Tata Motors Limited (NYSE:TTM) Q2 2023 Earnings Conference Call November 9, 2022 8:00 AM ET
Company Participants
P.B. Balaji – Group CFO
Adrian Mardell – CFO, Jaguar Land Rover
Girish Wagh – Executive Director
Shailesh Chandra – Tata Motors’ MD, Tata Motors Passenger Vehicles and Tata Passenger Electric Mobility Limited
Thierry Bollore – CEO, Jaguar Land Rover
Conference Call Participants
Operator
Welcome to the Tata Motors Q2 FY ‘23 Earnings Conference Call. I’m joined today by Mr. Thierry Bollore, CEO, Jaguar Land Rover; Mr. P.B. Balaji, Group CFO, Tata Motors; Mr. Girish Wagh, Executive Director, Tata Motors; Mr. Shailesh Chandra, Tata Motors’ MD, Tata Motors Passenger Vehicles and Tata Passenger Electric Mobility Limited; Mr. Adrian Mardell, CFO, Jaguar Land Rover and my colleagues from the Investor Relations Team.
Today, we plan to walk you through the earnings presentation followed by Q&A. As a reminder, all participant lines will be in listen-only mode. And we will be taking questions via the team’s platform, which is already open for you to submit your questions. You are requested to mention your name and the name of your organization while submitting the questions.
I now hand over to Balaji to begin the presentation.
P.B. Balaji
Thank you. Good day, everybody. Thanks for taking the time to join this session. As is customary, we’ll try and keep a fair clip in terms of going through the slides and pointing out the key highlights, and then look forward to taking on the Q&A at the subsequent stage. Next question – next slide, please.
This is the standard Safe Harbor statement. The only call out I would say is the segments – automotive segment just to reiterate, we have done this no change from last time, but just to confirm. When you say Tata commercial vehicles is all things commercial vehicles wherever Tata branded commercial vehicles around, similarly passenger vehicles all Tata branded passenger vehicles, Jaguar Land Rover and vehicle financing as a four automotive verticals and, of course, others this is the remaining segments. So these are the segments, no change there. Next slide.
Again, an intense quarter this year. In India, it is – the commercial vehicles space saw a flurry of activity with multiple launches in the medium heavy’s light commercial and a full range of pickups that were launched. In the passenger vehicle space, the big one was the Tiago EV launched which was a blockbuster opening up 10,000 vehicles, which I’m sure Shailesh will talk about later.
On the JLR side, the key move was the stabilization and the ramping up of production of Range Rover and Range Rover Sports that we are committed to. The order bank, of course, grew to a record 205,000 vehicles. And the chip supplies continue to create trouble for us. But as we start signing more and more partnership agreements, we do expect to see this easing and I’m sure Adrian is going to cover that subsequently. Next slide, please.
Before I get started our key corporate action that was announced today, Tata Motors intends to voluntarily deal its American Depository Receipts shares from the New York Stock Exchange, as the objectives with which these were originally listed in 2004 are no longer relevant. There’s a consistent drop in the participation in the ADS program, and it’s now less than 5% of the ordinary shares.
And, we will file for a voluntary delisting of the ADS in Jan 2023, and also terminate our depository program that we have with Citibank, N.A. And once the ADS have been delisted from NYSE, there’ll be no over-the-counter market trading of the ADS in the US due to – regulatory restrictions we have in India under the Indian law, and therefore, the holders will need to convert their ADS into underlying ordinary shares.
But you have time till July 2023 to make that happen. And we expect to file for deregistration with the SEC in Jan 2024 a full 12-month after the delisting for ceasing our US reporting obligations. Obviously this is an – the whole process is being done with an aim to simplify our financial reporting and also reduce the administrative burden and there’s no cash outflow for TML due to this. Next slide, please.
I’m happy to take any questions that you may have on this subsequently. And an overall revenue we grew at about 29% with the global wholesale is going up 33% and profit before tax is a loss of INR 1,800 crores. EBITDA went up 130 bps, EBIT was 390 bps, and we had a free cash flow breakeven about INR 1,000 crores in the quarter. And the volume recovery was – and is fundamentally based on a better mix and lower breakevens even though volumes were lower than planned, particularly at JLR. Next slide, please.
Where this growth of 29% come from? 28% came from volume and mix. And reassuringly. A good 8% came from price, which means, we are able to take our prices in line with inflation that is there in the market which is also reflected in the results. Translation we lost a fair bit with as the Pound Sterling depreciated basically the Indian Rupee.
And from a profitability perspective, all businesses came to improve the profits, we had a challenge in Tata Motors Finance, which I’ll talk about later. And the net debt came in at INR 59,900 crores. The good part is the external debt is now down to INR 32,500 crores, almost INR 20,000 crores is because of working capital, mostly in JLR, a little bit in Tata Motors as well, which we intend to sort out as the growth comes back into the business. So, that’s overall from me. Next slide, handing it over to Adrian for talking about JLR. Adrian, over to you.
Adrian Mardell
Yeah. Many thanks, Balaji. Next slide, if you would please. Okay, so these are our KPIs. Top left, you can see retails did start to improve quarter-over-quarter of 12%. Not yet back to last year’s levels. But I’ll share you the inventory build later in the presentation. So we’re confident we’re going to get there in the second half of the year.
Going down the page, double-digit EBITDA for the first time in a few quarters. And again, we’re confident that’s going to continue going forward. The revenue are dramatic year-over-year increase of 36%, even though volumes were only up 17%. So what you’re seeing there is, both an increase in volume and a substantial increase in mix of volume as a result of our Range Rover and Range Rover Sport vehicles now being presented to the marketplace, that’s driven an EBIT positive in the quarter for the first time in those comparative two quarters, substantial improvement of more than 5 percentage points.
We were loss making, obviously, all of that was non-EBIT and we’ll take you through the implications of exchange on our numbers later. And we were close to cash breakeven minus GBP 15 million, substantially better than the comparative quarters with just 75,000 wholesales and all of that cash loss, and more was actually working capital negative. So we’ve taken our breakeven underlying point down to 70,000 units again, which was the level we’re at, at the end of last year that we didn’t think we will be able to get back to. So there is a lot of positive information underlying within this data set. Next slide, please.
Okay, the only things I really haven’t called out there is the order book, the order book is still very strong more than 200,000 units. I’ll take you through the details of that. The breakthrough on Range Rover and Range Rover Sport production. Now at the end of September up to 2,000 units a week.
