Tata Motors Limited
Q3 2015 Earnings Call Transcript

Published: 6 Feb 2015

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Tata Motors Q3 FY '15 Results Conference Call hosted by Nomura. [Operator Instructions] Please be advised that this conference is being recorded today. And now, it's my pleasure to hand over the call to your speaker for today, Mr. Kapil Singh. Over to you, sir.

[Kapil Singh:]

Hello, everyone. Thanks for joining the call. We have with us today, the Group CFO of Tata Motors, Mr. C. Ramakrishnan; Mr. Vijay Somaiya, Head of Investor Relations and the IR team. Sir, I'll hand the call over to you for presentation.

[Vijay Somaiya:]

Thank you, everyone, for taking out time and joining the call. Thank you, Kapil. I am Vijay Somaiya. Let me take you through the financial highlights for the Q3 FY '15. Starting with the consolidated financials. The net revenue for Q3 came in at around INR 70,000 crores, compared to almost INR 63,900 crores similar quarter last year. EBITDA was slightly lower at 15.4% as compared to 16.6% last year. The profit after tax was close to INR 3,600 crores as compared to INR 4,800 crores the previous year. For the 9 months financial FY '15. The net revenue came in at INR 1,95,000 crores as compared to INR 1,67,500 crores. EBITDA was 16.8% as compared to 15.9% last year. And profit after tax came in at INR 12,270 crores as compared to INR 10,000 crores last year. The net automotive debt equity as of 31st December 2014 on a consolidated basis is 0.15. Moving over to Tata Motors Group India business. The revenue for third quarter was INR 9,000 crores as compared to INR 7,770 crores in the previous quarter. EBITDA was negative, minus 8.5% as compared to minus 4.3% the last quarter and profit after tax came in at negative INR 2,123 crores as compared to INR 1,250 crores last year. The EBITDA this year has been impacted by the provision, of which we had taken for Singur, amounting to around INR 310 crores because of the uncertainty in the legal case. And you may also recollect that in the Q3 of FY '14, we had done a divestment of overseas subsidiaries from India to the Singapore holding company, which had resulted in significant profit, and that is why the profit after tax was on the positive side. So the 2 quarters are not exactly comparable. For the 9 months FY '15, the revenues at the India business came in at INR 25,500 crores, almost flat compared to last year. The EBITDA margin is at minus 4.5% as compared to 0.2% last year and profit after tax for the 9 months came in at minus INR 3,575 crores as compared to INR 1,150 crores last year. The net debt equity as of 31st December in the India business is 1.22 greater than 1

[Operator:]

[Operator Instructions] Your first question comes from the line of Binay Singh from Morgan Stanley.

[Binay Singh:]

My first question is basically on your guidance that you're guiding for JLR that the margins will be slightly weaker next year versus this year. Are you taking into account the currency, like what kind of currency assumptions are you taking in? Because currency should be fairly favorable for you next year.

[Vijay Somaiya:]

Currency is a nonfactor. I think the general guidance, while there will be volume and richer mix and newer products as well as the top line and the product performance and the business performance is considered to be exciting. If you are cautioned because of the year in which we will be next year, due to the startup and rampup of many of these major activities, so in this, I will say the currency assumption if you take it as constant, there would be pressure on the margins.

[Binay Singh:]

So when you say constant, you mean currency remains where it is today and the head is rolled from there on? Not what it is the average of 2015 -- FY '15?

[Vijay Somaiya:]

Yes. I think it's [indiscernible]. I think I would say on average, if it remains at '14-'15 and '15-'16 levels, on a comparable basis...

[Binay Singh:]

Okay. Okay. Okay. And then secondly, on the JLR margins. This time, where are the incentive being added from U.K., we've been talking about?

[Vijay Somaiya:]

We have received the incentive from China, which is around GBP 54 million this quarter.

[Binay Singh:]

How big is that?

[Vijay Somaiya:]

It is above EBITDA.

[Binay Singh:]

Okay. Like, what is the nature of this incentive? It comes once every year in one quarter?

