's -- technically, it's a shift by one quarter, maybe we shift towards the end of the calendar year, maybe into the early part of next calendar year.

[Kapil Singh:]

And sir, how much do we plan to utilize that capacity in the first year? I mean, will it be full-scale production or will it be doing assembly of securities, et cetera, as well?

[Chandrasekaran Ramakrishnan:]

It can't be full-scale production to start with in any case and the capacity utilization normally doesn't become 100% on day one. So it will be a ramp-up over the next 3 to 4 quarters.

[Kapil Singh:]

Okay. Sir, I ask because typically, we see that, if the utilization is below 50%, 60% then in the first year there's a loss. So is that something that -- I mean, how do you look at it? Will the first year be around 50% utilization or...

[Chandrasekaran Ramakrishnan:]

It's difficult to answer something like this on a call. Let me come at it slightly differently. In Phase 1, the full capacity in China will be about 130,000 cars, which in the second phase, we will increase at about 150,000, 160,000. So just now we are shifting our discussion to this 130,000. It will obviously happen in -- the capacity itself, 130,000 will come over a 3-year period, 3-year phase, from the start up. So the setting above the full capacity in terms of our availability of 130,000 vehicles to be produced will be reached over a 3-year period and you do it in different stages. At each stage, when you start the production on day one -- let's say, in stage 1, you start with 10,000, 20,000, 30,000 capacity, 40,000 capacity, you can't achieve that fully. It will take about 2 to 3 quarters to ramp up to that level. Then in it goes into the next phase of expansion and reach 130,000 over a 3-year period. You do it both in the modular fashion and also in a ramp-up fashion in terms of various operations and so on. Yes, in the initial period, there'll be set up costs. There will be lower productivity in terms of if you could do x number of vehicles given a full shift availability in U.K. can, Geely manufacturing in China for the first time [indiscernible] achieve the same numbers per shift on day 1? It can't. There'll be set up costs, there will be perhaps a rework or lower productivity and efficiency to start with, it will build over a time. And we are also talking about a whole lot of supply chain logistics here in terms of U.K. supplies and local China procurement. So that will be under recovery of some of the initial costs in the initial phase, first 2, 3 quarters or maybe first year, 1.5 years, but not really significant. That will at the JV level, not at Jaguar Land Rover level.

[Kapil Singh:]

That's very helpful, sir. And sir, just a small question on -- sir, what is the debt that we have on the Singapore subsidiary? And when we report this net automotive debt, do we include that debt as well?

[Chandrasekaran Ramakrishnan:]

Net automotive debt consolidated, when we reported, we have obviously included the Singapore subsidiary debt also.

[Kapil Singh:]

And how much is that?

[Chandrasekaran Ramakrishnan:]

As of now, the debt at Singapore holding company is close to $900 million. We have raised it into transits in dollar and U.S. dollar.

[Unknown Executive:]

Last year and this year.

[Chandrasekaran Ramakrishnan:]

So 2 tranches in May and...

[Unknown Executive:]

Sorry, the earlier part of this fiscal year and more recently now.

[Chandrasekaran Ramakrishnan:]

SGD 350 million in May and USD 500 million in November.

[Kapil Singh:]

Okay. And that will be serviced out of the dividend that it receives from JLR?

[Chandrasekaran Ramakrishnan:]

And the Korea, et cetera.

[Operator:]

Our next question is from Sahil Kedia of Barclays.

[Sahil Kedia:]

Sir, just wanted to clarify one point. This quarter, or on a sequential basis, we have not seen the share of China go up as much in JLR. On the other hand, we've the seen the share of Range Rover and Range Rover Sport go up quite sharply. So just wanted to understand that the improvement in margin that we have seen, is it purely a function of product mix, high utilization, or are there some cost benefits -- I mean, certain reductions, et cetera, that are also taking place given that both the new Range Rover and the Range Rover Sport are on the same platform? If you can just help us understand kind of what is leading to the improved margins?

[Chandrasekaran Ramakrishnan:]

More than cost reduction or cost factors, I think there's been more on the realization mix and higher content, richer product mix. When I talked about richer geographical mix, I was referring to comparison of Q3 to now where China has seen improvement. But on a sequential basis, if you see, I think it will be contributed more by product mix and content and variance mix and better realization of product and lower overall variable marketing expenses. Not so much on the cost factor. Costs have been more or less benign, I will say.

[Sahil Kedia:]

Okay. And sir, can you give us an update as far as your distribution footprint in China is concerned? Where have we reached and are we still on track to reach that 200 kind of number by FY '15?

[Chandrasekaran Ramakrishnan:]

We are on track. I'm not sure whether I can give an update on this every quarter. I think end of last year -- end of this year, or beginning of this year, I think our distribution strength, dealership strength in China was about 120, 130,000 -- 130 dealers. We do expect it can go up to 170 to 200 in that region in the next year, 1.5 years. We on track for that.

[Sahil Kedia:]

But sir, as I understand that of that 130, only about 100 odd were operational, is that -- so can you give us a sense of how many are operational?

[Chandrasekaran Ramakrishnan:]

No, we are talking about 130 operational dealers.

[Sahil Kedia:]

130 operational. So that number is going to go about to 170 to 200 in the next 12 to 15 months?

[Chandrasekaran Ramakrishnan:]

Yes. Of course, the touch points could be more. One dealer could have more than 1 showroom or whatever. But we're talking about dealerships.

[Operator:]

Ladies and gentlemen, due to time constraints, that was our last question. I now hand this floor...

[Chandrasekaran Ramakrishnan:]

May I interrupt for one minute before we the end the call. There was one question earlier where I said before the end of this call, I would revert with the specific numbers. The question related to distribution of capacity, when we talk about 550,000 or 600,000 or whatever, what is the broad distribution from -- between Jaguar and Land Rover capacities? In line with the overall mix in terms of our total number of vehicles, the capacity consistently will be planned about 1/3, 30% to 35% for Jaguar and about 60% to 65% for Range Rover and Range Rover. I just thought, since I mentioned I'll mention it before the end of the call. I just thought I'll -- the person whoever has asked the question, if he's still there, sorry I couldn't reply immediately.

[Operator:]

Thank you very much, sir. I now hand the floor to Mr. Jinesh Gandhi of Motilal Oswal Securities for closing comments.

[Jinesh K. Gandhi:]

Thank you, Imba. On behalf of Motilal Oswal Securities, I'd once again like to thanks all for joining the call today. Thanks.

[Operator:]

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