Let me remind you, when I talked to you in July, I was referencing 1,000 units per week, that’s a substantial increase there, a refocus program continues to be value-generative, GBP 300 million in the quarter, GBP 550 million in the first half of the year, and their liquidity is strong GBP 3.7 billion cash plus the revolving credit facility GBP 5.2 billion in total. Next slide please.
Okay, so these are the volume positions I’ve talked to the top right-hand side the increases in the retails quarter-over-quarter. And not surprisingly, with those Range Rovers now coming through all of that increase, most of it is actually in the Range Rover brand. From a wholesale perspective, we did 75,000 wholesales a lot lower than the 90,000 we were signaling in July, we were decommitted on semiconductors in September at an impact both on September – on September production.
And when actually flow into the September and the October wholesale basis that decommitment is fixed. A long-term supply agreement is now in place with that source. So we do not expect further decommitments from that source going forward. And again, the wholesale numbers you expect given the production increases on Range Rover and Range Rover Sport is all in our very rich Range Rover brand. Next slide, please.
This is the same data, but by region and as you know us while enough now, a lot of our Range Rovers are sold in North America and China. Therefore, it’s not – surprising and corroborated data that the big increases quarter-over-quarter are in those two regions in the retailers and even more so in wholesales, of course, because our units flow from production to wholesale before retail.
So again, good corroborative information of the trends to come increasing those new Range Rover products. Electrification is stable at 65%, stable on BEV and PHEV at 11%. We need more supply, particularly of those PHEV units, will actually come on board as we go through the next several quarters. Next page, please.
Okay, so our profit bridge, our profit walk versus last year. I mentioned a few things here. I mentioned them, because they’re important to this quarter. But they’re also important to the trends that you’re going to see in future quarters. So you will see volumes at a higher level that was worth GBP 120 million versus last year, you will see a significant improvement in mix, just with the value we actually fetched the markets in Q2 that was GBP 300 million higher than last year.
Emissions was a last year credit that not repeated this year, not a negative trend this year. Pricing now those vehicles are coming to the marketplace and VME at very low levels will both continue into the second half of the year. And obviously they’re intended to offset the inflationary costs you see there in material which we suffered in the quarter versus last year. I have a slide on that later. So we’ll hold those comments till then. And the fixed costs are growing, but they’re growing from historical lows and this is still significantly lower than three years ago, they will lift a little bit as we go forward.
Because we do now want to begin to accelerate our transformation programs in commercial and digital. And obviously, we’re now scaling up our product engineering programs. So you’ll see these numbers continue going forward, the adverse versus last year, but still at historical lows, and I will talk about exchange on the next page. Very complicated exchange at the moment. So we thought we’d take the opportunity to lay it out for you and hopefully kill all the questions you may have around it.
First big point our operation exchange is very positive. It will be. We’re predominantly a UK-based manufacturer, exporting 80% of those vehicles. And obviously, for any exporter, if your local currency for a sterling is at a low value, you do very well. This is a good operational model for us on exchange. Of course, you also know we protect ourself a variability in downside risk on exchange, and therefore a lot of that protection is coming towards negative versus a weak sterling.
Most of our dollar contracts were in around $1.30. And this will be with us for the next four quarters to five quarters. And then there was a big movement against sterling in the quarter. So you see that within the revaluation it totals GBP 100 million in total versus last year, the dollar effectively moved from 121 million down to 111 million. We have a lot of liabilities on our balance sheet for dollar-denominated. And that’s what you’re seeing within here. But it’s a point-to-point adjustment, reflecting a very weak sterling at the end of September.
I think the bottom left is really important. It gives you the – what happens next, we have GBP 20 billion worth of hedging contracts you see there, we’ve shown those same three points, GBP 20.1 billion at the end of September. And if we were to strike those versus the GBP 111 million, at the end of September, there’ll be GBP 2 billion of losses to come through.
Look at the memo below that shifted with sterling appreciation of just GBP 0.04 in October had dropped from GBP 2 billion to GBP 1.4 billion. And let me remind you again, against the top left, our operational exchange will be bigger than our losses going through our income statement. And this is the theme that will continue with us over the next several quarters if we stay within this 110 to 115 dollar-sterling window which we seem to be into at the moment. Next slide if you would, please.
Okay, so this is the cash position, we were cash negative of GBP 15 million. But just take a look at the working capital it was GBP 124 million of the GBP 15 million. And therefore, again, we were underlying cash positive on just 75,000 units with an 18% MLA Range Rover, Range Rover Sport mix, which will grow going forward, of course.
Effectively, we paid for more units in the quarter than we wholesaled to the market, our wholesale pipelines are starting to lift, which is a signal actually of a better – a better supply flow. Just look at the brown box there. And working capital negative over the last six quarters has been more than GBP 2 billion now. As our volume start to increase and our mixes improve, that will slowly start to unwind the other way. So we are confident we’re at the low point on working capital and that will build back over the next six quarters. Next slide, please.
So breakeven. Look, we’ve taken the breakeven down to historical lows again, in part, because we’ve been tough on expenditure, even though we’ve allowed some to grow, in part, of course, because volumes are bigger. Mostly because the mix is turning back to a more normal level of mix, we would actually expect it’s getting back to mixes we would have had in Q3 last year, and that will improve in the second half of the year. We do expect expenditure to increase, because we do want to continue with our change programs through to our reimagine strategy, which you’re very clear about I’m sure.
But the mix will help her offsets the breakeven point to about 300,000 units four years. We feel we’re in a really good position in terms of the underlying structure of this organization, and the resupply and the improving mix will both move in our favor as we go forward over the next several quarters. Next slide, please.
So this is investment, and investment was higher in Q2 than Q1. But still Just GBP 526 million. Few things to note, engineering investment is increasing as we’re now bringing in more engineers in place to move to our electrified architectures that will continue over the next several quarters. We’re now beginning to capitalize more of those engineers, because we’ve triggered a maturation and our architectures, which enables us to do so in line with our accounting policy, which we’ve taken it previously.
Overall, we’re at 40% engineering capitalization. And let me remind you, we expect to be between 50% and 60% at some point going forward over the next cycle, again, I’m referencing three to four quarters often over that period, you’ll see capitalization increase for those levels again. Next slide, if you would, please.