[Chandrasekaran Ramakrishnan:]

Yes. It comes once every -- once a quarter, every year. You are right.

[Binay Singh:]

Okay. Okay. And then lastly, just on the India business apart from the Singur expenses, is there any one-off expense from the ZEST launch or something because the other expenses seem pretty sizeable. Is it mainly car launch expense or, it's because of the mix being slightly more adverse or more serious. Could you throw some light on that?

[Vijay Somaiya:]

More than mix or business issue, I think it is more a question of -- more the effect of one-time provisions. The bigger sort of that was -- comparing between 2 quarters, this quarter and the previous year's quarter. The Singur of course is a major provision. And we also have additional one-time provisions for receivables and write-offs and inventories and so on. The effect of launches, et cetera, would be there in the quarter but much less, not really material. But the one-off items had been slightly crowded in this quarter.

[Operator:]

Your next question comes from the line of Pramod Kumar from Goldman Sachs.

[Pramod Kumar:]

My first question pertains to your China business. As you roll forward Evoque into the market through the JV, how are you reading the demand environment in China, especially for imported brands? Because what we learned is few of the other imported -- few other brands are actually indicating that demand for imported models could be kind of flattish for the year. So how are you looking at for your portfolio on the import basis?

[Vijay Somaiya:]

From an order retail and market footprint point of view, the JLR brand vehicle supply from U.K. or from the China production, overall I think the market footprint in the retail section of JLR, I think will see a strong growth. The demand continues to be quite favorable for new product lineup that we have.

[Pramod Kumar:]

Okay. But would you like to quantify what are the calendar year growth we will be looking for in China?

[Vijay Somaiya:]

Beyond saying that we remain positive and confident about it, I wouldn't want to give a number.

[Pramod Kumar:]

Sounds good. And the second question pertains to your exponential line in the JLR result. If you can just help us walk through what are the quantum of gains and losses on the ForEx side -- on the realized side. That will be very helpful.

[Vijay Somaiya:]

Sure. If you look at Q3 FY '15 compared to Q2 FY '15, which is there on a quarterly basis running quarter -- as a running quarter business, the net impact on exchange fluctuation is close to adverse GBP 140 million above EBITDA.

[Pramod Kumar:]

Okay. Around GBP 140 million. And last quarter, we had a favorable impact, right -- net impact?

[Chandrasekaran Ramakrishnan:]

Last quarter meaning the previous quarter?

[Pramod Kumar:]

Yes. The Q2. Sorry. Sorry. I'm referring to Q2.

[Chandrasekaran Ramakrishnan:]

Q2 FY '15 was a positive impact, close to GBP 120 million. In Q3 FY '15, the impact is minus GBP 20 million, so you should look at the swing, it is GBP 140 million adverse.

[Pramod Kumar:]

Okay. Sorry. Apologies for this but I'm just going through the notes on the last quarterly call. In other expenditure, you had talked about GBP 80 million realized gain on hedges and $30 million -- GBP 30 million realized loss on the balance sheet items.

[Chandrasekaran Ramakrishnan:]

We are talking about EBITDA. So on the loan side, it will be below EBITDA.

[Pramod Kumar:]

Okay. So you're saying between the quarters, there is a GBP 140 million swing with minus GBP 20 million being in this quarter and there was GBP 120 million positive last quarter?

[Vijay Somaiya:]

Yes. This is above EBITDA. And let me speak to you of what happened below EBITDA, which is there. So below EBITDA, Q2 of FY '15, there was an adverse exchange fluctuation of GBP 85 million. In Q3 of FY '15, we have an adverse exchange fluctuation of GBP 137 million. For the net delta, there is minus GBP 52 million. If you compare both above EBITDA and below EBITDA, the bottom line impact is as what I have spoken about.

[Pramod Kumar:]

Okay. And so finally, where is this incentive being routed? The China incentive? Is it being which line item?

[Vijay Somaiya:]

It will be in other expenses.

