Auto major Tata Motors on Wednesday reported a 50% year-on-year drop in consolidated net profit at Rs 2,175 crore for the March quarter. Jaguar Land Rover (JLR) margins fell 200 basis points.
The fixed costs for Tata Motors' Jaguar Land Rover (JLR) production will have to be brought down, said PB Balaji, CFO of the company, adding that the auto major is trying to get its cost structure in place.
He said that the UK still remains a challenging market for JLR.
Q: I want to start with the commentary made at the conference call yesterday where you said the outlook for the market remains challenging, especially in key markets like UK and Europe – what is the plan with respect to volume growth will you at least do as well as you did in FY18, which is 6-6.5 percent for Jaguar Land Rover
A: As far as Jaguar Land Rover (JLR) is concerned, the UK remains a challenging market. We have called that out explicitly and at the same time you shouldn't forget the China market continues to do very well for us and rest of the world continues to do pretty well for us.
Europe from a situation of red we have moved it to amber because we are starting to see growth coming through. At the same time US continues to remain challenging from the point of view of its traditional cyclicality that is there.
As far as our growth plan, we called out in our investor deck, where we said new models will continue to come through well. Keep in mind that we launched five models last year and all of them will get their full year impact this year. So the product pipeline is coming through very strong and we are very excited with that. That for me is the starting point of growth and of course we need to be given our market shares, so definitely opportunities of growth will remain there.
Hence we have explicitly called out that we expect, as far as FY19 is concerned, both growth and profitability to be better than FY18.
Q: When you say better, give me some sort of hint? Will it be in high single digits, or will it be in double-digits in terms of volume growth?
A: We do not look at the individual number per se but the fact that we are growing is the key point and we have to be better than last year. We know what our capability – back in history, what are the possibility that we can deliver.
So we are quite confident with the product pipeline that we have and therefore we look forward to a very exciting 2019.
Q: You have given explicit guidance for the EBIT margins, you have said 4-7 percent for FY19 to FY21. I want to understand that given that the volume upside is capped because of challenging conditions, is there any major cost cutting programme that the company plans to do in order to achieve these margins?
A: More than a guidance, I would call this a plan that we are internally planning for and the reason we did that is that the people who are keen to understand, as you put out 8-10 percent guidance before how are we going to reach that 8-10 percent broad range we have indicated.
To adjust for the capitalisaton policy changes that we have done, 8-10 percent becomes to 7-9 percent that is 100 bps correction that is there. So we have said over the next three years we will improve gradually from where we are today, which we are not comfortable with what was there last year to 2 or 4-7 percent range and step in that direction and take it off from there.
To do so multiple levers are there. Innovation and growth is a multiple lever and we are not going to let that go and that is the reason we continue to invest. As far as other areas are concerned we will continue to drive improvements in contribution and margin and mix very key part of any portfolio.
And of course fixed cost if you look at the last 3 years performance on JLR, while we did better on most counts, we got almost 6 percent CAGR till FY17, the area where we lost out was operating leverage. This operating leverage is not just depreciation and amortisation coming down only because of that but also fixed cost, which is cost of vehicle what are the costs per vehicle made.
Those costs have increased compared to what they were before. So that is area we need to take charge of and bring it down, so that we can be able to drive operating leverage. You have seen that happen in Tata Motors story, where the standalone business has actually delivered tremendous operating leverage. So we would want to see how we can replicate parts of that in JLR as well.
Q: As we see more and more electric vehicles come on board – electrification of vehicles is generally a low margin business but you still have your longer-term margin guidance which was higher than the short-term guidance. You don’t see electrification impact your margin?
A: It is a mix of portfolios that you would have and in the peak of electrification, what are the percentage of portfolio likely to become electric, we need to think about. So, the mainstay will continue to remain the IC engines and plug-in hybrids, which are all extremely profitable businesses.
Land Rover is an extremely profitable business. I think we have to ensure that we are leveraging those core assets as we go forward and volume leverage. The biggest is thing is not contribution margin issue - JLR does not have a contribution margin issue which I have in the passenger vehicle business in India.
JLR has an operating leverage issue, which is an element of discipline, focus and cost control. If you get that right, then a 22 million pound business, with a 1.5 million pound profit, if you get your cost structures right, you will make money. So we are quite confident of getting our 4-7 percent, which is the reason we put it out there.
Q: It is good you mentioned that because if we look at the EBITDA margins of JLR, they have come up substantially to 10 percent by end of FY18, 4-5 years back you were doing 17-18 percent. So, is it safe to assume that because of all this cost cutting initiatives etc you will get back to the high teens?
A: That is the only way we will deliver 4-7 percent EBIT, so EBITDA has to improve by the same 300 odd basis points in this period back to where it is supposed to belong.