Okay, business update. Let’s talk semiconductors. Next slide. There we go. Look, we’re now in a position to do the first phase of what other OEMs are doing. We’ve got our new nameplates out there, our Range Rovers and Range Rover Sports, they are a valuable assets, most valuable assets and we’re in a – we have a position now we can start putting those chips into our most valuable assets. All other OEMs have been doing that over the last 12 months, we’ve been in project changeover over the last 12 months.
So it’s not surprising that mix is improving in our favor and that will continue. So phase 1 of the management of these challenges, we’re now in a position to be able to do. Phase two we’ve been working on for a long time actually that’s engaging directly with the chip manufacturers putting in place long-term supply agreements with them. We’ve again had breakthroughs over the last three months, including with the chip supplier, which decommitted us in September. And we’re confident from those supply sources into calendar year ‘23 on Quarter 4 this year for ourselves, and we continue to work to close out the residual items we have.
We do have residual items left to close out, there is still a possibility we’ll be knocked off of course. But month – week by month – month-by-month, we are starting to put in place a more robust, a more fit-for-purpose supply chain and agreements with our sources. So again, we’re heading in a good direction slower than we want to be, slower than others, but we’re heading in a good direction here. Next slide, please.
And this is really, really good, right. So this is the new Range Rover and Range Rover Sport. It’s weekly production. I’ve given you the trend over the last five months. June was the last time we talked we had the June data I referenced 1,000 units. You can see we improved as we went through the summer period.
But the real breakthroughs were from September and that’s continued into October. This is weekly data. So we’re now building and shipping more than 2,000 cars a week, which means, within a quarter MLA will soon once these cars get to their destinations in China and North America, in particular, we will soon be posting 30,000 wholesales within a quarter into Quarter 4, Quarter 3, some of those cars will be on water.
But that will dramatically shift the mix of these units from sub 10% earlier in the year to 18% in Quarter 2 towards 30% and beyond for Quarter 3, Quarter 4. So that page on that profit bridge on both volume and mix will continue to be strongly positive as we go forward over the next several quarters. A really, really big breakthrough for us and my compliments to the team who have worked tirelessly for the last nine months to get us to this position. Next slide, please.
And this is our order book. And, of course, you’ll see straight away that the breakthrough in supply is now starting to attack where our orders are. So our very patient client who’ve been waiting for these new vehicles for a long time will soon start to receive handover of said vehicles, it’s grown over the quarter to 205,000 units. It’s starting to taper off as our fulfilled orders, our handovers to customers are increasing.
And our new orders net of cancellations you ask cancellations is within that data there are just about the 90,000 level, we really haven’t marketed these cars or any of our vehicles over the last 12 months, because of supply. When supply starts to come through, we have several tools and several weapons to drive up that new order intake, which we will actually do. But obviously, there’ve been orders in place for longer than our clients wish for has been at consideration, which is why we’ve held off on those marketing campaigns over the last several quarters. This is starting to feel better balanced and healthier. And I don’t expect all the total is to explode going forward like they have over the last five quarters. Next slide, please.
Okay, so health of our pipeline expressed with the finished vehicles, two datasets here, the blue black line, the one at the top, that’s retailer inventory, that’s vehicles where their retailers are waiting customer pickup. You can see the light blue bar at the top, that’s a normal level of activity. So in normal times, that blue line should be within that top block. It was until May ‘21. It’s fallen away dramatically.
But the important point is, it steadily lifting from about February, it’s steadily lifting to the point where we had 44,000 vehicles at dealers at the end of September awaiting customer pickup, these are sold cars are waiting for people to handover, which is why our retail levels as I mentioned earlier, will now start to grow. Our own wholesale stock, the stock that we still own, that’s in transit to dealers is actually in the gray line.
And you can see that started to lift and you can see in September, it fell away dramatically. That was the supply decommitment we’ve mentioned already, which did impact dramatically September production also impacted September wholesales, which is why we missed September and October wholesales. But we’re now back on track. Our production levels are now working to the level we expected. And again, we do expect the gray line to be back in that gray section as we go through Quarter 3 and Quarter 4. So we’re getting healthier. I’ve spent time on this so it’s clear that our data is starting to turn slower than we want, but in several corroborative data points. Next slide, please.
Okay, so inflation obviously is the other big thing. The Big Three, supply, MLA and inflation. MLA is in a really nice place, the other two still work in progress. It’s broadly what we anticipated at the start of the year, we referenced up to GBP 1 billion. This is first half data, GBP 430 million. And, of course, our refocus program is there not only to offset inflation, but to generate bottom line value, it’s doing that. It generated GBP 550 million in the first half of the year.
So we’re positive cash GBP 120 million. It’s mostly doing that in the commercial space, pricing, lower variable marketing, lower wait times and therefore, lower discounts going forward. We’ll also start to see the Agile transformation come through with lower headcount. And people costs and investment is lower in the first half of the year. How do I expect this to shape? I expect inflation to be with this, we know it’s going to be bigger and deeper than we thought six months ago.
So this level of inflation feels about right in the second half of the year. For us. I expect refocus to continue at this level. We are reconfirming GBP 1 billion plus four year, but I expect the market performance to grow the cost labor to be about the same and the investment to fall away as we start to increase our product engineering investments over the second half of the year. Next slide, please. I think this is my final one. Next one, thank you.
The first half metrics on the left hand side. Look, what do we expect in the second half of the year? We expect our wholesales, our revenue based volumes to be up about 10%. More in Q3 than Q4 – excuse me than Q3 as supplies coming through and as – MLA is still building, they had those vehicles have to get to their revenue recognition points, which is you know, some of those points of six weeks after build.
So that will increase as we progressively go through month-by-month. Revenue will be bigger than GBP 10 billion, where we see today, it’s closer to GBP 11 billion. EBIT margin will be positive in the second half in both quarters, we anticipate. I’ve mentioned investment increases for the full year guidance around GBP 2.3 billion. And you know what, we can get back the cash we didn’t get in the first half of the year.
We know it’s all working capital, we think our trend of volumes is positive, and therefore, working capital will be positive and we’ve demonstrated for the last four quarters, we’re underlying cash positive anyway. So we believe we can get back the cash we lost in the first half of the year, breakeven we’re writing, but if you know us well enough, we want to do better than that.
Key priorities. Of course, it’s all about chips, chips and chips. It’s hard work for us right. Now we were behind the clock. It’s been like turning up to the buffet two weeks late, right, some of the stuff left and what you want, but we’re breaking through this. We’re working tirelessly and we’re working in the right direction. Continue on new Range Rover, Range Rover Sport, which we’re doing, volumes I’ve mentioned, refocus I’ve mentioned and also our intent to be positive, positive on the KPIs EBIT, and cash flow. I think I’m back to you, Balaji.