[Operator:]

[Technical Difficulty] Your next question comes from the line of Jamshed Dadabhoy from Citigroup.

[Jamshed Rustom Dadabhoy:]

So just to clarify. You mentioned that if you'll have a constant currency, year-on-year between FY '15 and FY '16 in JLR, the margins will be under pressure. So what I wanted to check is when you mean average currency, you're taking the full run through all the way from the first quarter to the fourth quarter? Or are you looking at the currency as it is today?

[Chandrasekaran Ramakrishnan:]

The guidance is the performance of '14, '15 compared to '15-'16. Difficult to get into a detailed calculation and weighted average impact and constant impact at a point of time. In general compared to '14-'15 and '15-'16, currency remaining same between the 2 years. While there will be ...

[Jamshed Rustom Dadabhoy:]

So how much will the swing be? Like how much compression do we expect and can we expect that in fiscal year '17, this reverses because it will be one-off due to startup costs, et cetera?

[Chandrasekaran Ramakrishnan:]

There will be 2, 3 impacts. One is the startup of China production and the rampup in China, the full volumes gets shifted from U.K. production to China production. And whatever the share of the JV profit in the JLR U.K, we will consolidate it at the PBT level -- at the EBITDA level. And the startup and the rampup of the engine production in the new car from the launch that is happening in '15-'16. We expect there'll be an offset in terms of overall growth in volumes and the demand of the new product in terms of pricing and demand pull. It's difficult to give a range, but in general I thought it's only fair to say that these impacts will happen in '15-'16, and we should be prepared for that. [indiscernible] number forecast, which we never do.

[Jamshed Rustom Dadabhoy:]

Sure. So what has led to the sharp deceleration in the CapEx spend? You've said that certain projects were deferred and even next year. I mean, if you just look at the CapEx to sale. This year is looking quite moderate vis-à-vis what we expected going into the beginning of this year and even next year at 3.6 to 3.8. There does seem to be a deceleration. So what is happening -- what has led to this change in CapEx outlook?

[Chandrasekaran Ramakrishnan:]

This year, at the beginning of the year, we had indicated about 3.5 to 3.7 as the range in which the capital expenditures would be for '14-'15 financial year. More the -- it's not so much the deferment of projects, if you remember, there is also an impact and more of an impact in terms of timing of the commitments and the cash flow. It's more of that effect rather than any retiming or postponement or delay. So we expect that you will end up at about 3.2 or so instead of 3.5, 3.7 range that we had indicated year-on-year. Yes, definitely it is lower, but more on accounts of timing and commitments and cash flow impact. All this year, I think we've been saying even at the beginning of the year, we said that it'll be between 3.5 to 3.7 for '14-'15, and we expect it will continue at that level for the next 2, 3 years. So for the following year, that is '15-'16 financial year, we're still saying 3.5, 3.6 or whatever, 3.7. I don't think there's any deduction that we are guiding now for the next year.

[Jamshed Rustom Dadabhoy:]

Okay. Okay. So, and just on the domestic business. If you look at the business on a rolling quarter basis, it looks like the gross margin has shrunk quite meaningfully. Could you shed some light, especially on the new passenger vehicle rollouts because I was under the impression that there were to be vendor discounts and cost-reduction initiatives, which would flow through the new platforms. So could you just give us some indication on when you expect some concrete improvements to happen on the domestic business, please?

[Chandrasekaran Ramakrishnan:]

As I said, I think the significant overall financial performance and bottom line performance improvements, I think, should start happening from next year. On account of 2 key reasons, you've seen some early signs as we said in the earlier calls and also a short while ago in the press conference. We've seen some early signs of smart recovery and volume growth in medium and heavy segments at this point of time. It has not yet percolated to a small commercial vehicles and other segments, which are also fairly large in numbers. Passenger vehicles, we have seen a good beginning with ZEST and BOLT. The numbers are still -- ZEST, we have launched in August, September and BOLT has just been launched. As the volumes ramp up and growth happens, triggered by these products and more products to follow of the new platform in the next year. As you will see some signs of positive impact on the bottom line from next fiscal onwards or perhaps even January-March quarter is likely to be a good volume quarter for industry in general in any year. Perhaps this quarter to [indiscernible], maybe more fully from next financial year, I think we should see some recovery in the financial performance.