Q: Talking about the domestic business, the standalone business continues to under pressure, this time we have seen margins come to about 7.5 percent, even if you make the adjustments its about 8.5 percent, less than what you have done in the past. This despite the medium and heavy commercial vehicle segment being on an upcycle. So it purely the passenger vehicle segment which is becoming a drag and will that continue?
A: As far as the domestic business is concerned, this year we have turned PBT positive if you adjust for the one-off that we have taken. For the quarter we are screamingly PBT positive.
We are cash positive after five years, which means you should be clear that it is only one-off impairment charge that is making the number because there is real cash coming through. This quarter we made Rs 2000 crore of cash. So everything is going right as far as that business is concerned.
If I split the problem into two- there is a commercial vehicle where we are now really starting to put gaps between us and competition because earlier part of the year we are more into filling our portfolio gaps which we had a lot. Now we are starting to get that piece right.
There is one other thing that people tell me that there is huge discounting happening in the M&HCV, we look at it smile and say yes, but my variable margin, marketing expenses is significantly lower this year compared to last year. So where is the discounting that people are talking about, I don’t get it.
Q: In fact your peers like Ashok Leyland have talked about discounting going down in this quarter versus last quarter?
A: For me discounting is lower this year, my VME is lower this year in M&HCV compared to last year. So it can be as categorical as that. Therefore margin improvement in CV is significant as far as this year is concerned once turnaround got called off.
At the same time passenger vehicle is now starting to sequentially improve its contribution margins because better mixes are coming into the market. Cars are better, better margins and well received by consumers, which is the reason we have now picked up share two years in a row and I have exited in 6.8 share. Definitely not where we are satisfied with both in CV and in PV shares have to be much higher than where they are today.
Q: So what are you working with as an internal target for passenger market?
A: The vision that we have put out that we should be a very strong number 3 player, which I think is within the realm of achievability. So let us first get to that because before you summit a mountain you have to get to hit base camp.
So base camp for passenger vehicle is let us get to strong number three player and in number 3 player we have to also start making profits because it is a business that is not yet profitable but we are very clear the reason why we have called it win sustainably is that we have to get to profitability as well in a sensible timeframe.
Q: So by when do you think you could get to profitability, any timeline?
A: As soon as possible. It starts with first switching on to your mind that this is the way we want to operate then timing just happens. The fact that we called out turnaround 1, which was last year, I think nobody expected us to turnaround this fast at this intensity, which we have done. We have picked up share, we have picked up profitability, and we have delivered cash. I think that for me a call for a turnaround. It’s a clear turnaround that is there.
We have picked up share both in CV and in PV and these are multiyear share losses that have been stemmed and turned around. Thereafter we have delivered cash, we have delivered profit. We have got very good story there. But we are not going to be satisfied with this, we want to embed this deep into the organization and give a purpose for each of these businesses. So CV is very clear – win decisively. PV is very clear win sustainably and the third ambit of turnaround 2 is embed turnaround thinking in everything we do in an organization.
Q: What part of the upcycle are in in the commercial vehicle sector?
A: We believe we have started as far as the upcycle is concerned this year and we expect to see that go forward given the investment that is happening in infrastructure, the GDP growth that we see, and loading restriction that we see.
Q: So there was a 20 percent plus volume growth last year for MHCVs, is that something you think you could do this year as well?
A: I think we are happy with the kind of demand that is currently underway. If I look at what is the fly in the ointment that is likely, there are two things that we look at and say that is a bit worrying. One, is the price of fuel and that is increasing and therefore inflation coming through with that and two, because of that interest rate because the automobile industry is highly interest sensitive.
Therefore, it really explodes, a little bit interest rate rises we are not too worried about but if interest rates were to suddenly take off for whatever reason be it geopolitical, trade deficit whatever could be the reason where there is significant interest rate corrections that could be a cause for concern.
However, I don’t want to sound alarmist having seen the demand situation, I think we are more on the optimistic side at this point in time.
Q: But you may not do as well in FY19 as you did in FY18 in the CV space?
A: I think the fact that we have called out win decisively means we also have to pick up share, there is growth and share and cost reductions. So finally, at the end of the day shareholders really interested in understanding where is my profits in all this. Therefore we are very clear that profitability has to improve independent of any of these things happening.
Q: Coming back to the bigger pain point which is JLR, you have changed your capitalization policy. I want to understand where this came from because a lot of your global peers have like BMW etc have moved closer to 30 percent. Is that the plan as well?
A: This change in capitalization policy, we are comfortable with where we are today. We have spent almost 6 months to grill it into a level of detail that we are comfortable with and therefore we have introduced a new gate for financial affordability. While the engineering gateways can be there, there is a clear financial gateway that has been introduced in the process to say that we may have great business cases but now let us figure out which of this can we afford.
Which means there is now choice being made across business cases, which we have never done before and therefore by introducing this we believe that we will be able to get capital envelope saying that this is the total envelop of capex that we would like to work under, may the best cases win.