P.B. Balaji
Thank you. Thank you, Adrian. Moving quickly on to commercial vehicles. A change here, where we are moving to the registration VAHAN market shares in our reporting. And the other thing you’ll also notice in this is our traditionally we used to refer our internal group of metrics are on medium and heavy commercial vehicles, intermediate light, small commercial vehicles and pickups and then commercial passenger vehicle. That’s how it used to be.
Since this is now we would love to ensure that it is as transparent and as easily pick up or you can pick it up from the from the VAHAN portal yourself. And therefore we are reporting the VAHAN numbers itself, your assets, whereas even in the splits that are there. So here we did the – from a market share perspective, compared to 44.7%. We lost about 150 bps this year so far.
And we are definitely looking at what is the right way to win in this marketplace in terms of shifting to a demand pull business model. And I’m sure, Girish is going to talk more about it in his section as well. And the focus is on getting back to a double-digit EBITDA and profitable growth as soon as possible. And you should see that playing out in the coming quarters. Next slide, please.
From our overall mix perspective, the only call out here, I would say is, draw your attention to the CNG section, where in ILCV section, thanks to the way the CNG prices are starting to move up and the gap between diesel and CNG has come off quite sharply. And you don’t see that in the salient therefore of CNG the overall segment actually come off quite sharply. We believe this is going to be temporary. And once this thing – the international geopolitical situation stabilizes the growth in CNG should be coming back again. Next slide, please.
Overall numbers wise, year-on-year growth of 35%, PBT positive at INR 300 crores, EBITDA year-on-year is 180 bps, but I would draw your attention to the sequential drop that you see this is basically coming out of our residual commodity inflation. This is the last of the price increases as we closed the contracts which we went through.
So we do see reductions coming through from Q3 onwards. And that’s already evident in our numbers from September-October as we see. So this is what you see as a number there and EBIT number of course 260 bps improvement and the year – quarter-on-quarter is more linked to the same number you saw on the EBITDA. Next slide, please.
Shape of the way the drivers came from, you do see volume mix, I draw your attention to the realizations starting to now inch up above the variable cost increases. So we are seeing numbers coming in. And this is on year-on-year basis.
Therefore, the increase you see and what is also from a commodity perspective, we did see a few challenges, particularly on the ForEx side where the international business significantly coming down because of the global situation. We had to take out a few covers, cancel a few covers, because the volumes are not supporting the covers there that’s a lot of what you see there. Next slide, please.
Girish, over to you.
Girish Wagh
Yeah. Thank you, Balaji. So I think Q2 had a healthy growth of around 40% over the Q2 of previous year, out of the Q2 of previous year was also COVID infected and I think from Q3 onwards with the improvement in the base, we will see normalization of the growth rates to a lower level.
As Balaji spoke the EBIT margin was impacted due to the residual impact of commodities, which was to the extent of almost 200 bps and also lower export mix, we were able to offset it partly with improved pricing, and also some cost reduction actions. We see a consistent growth in our spares and service penetration, which is a key focus area for us. And the non-vehicle business revenue grew by almost 50% for the entire first half as compared to the H1 of last year.
Balaji spoke about CNG salience coming down, and it’s almost down to now 17% and 15% in ILCV and SCV, respectively, from a level of almost 45% and 18% in the same quarter last year. And this is because the difference between diesel and CNG price which used to be almost INR 44, INR 45 has come down to now INR 15.
Within the bright spots, I think, of course, I think the strong industry growth, especially led by M&HCV, of course, has a base effect of the last year. And the good thing is the passenger vehicles, the buses have also come back pretty strong with good demand in school buses, employee transportation and there’s also some demand coming in from mixed use now.
I think with our consistent focus on ETL communication, as well as digital for lead generation, I think we see the consistent we had in the Net Promoter Score, as also top of the mind, brand awareness and consideration by almost 100, 200 and 300 bps, respectively. And they are now at the highest ever level.
So I think our strategy of therefore, increasing the brand salience is working in the right direction, which is going to support our retail acceleration initiative. We also strengthen our product player with launch of more than 30 new products and 70 variants. And within that, I think in Quarter 2, we did launch our new range of pickups as also radio smart drugs, including some of the first in the industry safety features.
The semiconductor situation has eased further, although it remains on our radar. And in addition to that, we are also keeping a track of the new semiconductors which will get introduced in the vehicle when we migrate to BSVI phase 2 as also saw the electric vehicles there we are going to ramp up the production.
Going ahead, clearly the focus will be on retail acceleration and track the VAHAN share which will also therefore help us to maintain the inventories at healthy level within the system, as we gear up for the BSVI ways to transition. Strong focus on margin improvement will continue through sustained market operating price increases. So I think what we’ve been doing is, reducing the discount and increasing the market operating price and not touching the max retail price, which is there.
And in addition to that, I think we also had a very good first half in terms of cost reduction, almost the best performance ever on cost reduction. We will continue to engage with the key financials as also the other stakeholders, especially with the kind of MOP correction that we’re taking. And also with the rising interest rate need to ensure that we provide all the right solutions for our customers, both retail as well as the key accounts. Ready – readiness for our BSVI stage 2 that is real world driving emissions is absolutely key and a lot of focus within the organization and we remain on track for this transition from April ‘23.
As Balaji mentioned you know the international markets, I think the total industry volume has declined sharply. And I think our focus has been clear on maintaining market shares, margins as well as the channel head. I think within this, we have seen a sharp decline in Sri Lanka followed by Nipah and even Bangladesh and also Sub Saharan Africa has declined by around 10%. Next.
Coming to our future businesses update. On the electric mobility, I think we have been able to complete the in-market trials of ES electric vehicle with our leading e-commerce customers at two locations in the country. I think the product has delivered very well in terms of range and the load it can carry, and seems to have a significant competitive advantage over the current solutions.
I think we should be starting actual deliveries within this quarter. We are also gearing up not just operations, but also supply chain for the new set of orders that we have on electric buses also, this is – I’m referring to the CESL phase one tender, which we had won for around 3,600 numbers is a – there’s a bit of a change in that likely to happen, but otherwise, we are gearing up for start off supply of these buses from Q1 of next year.