[Operator:]

Next question comes from the line of Jinesh Gandhi from Oswal.

[Jinesh K. Gandhi:]

My question pertains to domestic business and that expenses you indicated there are some one-time provisionings apart from Singur project provisions for [indiscernible] inventories et cetera. Can you quantify that? How big that is?

[Chandrasekaran Ramakrishnan:]

It's almost of the same magnitude in 3, 4, 5 different line items or INR 300 to INR 400 crores.

[Jinesh K. Gandhi:]

Okay. Okay. And just secondly, in domestic business, we had seen a very strong improvement in net realizations. So what would you attribute this kind of improvement to, especially considering that mix has been more favorable on commercial -- or sorry, on passenger vehicle side?

[Chandrasekaran Ramakrishnan:]

In fact, one of that you touched upon, which is the mix improvement. If you take the passenger vehicle business and your product are differently cashing up well and we have been able to get good revenue impact on that. And on the commercial vehicle front also the growth has been in the larger segment, which is in medium which Vijay talked about and in the small commercial vehicles, mainly the mix effect.

[Jinesh K. Gandhi:]

Okay. Okay. No major price increases during the quarter?

[Chandrasekaran Ramakrishnan:]

Price increase, we have done one price increase, for [indiscernible].

[Jinesh K. Gandhi:]

And how big that would be?

[Chandrasekaran Ramakrishnan:]

I think it's of about 1%, 1.25%. Almost across the board.

[Jinesh K. Gandhi:]

Right. Right. Last question pertains to JLR tax. You mentioned in the presentation that there was -- tax was low due to reduction in China withholding tax. What would be impact of that and would it be -- would it mean in lower overall tax rate going forward?

[Chandrasekaran Ramakrishnan:]

No. It is a onetime correction. They have been providing withholding tax at a higher percentage and that has been decided it will be lower. So we will not have a continuing impact on them going forward.

[Jinesh K. Gandhi:]

Okay. But what would be the impact on this quarter?

[Unknown Executive:]

23 to 25.

[Chandrasekaran Ramakrishnan:]

It's relatively small. If I remember, I think it was somewhere between GBP 25 million to GBP 30 million.

[Jinesh K. Gandhi:]

GBP 25 million to GBP 30 million. But going forward, it would be 5% withholding tax?

[Chandrasekaran Ramakrishnan:]

Can you hold on for a minute?

[Jinesh K. Gandhi:]

Sure. Sure.

[Unknown Executive:]

[indiscernible]

[Chandrasekaran Ramakrishnan:]

Just one correction. The -- an average quarterly impact of this lowering of the tax rate would be around GBP 20 million, GBP 25 million, as I said. At this quarter, we have seen a reversal in the Indian consolidated accounts in terms of cumulative effect of about 3, 4 quarters. So the total impact on the tax rate in this quarter is slightly more pronounced, about GBP 70 million, which is what in this quarter has lowered the effective tax rate. Going forward, since this is a one-time correction, going forward, the effective tax rate would still continue to be around GBP 25 million to GBP 26 million.

[Operator:]

Next question comes from the line of Sahil Kedia from Barclays.

[Sahil Kedia:]

One question on the realization in JLR. There's actually been a pretty sharp jump in the revenue side. Is there any one-off in the revenue that we have booked or is it just product mix?

[Chandrasekaran Ramakrishnan:]

Volume and product mix. Mainly the volume for overall product mix and geographical mix.

[Sahil Kedia:]

Okay. Sort of one thing. Sorry to go back to the free cash negative number of the guidance that you have mentioned. You are already tracking if I analyze your number close to about GBP 4 billion in the [indiscernible] more than that while your guidance seems to be between 3.6 to 3.8. So just wanted to understand does this imply a pretty sharp correction as far as profitability is concerned? That's number one. Number two, can you -- new capacities coming up in the U.K. Can you just give us a status of that and lastly how your China distribution footprint is going to look? And what our targets are there?