It goes with the basic like Professor Prahlad’s philosophy that ambition needs to be greater than affordability. So we are fixing the affordability and now let us figure out the best ambition that we can have within that, which will help everybody think creatively, everybody to get better solutions and that is exactly the philosophy for JLR, same in TML as well. Don’t forget that music is just seven notes, it is highly disciplined – you get that you get best creativity.
Q: I am glad you bringing a lot of discipline on board especially these hard decisions you are taking on accounting policies etc. I notice that a lot of that has happened ones the new chairman has come on board. He seems to be taking a lot of interest in the decisions, what is his vision in terms of the long-term plans for JLR – any plans to hive off the business, people have been talking about an IPO. If you do get a strategic investor, do you plan to get them on board?
A: Independent of whatever be the capital structure we want to operate with for JLR, I think that for me is the least of the issues we have.
I think the starting point that we have put out explicitly is that that there six cylinders in the Tata motors engine – there is JLR, there is CJLR, there is CV, there is PV, there is Tata Motors Finance and the sixth is all other subsidiaries and my net debt situation. These six cylinders on their own need to be consistent, competitive and cash accretive for TML as a group to really fly.
That is what is the strategy from the Chairman and therefore he is taking enormous interest as far as TML is concerned, which we are very thankful for, lot of guidance and that is also getting us very fast in terms of decision making. Look at the number of decisions we have put through in a very short period of time.
Starting from the first turnaround, then we moved on to changing accounting policy, we then moved on to deciding on our subsidiaries, what decisions to be take, we have put an ESOP for our employees in Tata Motors. Now this kind of speed of decision making, I am sure you would never have seen us operate at this speed before but that is exactly what we are able to do because we are now pulling together one Tata Motors Group.
Q: That is very interesting because at the end of the day it boils down to being free cash flow positive and that is what shareholders care about the most and we have seen free cash flow (FCF) negative for JLR for a very long time, now you have a higher capex as well by when do you think the company could at least get back on track to become free cash flow positive?
A: I think sometimes the memory fails us. For JLR the ten year story is a stupendous story, in the recent past they have become free cash flow negative and that is fundamentally coming out of growth not firing to the extent we want to and that is also coming from their home market UK being in trouble, so it is a very specific issue that we are dealing with.
Se are not in a crisis situation. The question for us is that how are we going to ensure that the cash flow starts getting positive again while we are managing the changes in the disruption coming from all the ACES disruption – autonomous, connected, electric, shared that is the exam question. I will give you a simple example of how we are thinking creatively about it.
Take a look at the I PACE that is being launched, which is clearly the first premium SUV battery electric that is there in the market today and something where there reviews are rave reviews but we did not stop with that, that same I PACE is now being tied-up with Waymo for the autonomous vehicle.
People have been so concerned about how we are going to manage this disruption. This is done on a third party manufacturing, which is shared, we have not spent monies on setting up capex and then we have now ensured that we have partnered with world’s best when it comes to autonomous, who has got 600,000 autonomous vehicles running around.
These guys have put an order of 20000 vehicles on us and with 1 billion pound payment, which means the costs are already amortized on that once you get the payments going.
More importantly, the technology is proven and we now understand how to work with that technology. Therefore, we have moved multiple steps with just one statement and we haven’t busted the bank.
Therefore, that is exactly how when a bunch of clever people when they joint together – the guys who have joined JLR are guys who are passionate about auto.
Q: We started the discussion with the kind of challenging market environment there is, but in your interactions with your teams, do you get a sense that this market environment – that these troubled times could last all through FY19 or if there are any signs of pickup apart from Europe?
A: I think there is one market we are concerned about is UK. It would be fair to say that in UK how BREXIT will play out, not necessarily our portfolio but I am getting more reassured about UK because our portfolio is filling up with plug-in-hybrids, as Range Rover sports models kick in there, we will get out of it and that is the reason we have said gradual improvement in growth.
But BREXIT is other one in UK we need to be worried about in terms of how is it going to play out, what are the contours of that whole thing needs to be there. A hard BREXIT is going to be very painful for everybody, a soft BREXIT we are in business, no problem at all. At the same time there are opportunities China – reduction in customs duty is an interesting opportunity.
Q: I wanted to talk about that as well because in your call you all refused to mention what kind of impact that would have. Sentiment wise it is positive but any more colour on that?
A: I think it is too early because it just came 2-3 days back and we are aware that this is going to happen but what are the reaction, teams are obviously working at a feverish pitch to get that thing right, it starts from July 1. Therefore, you can give us little bit of time, the minute we are ready with it, we will share.
Q: Eventual plans for JLR – once again not plans of hiving off, IPO anything that is in the talks?
A: Absolutely nothing at this point in time.