In terms of our Smart City Mobility Solutions. In the last quarter, we completed delivery of 100 more electric buses to Delhi Transport Corporation. And with this now, the total E-Bus fleet has covered more than 51 million kilometers cumulative. We – as I said, we received a LOA, Letter of Acceptance from – for 3,600 buses from Delhi, Calcutta and Bangalore as a part of the Phase 1 tender.
The Calcutta one is being reviewed in light of the recent court order which has come in this regard. In addition to this, we – there was a new tender which was quoted by Jammu and Kashmir for 200 E-Buses for own and operate model, which we have won and even this buses – delivery of these buses will start during the next year.
So we have a healthy order pipeline, not just from the tenders from the government, but also from private sector, especially for employee transportation incorporates. I think amongst the fleet, we have been able to deliver more than 96% uptime across the buses which is better than what we have committed in the contracts. The total revenue from this business in H1 has now – crossed the INR 200 crores. So that’s where we are in terms of revenue from this new business line.
On digital front, I think fleet edge continues to do pretty well. Now we have more than 290,000 trucks – connected trucks on the road. And within that you’ve seen more than almost 80% active users now with good usage during the day. During the last quarter, we launched the Minimum Viable Product-2 on Fleet edge, which includes a lot of new features and reports for the customers and the fleet owners, as well as their workshop managers. And they see a lot of value coming in from these reports and insight, which will help them to improve their total cost of operation.
Lastly, E-dukaan, which is our online spare parts marketplace has been doing pretty well. In fact, in H1, the revenue has grown three times from what we had achieved in H1 of FY ‘22. So I think we continue to build the backend, and then have more and more customers coming on – onto this app, which will help us to grow this revenue at similar rate. So that’s about CV. Back to you, Balaji.
P.B. Balaji
Thanks, Girish. Moving on to passenger vehicles, pretty strong quarter coming through, 57% retail growth and domestic market share steady at 14% and 8% EV penetration, 10% CNG penetration. Those are the key highlights. Next slide.
EV side, I think the first the strongest quarter that we have had, we’re now almost 88% market share. And more than that the penetration and are continuing to increase charging infra has continued to increase. So we do expect to see this continuing to drive penetration up. Next slide.
On the financials, 71% revenue growth, PBT breakeven again, and EBITDA was down 70 bps, but a lot of are the same two reasons here on a sequential drop. One is the residual commodity inflation there. And the other was a one-off that was taken in this quarter which will correct in the subsequent quarters. So no major concern there, we’ll continue to keep this profitability improving. EBIT of 200 bps improvement.
Let me hand it over to Shailesh for on the financial this is what I just referred to, I think on a year-on-year basis, volume realizations continuing to increase. There’s still scope for pricing, we just put through a pricing in the first of November. And, of course, from an overall perspective, the one that is – that I will want to draw your attention to is the depreciation and amortization were given the – taking more into the P&L than to the balance sheet. And on the commodities, the hedges are paying off at this point in time as the currency depreciates. Next slide. Shailesh, over to you.
Shailesh Chandra
Yeah. Thank you, Balaji. Let me start with the key highlights of the industry first. In Quarter 2, the industrial wholesale breached our highest ever, crossing 1 million mark, the very healthy growth rate of 38% year-on-year. As we know that last year, the base was low because of semiconductor issues that the industry was facing. Segment to trend you know continue to go strong in favor of SUVs. So SUVs further increase their share in the total TIV, whereas hatches continue to see significant decline.
As far as Tata Motors is concerned, we further strengthened our market share in H1 to 14.1% as compared to 12.1% in FY ‘22. And in PV and EV the business grew by 84% and 371%, respectively. It was, of course, the highest ever offtake for us in Quarter 2. We maintained our number one SUV position, as well as Nexon also retained its number one SUV position among the 40 plus SUV models that we have in the industry.
EV also posted its highest ever quarterly sales at 12,000 plus with a market share of 87% while Balaji talked about the launch of Tiago EV and a very strong response that we bought on the first day of in opening the booking with 10,000 between the first day itself. And so far we have received very, very healthy bookings for Tiago EV even while the customers have not tested in the car. So, very, very encouraging response seen for Tiago EV.
Talking about the bright spot that we foresee in Quarter 3, we believe that industry will sustain the momentum what we have been seeing in the past quarters. The focus in this quarter for the industry would be retail, there will be moderation in offtake as all the players would like to reduce the channel inventory as we are approaching the calendar year end. Also, semiconductor supplies have been strong and we have seen that’s the reason why last quarter there was 1 million supplies in the industry and this quarter also we don’t see a major issue because of semiconductor supplies.
As far as Tata Motors is concerned you know across all the models, we are seeing the demand remaining strong, because of a strong customer appeal for our products. There has been consistency in supplies and we have seen you know quarter-after-quarter we have been sequentially growing our supplies also will be bottlenecked some of the capacities in our existing plants. So, it is therefore going to support the demand well and we will see strong growth trajectory as far as EV is concerned.
Challenges in the industry would be now preparing towards you know a transition to the new emission norms from April 2023. So the work will start from now. And market growth is going to normalize, as I mentioned, especially in this quarter as the effort would be to reduce the challenging inventory. So how we are planning to work on the challenge?
I think as far as demand is concerned we’ll continue sustained initiatives at micro market level for different products. We also start transitioning to BSVI Phase 2 from Quarter 3 and itself. And hopefully Quarter 4 will be a seamless transition for us. And there is a clear glide path that we have created for our profitability improvement using nine levers. And that is also pretty much on track and there’s a very strong rigor as far as execution of this aspect is concerned. Back to you, Balaji.
P.B. Balaji
Thank you. Thanks, Shailesh. Next slide. Overall CV and PV on the cash side, the cash profit after tax and investments very well-funded. So the business is generating the cash needs to invest. And you can see the working capital changes flow through as growth comes up is what I would expect to see in JLR as well as growth comes back. So, we still have a way to go to knock off INR 2,600 crores for a full year basis. And I’m sure as the year progresses, we’ll get back those numbers as well. Next slide, please.
Investment spending to be up to INR 6,000 crores and FCF still remain positive that’s a broad message here. Next slide. We’ll take a minute on Tata Motors Finance. We had an AUM of INR 46,000 crore, but I do draw your attention to the GNPA line of 8.5%. Before the two comments one is TMF and the TMFSL. The two NBFCs are classified as middle layer by – by RBI.