[Chandrasekaran Ramakrishnan:]

In the same order that you asked the questions. I don't want to get further into pinpointing a number on the EBITDA or the cash flow negative, et cetera. I think what we intended was the general guidance. One can look at it in different ways and I don't want to get to the extent of putting a number in terms of our guidance. From a business -- for expectation point of view, we expect and I think it's only fair to share with you all, that there will be some negative trends, which have an effect on the EBITDA. We're lowering the EBITDA in '15-'16, all of which mostly you will be aware of. In any situation where the manufacturing get shifted from U.K. to JV company in China, EBITDA accounting will be different when you account for the China JV profitability. And the JV is also tracking its production in the greenfield plant. A complete new family of engines is starting now and getting built up. And because the crowded calendar that we have, there will be a launch and another related costs also for many of the products in the next year. Vijay, already in his opening comments, has talked about some of the performance in many of our -- in some of our global markets. I think it's a combination of all this, and I don't want to get beyond this, whether the EBITDA will be X percentage or Y percentage, what will be the extent of free cash flow negative if any. Our aim would be to ensure that we are able to generate cash flows to meet our expenditure, but it's only fair that we provide a warning for this shape of the underlying business factor that are expected for next year. I don't want to go beyond this in terms of giving a precise number, amount or quantifying. The second question was related to capacity. We have talked about this before. By end of March '16 -- March '16 fiscal year, the manufacturing capacity in U.K. will reach about 550,000 vehicles, around that level and we will have the China capacity at about 130,000, that will be our global capacity of the JLR cars. The third question was about the China distribution footprint. As I recall, we had about 160, 170 distribution points at this point of time. We expect it will cost about 200 plus by next financial year.

[Operator:]

Next question comes from the line of Govind Chellappa from Jefferies.

[Govindarajan Chellappa:]

I have 2 questions. Number one, you mentioned and you quantified the amount of write-offs on receivables in the current quarter. Could you also tell us what has been the delinquencies support to Tata Finance -- Tata Motor Finance? I think last year, it was little short of INR 1,000 crores. That's question number one. Second, just to refresh our memory and this question has remained relevant for a long time. What is your capacity across various product lines in India, M&HCV, LCVs and cars? And my third question is do we have any clarity on the new Bharat Stage norms?

[Chandrasekaran Ramakrishnan:]

Clarity on?

[Unknown Executive:]

Bharat Stage norms. Emission norms.

[Govindarajan Chellappa:]

Emission norms.

[Chandrasekaran Ramakrishnan:]

First, in terms of the provisions and write ups, both in terms of receivables, inventories and others in the quarter, it has been a little over INR 300 crores that includes a variety of 3, 4 items. As far as the delinquency and other support, the support to financiers, not only Tata Motor Finance but also other financiers, can be in the form of delinquency support. It can be in the form of interest. I've mentioned that we provide to the financiers for more attractive interest rates than what they would like to charge as far as the customers are concerned. So it can take in different forms. The delinquency support to Tata Motor Finance, which we had been providing for on a quarterly basis. Including that is the amount that I told you for the quarter, it's about INR 300 crores to INR 400 crores, more pronounced in this particular quarter in Q3, that has tended to make the comparisons somewhat difficult in this quarter. The second question was capacities in India. At the current level of operations, we are roughly operating at about -- it's difficult to put one magic number for capacity because for wide portfolio of products ranging from trucks to small commercial vehicles to cars and UVs. Overall, in the commercial vehicle business, if I can put an average number, we will be operating between 50% to 55% in terms of capacity utilization and about 30% in terms of passenger vehicle business. The last question was on the Bharat Stage norms. No, the position is not very clear at this point of time. We'll have to wait and see what happens.

[Govindarajan Chellappa:]

What proportion of your truck sales today is BS-IV?

[Chandrasekaran Ramakrishnan:]

I don't think we will be able to give you an offhand answer at this point of time. Maybe I can -- we can put it out on the website as a response to the question. So that everybody would be...

[Vijay Somaiya:]

Govind, on the Bharat Stage norms, what the government has said that the new fuel would only be available in late 2017.

[Chandrasekaran Ramakrishnan:]

Effectively, we'll have to wait and see.

[Vijay Somaiya:]

So this is the pronouncement from the government. So we'll have to wait and see. So it does look as if it is pushed out in time by 2 years.

[Chandrasekaran Ramakrishnan:]

The Bharat Stage IV being met also requires key change in the, if I remember, I think the sulphur content in the fuel that requires some major investments and modifications in the refining -- in the refining capacities in the refineries. So I'm not sure if we are able to give a definitive date. Right now, it is being talked about in terms of 2017. Even that, if I remember right from history, I think it's the shift by about almost couple of years from the position stated earlier. We have to wait and see how it's happening.

[Govindarajan Chellappa:]

If you could slip in a related question. There is also some talk that we'll go directly from BS-IV to BS-VI, if that is by 2020. If that were to happen, how prepared are we?

[Chandrasekaran Ramakrishnan:]

I need to pass that question at this point in time. Qualified enough to answer that but I owe you an answer.

[Operator:]

Your next question comes from the line of Sonal Gupta from UBS.

[Sonal Gupta:]

Just want to understand, I mean, has there been -- has there been a significant impact in this quarter of the -- I mean, the impact of Freelander runoff in this quarter? I mean, because your -- while your ASPs are improved and I guess, that's because of the FX being favorable this quarter, the raw material cost has not really dropped down. So if you could give some explanation as to what's keeping the raw material cost constant despite better ASPs?

[Chandrasekaran Ramakrishnan:]

You are right. Freelander has been a runout model. And typically, when a model runs out, you have to support it with a slightly higher variable marketing expense. So that is correct, what you're speaking about, Sonal.

[Sonal Gupta:]

But would you be able to quantify anything on the raw material cost side, what sort of cost?

[Chandrasekaran Ramakrishnan:]

No, I don't think, we'll be able to quantify, Sonal.

[Sonal Gupta:]

Okay. And the other things in terms of your EBITDA pressure point. You mentioned the new family of engines. So I mean, my sense would be that since you're moving it in-house, it should ideally be EBITDA accretive. How does it become EBITDA negative for you?

[Chandrasekaran Ramakrishnan:]

So we are talking about the launch costs, which are there. When you start a commercial production, the launch costs would be charged off to the P&L. I think what you are talking about is after the engine plant achieves the full ramp up. What you say is if you recollect what we had said earlier that while we will definitely save Forbes' profit margin on this, however, the investments are fairly high and the depreciation and interest charge would be on the higher side. So to start off the commercial production, there would be higher launch costs. But once you reach the ramp-up stage, it would be EBITDA accretive and [indiscernible] neutral.

[Sonal Gupta:]

So EBITDA accretive and EBIT neutral, right?

[Chandrasekaran Ramakrishnan:]

[indiscernible] neutral.

[Sonal Gupta:]

And just going back to the Freelander thing. Have you seen the most of the runoff thing in this quarter itself or do you still expect something in Q4?

[Chandrasekaran Ramakrishnan:]

I think we still expect something in Q4.

[Sonal Gupta:]

Okay. And the negative impact of FX heading this quarter is minus GBP 20 million. Is it?

[Vijay Somaiya:]

The realized hedges...

[Sonal Gupta:]

Above the EBIT deadline the realized hedges.

[Vijay Somaiya:]

Yes, please.

[Operator:]

Ladies and gentlemen, now it's my pleasure to hand the call flow back to Mr. Kapil Singh for the final remarks. Over to you, sir.

[Kapil Singh:]

Hi everyone, thanks for joining the call and thanks to the management of Tata Motors for taking this call and joining late in the day. We will close the call now. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect. Good day.