And the process to demerge the NBFC business will combine the two Tata Motors Finance and Tata Motors Finance Solution, it will consolidate and simplify the group, very similar message for the ADR message, as I said earlier, so that’s on the corporate side. But the main one is the central line, which is the point related to the shop slippage is that we’ve seen in the restructured portfolio COVID linked stuff that is there. The underlying portfolio is pretty healthy and continuing to do well.
But the restructured portfolio is something that has seen a sharp slippages and therefore we will be monitoring this closely. And that’s why you see the loss this quarter as well. So, this is something that does concern us. And we will aim to therefore, tweak some of the approaches in Tata Motors Finance, to focus squarely on improving sole sourcing quality and underlying business to offset some of this and also stepping up the targeted collection that we have there. So, but at the same time capital adequacy is fine, the debt equity ratios are fine, liquidity is fine. So we just have to ensure that the execution on the ground in Tata Motors Finance steps further and the team has one message to get that done. Next slide, please.
The overall outlook will pause here particularly on the top line. Demand remains strong for now, and will remain a key monitorable, because the geopolitical uncertainties are pretty large and wouldn’t want to be complacent as far as demand is concerned. At the same time, no worries at this point in time. So we will be remaining watchful.
Chip supplies as Adrian indicated earlier, will improve further there. India, we do not see a concern, and therefore the volumes will continue to ramp up steadily. In India, definitely and JLR as well, cooling commodity prices will aid improvement in underlying margins. And we do expect to deliver strong improvement in EBIT and free cash flows in H2.
JLR, we already talked about. Coming to Tata Motors’ priorities, so definitely delivering market beating revenue growth through product innovation, service quality and the new demand pull model is going to be a very important one. And a sharp improvement in realization and EBITDA margins is what the business is focused on. And we’re already starting to see the first successes of that. And we will deliver as far as PV is concerned, market beating growth and continuing steady improvement in profitability and cash flows. And as far as EV, it’s about driving penetration. So here’s what we have to say.
There is a flurry of questions that have already landed up. Let me try and lump them together, because it’s going to be I guess it’ll be a fair amount of repetition. There’s a broad set of themes Adrian coming your way. One related to chip supplies. In the theme of when the global chip suppliers are actually starting to ease. Why are we doing long-term contracts? So that’s one kind of questions that are there. Second is, now that we’re secured chip supplies, are we the 80k, 160k production for second half – wholesale for second half that you have signaled. Is it on the conservative side? And thirdly, will that also mean that the margins that we are also putting out there is on the conservative side? So these are the – I think there’s one theme around semiconductor that I see. If you could pick that in the meanwhile, let me try and summarize other questions as well. Over to you, Adrian?
Adrian Mardell
Yeah, sure. Thierry will answer the semiconductors, and then I’ll go into the profitability stuff afterwards.
Thierry Bollore
Yeah. Well, good afternoon and good morning, everyone. I think this chip supply is absolutely fundamental to understand that’s we have almost finalized all our long-term supply agreements. But it is very clear that if you miss one, it’s enough to create the problem that we have had you know and that Adrian explained in September.
The good news is that, now we have finalized all our supply agreements. And but let’s take the example of last one that we could sign, it’s going to be effective by calendar year 2023, which means, that we can see already very positive signs in the way we are dealing with our problems in an effective manner. That’s why we are very confident of our ramp up. But the full effect of these long-term agreement is going to – come into action gradually with the global supply base and with our tier one.
So that’s the reason why it’s a gradual improvement. And we should not also forget that the crisis supply in terms of chips is really in crisis in our sector. So we can see improvements, but it’s going to continue when I’m discussing with the CEOs of all the industry, it’s going to continue in the coming years. It’s not a matter of months or quarters, but it’s going to be a matter of years before we come back to a situation which is much more normal at what we can see today.
Adrian Mardell
And if you let me build from that theme into the second half of the year, [technical difficulty] something said is, we’re more certain of supply from January than we are from October. I told you earlier in the presentation that we were decommitted in September, and that carried through into our production and wholesales into October, which is this quarter.
So it’s reasonable for you to assume 160,000 in the second half of the year, we’ve guided you, but with stronger volume in Quarter 4, i.e., from January than in Quarter 3. What we’re seeing from an overall volume position in Quarter 3 is a little bit better than Q2, but not a dramatic improvement.
However, our mix because of the units we’re now able to build within Phase 3 and signing up will improve. And therefore total units in Q3 will be modestly increased, but average selling price and average revenue per unit will increase a lot above the GBP 70,000 per unit level, which we started to see towards the end of September. So that’s what you’re going to see over the next three months with an increase in supply in our Quarter 4 balances out to the 160,000 units. Don’t forget, we don’t want to put a number out there that we’re having to explain why we didn’t either.
So a part of this is learning from our Q2 experience, because Thierry’s other advices at a point in time, you can actually be decommitted outside of your expectations. And it just takes one part for us not to be able to complete and ship a vehicle. So that’s why the guidance you’re seeing in the second half of the year and the intent behind what we’re trying to do here. And the complexity that there still is for ourselves and for everybody else in the automotive industry by the way.
P.B. Balaji
Thanks, Adrian. I think let’s probably take the other two questions also coming your way, which then takes us to the next logical question, saying that, what are the reduction in production and cash flow, our guidance in JLR mean for FY ‘24 guidance of becoming debt-free? And how do you see the revised guidance?
Let me take that. I think the – at this point in time, the net debt – near net debt-free target remains as it is, we’re not changing it simply because we don’t want to update it every now and then. But we do understand the stretch that is there in trying to get there. So obviously, we will work at all, look at all options as far as trying to see how close we can get to that.
I think the better time to do this discussion would be at the end of the financial year, as we are able to see as Adrian and Thierry talked about, Q3 is a transition period and then Q4 is when the full calendar year benefits come through as well. That will give us the fine – better time in terms we talk about it. So we are aware of the challenges to get there. At the same time, would want to run ahead of ourselves in terms of putting a number out there. So that’s on the net debt.
And a related point on this in terms of your funding, Adrian, does it also mean that you may be coming to the bond market sooner rather than later in terms of taking care of this 1 billion that is currently not in your plan?
Adrian Mardell
Thanks, Balaji. Ben, what are your thoughts?
Unidentified Company Representative
Yeah now I’m happy to pick that one up. So we did end the quarter at GBP 3.7 billion of cash. And that does include buffer for unforeseen cash requirements or to cover maturities if we don’t want to go to the market at the time. So we already gave guidance that we would be significantly cash flow positive in the second half of the year. And we have about GBP 800 million of bonds maturing in February, March.
And basically you know the guidance that was put on the page we saw was GBP 750 million. So that would about cover it and say you really wouldn’t be eating into the buffer. You know we could do scenario planning and say what would happen if that didn’t happen. But I think that what would happen is, we just use some of the buffer and I think we are in a situation where yes, you know over time, we’ll always want to maintain that buffer and maintain good liquidity. But rates in the market right now are not very attractive. And I think we do have flexibility for the reasons that I just said to wait until we see rates that are more attractive to us to issue at.
Adrian Mardell
Thanks, Ben.
P.B. Balaji
Let me turn to India. I think there – the questions coming through on the profitability of the Indian business. So the Indian business margins I think this comes from Gunjan, Bank of America. The Indian business margins have declined sequentially in both segments despite price hikes and better operating leverage. How should this pan out ahead? What sort of metal collections tailwind we expect in second half, if you can quantify?
I think let me take that question, Gunjan. I think so if I see PV and CV individually, close to about 70 odd bps of residual inflation came through in this current quarter in our overall profitability, which we expect to actually neutralize and turn and actually go forward, start giving credits then in Q3 and beyond. We do, as I said earlier itself, the intention is for the senior business to get to as close to double-digit EBITDA at the earliest.
And PV will continue to have a steady improvement in profitability going forward, for which commodities is one of the levers, but it’s fair to say that the operating leverage from a PV perspective is now juiced to the limit. And we would want to now see the contribution margins and mix continuing to play and keep improving, and there’s enough and more opportunities on that front. So that’s what we see it from our improvement perspective.
Other thing on the PV, we should keep in mind, I think we’ve lost a more – not lost, I think that they we have taken a charge, one-off charge of almost about 50 odd bps this quarter on the related to the SKU obsolesce issues that are there. And those are sitting in underlying business, which they are one-offs and should not repeat going forward. So that’s on the profitability side.
Girish, this one coming your way. I think when you see CV margins, they are very weak, despite industry volumes, just for an industry itself being very weak. So can CV business margin reached double-digit? Are they closer to double-digit like, let’s say 9% kind of a close double-digit there? How do you see the profitability of the industries?
Girish Wagh
Yeah. So I think as Balaji mentioned, you know we as market leader have actually taken this upon ourselves to increase the realization from the market. And that’s a big change that we’ve done in towards you know second half of Q2, and we have been increasing our market operating prices with which we will see that the margin should improve.
And as Balaji mentioned, I think our target will remain to get to double-digit margin EBITDA. And I think the good thing right now is the transporter sentiment index we do see it remains quite positive, which is good, so the demand is going to be there. We also see that the feed utilizations are good.
Freight rates are also at a good level. So despite the increases in diesel prices, and the vehicle prices at whatever level they are, the transporter profitability is intact. So this should help us to firm up the realizations as we go ahead. And with commodities tapering off and our cost reduction actions, I think we should be getting towards our double-digit EBITDA of target.
P.B. Balaji
Now getting question to both Shailesh and Girish in terms of BSVI Phase 2, what kind of cost inflation can we expect?
Girish Wagh
So I can say at this juncture that the cost increases for the BSVI Phase 2 are going to be lower than what we had seen in the BSIV to BSVI transition. So in terms of price increases, therefore it may be lower than what we had to take from BSIV to BSVI. I think it depends upon the technology also.
But the statement that I’m making is applicable to most part of the diesel portfolio. That’s what – that’s where we are, I think we obviously you know are very light on gasoline, there is only one product in gasoline, but gasoline anyway will have a much lower cost impact. So that’s where we are in terms of cost impact due to RD migration.
Shailesh Chandra
A similar response, I think you know the transition that we had seen earlier from BSIV to BSVI, it was a double-digit kind of an increase. As far as price was concerned, you’re not going to see that kind of a price increase in this time and you know diesel when we specifically talk about diesel, because that gets impacted the most. But you’ll see different kind of cost increases for different manufacturers depending on the technology selection curve. So that’s what we now see going forward, but it’s not going to be as significant increase as we had seen from BSIV to BSVI.
P.B. Balaji
Thanks, Shailesh. Adrian, this is coming your away. Given that a lot of your cash outflows coming out of working capital, the fact that you are now guiding to a 160 that semiconductors having taped up is that number conservative? Number one, which you answered that in a part, but the implication on cash flows, given that working capital rewind should give you better benefits going forward. Are we being conservative on the cash flow?
Adrian Mardell
Yeah, okay. Thanks, Balaji. So are we being conservative on the cash flows? There’s two, three things happening into the second half of the year within that. One is, an order form I’ve actually referenced on the corporate to play it back in terms of the data, and one is, we’ll be building more cars, and therefore, working capital will start to turn in our favor.
Ultimately, it depends on how many cars we built in the last six weeks of the year, of course, right. So but our assumption is, we will build more cars over the end of Q4 than we’re building at the end of Q2, therefore, there will be a working capital turn in our favor in the second half of the year.
There’s a mix improvement. So even though volumes aren’t as high as some people wished that mix improvement and the value per unit, and the average selling price will grow as well. All of those things will be positive. I’ve also sent you on the call as we expect investments to increase in the second half year, in two or three places.
One of which is the optical investment number, which the guidance we’ve given you is 200 million higher in the second half of the year than the first half of the year. With supplies starting to improve, we’re also anticipating improving other investments like fixed marketing to generate more orders, which we – deliberately not generating today, because the size of the order banks, and we will also allow expenditures to grow in other places alongside our digital transformation.
So our spend will grow and our cash receipts will grow or net out to the flavor of the 750 you see there. I’m not consciously and deliberately being conservative, although we’re being very balanced. And it is possible to overachieve those numbers, should we get more supply or more value in its to end destination before the end of March.
P.B. Balaji
Thank you. Adrian, one more coming your way. This is on the order inflow. Q2 seems to be around 93k lower than the 100k plus that you were reporting in the previous quarter. So the broader question that’s coming through is, is this because of a demand slowdown? Or is it because the long wait periods? What’s causing this throughput rate to come down? And therefore how are we seeing the cancellation rates as well as the overall demand environment?
Adrian Mardell
Yeah, okay. So we are about 10,000 units lower than we were by quarter earlier in the year. Obviously, a part of that is the reasons I’ve just said, we’re not stimulating new demand. But what you’re also seeing in the absence of that stimulation demand is, you know, the aggressive increases in orders for new Range Rover, for example, have starting to flatten off.
And we’re building more of those units as well. So that’s what you’re seeing here. You’re seeing the original spike launch of new Ranger Rover they’re starting to flatten off. There’s been no marketing spend beyond that vehicle at all, advertising or indeed verbal marketing. So there’s plenty of opportunities for us to stimulate that demand.
The other thing you’re seeing, we’re starting as the Range Rover Sport is becoming visible into the marketplace. You will actually see the database increase Range Rover Sport orders as we go month-by-month in the second half of the year. So we’re waiting and watching to see whether it naturally, because of that second reason gets to 100,000 or whether we actually need to start to stimulate some of that demand.
And a fourth reason is that, we know dealers are holding back on some orders at this point, because we don’t have delivery times for them. So when you put that flavor together, Balaji we are super confident we’re going to stimulate orders more than 100,000 going forward once we get the supply.
P.B. Balaji
Thank you. I will leave you with a teaser on pension that’s going to come your way. But let me before that move to Shailesh. Two questions, Shailesh on EVs in particular, one value proposition of EVs, how is it better than hybrids? So that’s one. And second, EV margins, the impact of EV and the overall margins of PV. Can you talk about these two?
Shailesh Chandra
So you know as far as EV is concerned, and the way the ramp up we have seen in terms of demand of EVs and Tiago is one big example. Firstly, getting 10,000 bookings we have never seen this kind of a response even for you know some of our very successful ICE cars. Clearly shows that it is being well understood.
The strength of the value proposition, not only versus hybrid but I’m saying versus normalized vehicles also. The biggest proposition here is the low operating cost. And the low operating cost is you know really translating into big benefits in terms of annual saving, and therefore, the justification for the premium that you have to pay for EVs.
It is a very smooth automatic transmission vehicle at the same time for which it was being appreciated. And also in terms of performance, and you know drivability pressure, it has proving to be much superior. And, of course, there’s a change in mindset and you know greater trend of you know younger population also to move towards more cleaner vehicles. And they’ll be responsible to the environment, all these trends you know make it a very strong proposition.
And we’re clearly seeing that translating into demand. So this is answer to the first question. The second question was on margin. I would say that margin of EVs is not very different than what we see for the ICE segment in PV. And this should further strengthen from next financial year as the PRA benefits also start coming in. Thank you.
P.B. Balaji
Maybe I’ll just have you there for a minute. In terms of your volume outlook for domestic PV, now that the pent up demand is more or less metal and semiconductor situation is normalized, how do you see it? One question. And second in terms of how do you expect to gain market share going forward on the PV business?
Shailesh Chandra
So as far as you know this H2 is concerned you know H1 itself was very strong and we saw nearly 1.9 million vehicle which got sold in H1, typically, you would see of 48%, 52% of a ratio between H1 and H2. This time, you’re going to see nearly 50:50 kind of a ratio. So it’s going to be a very strong year you know highest ever, industry volume is what we are going to witness in this financial year, possibly going up to 3.8 million plus.
And therefore, I don’t see right now, the demand really going down, except that you will see moderation on offtake this quarter, and then it should again pick up in the next quarter and not to the full extent I would say, because of the transition from BSVI Phase 1 to Phase 2, but still it will be good enough to do similar kind of volume as we have seen for the H1.
P.B. Balaji
Definitely, then the question will be in FY ‘24, whether you will have similar kind of growth, I would not expect that because a lot of pent up has got released already in H1. And therefore, now it will be more triggered through the new launches.
And there will be segments you know which might get impacted which will be mostly the entry segment as there will be some price increases coming because of some regulations which are going to hit which is one, the Phase 2 RD and then the safety regulations which will also hit in October ‘23. So I think FY ‘24 I would just hold my comment right now, because I also you know we have also then triangulate based on what projections we are going to see from various agencies.
Shailesh Chandra
What was the second question, Balaji?
P.B. Balaji
CV margins you have covered it, right.
Shailesh Chandra
Covered.
P.B. Balaji
Okay.
Shailesh Chandra
Thank you, Balaji.
P.B. Balaji
Let me probably take the comment. Adrian, coming your way. JLR pension liability situation and the provision needed due to the bond yield changes. So you want to take that?
Unidentified Company Representative
So, Balaji, Adrian asked me to pick this one up. So, I think this question is relating to the extreme volatility we saw in gilt price – in gilt yields, following the mini budget that was announced in the UK in late September, and that did cause liquidity challenges for pension plans in the UK, because they have interest rate hedging arrangements, and they had to post collateral against those interest rate hedging arrangements.
And JLR was no different. We did see increased collateral requirements in the pension plan related to our hedging arrangements, and we did take action in the pension plan to reduce the hedging levels and sell assets to cover those collateral requirements. And we acted to very, very quickly when that came up. So the pension plan remained – remains liquid throughout the issue.
Rates have, of course, normalized now, they had risen by 2 percentage points to something like 5.5%. And they’re back now down into the mid-3s again. I think an important point here is that, it was always a liquidity issue only, not a funding or solvency issue. And the ironic thing is the actually the pension plans of JLR. The accounted – accounting basis surplus actually rose from the end of Q1 to the end of Q2. So the accounting surplus is actually over GBP 1 billion at the end of September, and it was slightly under GBP 1 billion at the end of June.
P.B. Balaji
Yeah. Thanks, Ben. One more question on to the JLR side. Other expenses to sales are flat quarter-on-quarter not seeing any leverage gains, any key drivers for that Adrian?
Adrian Mardell
No, not really. Look, I mean, the – even though we’ve broken through on MLA, we still only have 13,500 Range Rover, Range Rover Sport’s wholesales within Quarter 2, it was just 18% of the total volumes. So we will be stronger and better than that in the second half, optically is incredibly powerful with that 300 million year-over-year. But we’re not punching our full weight yet by any means on MLA. And that will actually increase the average revenue per unit and the total revenue in Q3.
And therefore, you may see a change as a counterweight to that I think I’ve already answered, we are going to start to lift some of those costs and some of those expenditures and, of course you know the inflationary pressures in the second half of the year, particularly on employee settlements will start to come in place to lift the cost as well. So I see a revenue – lift, I see a cost lift and broadly speaking, the balance between the two will be reasonably close going forward as we see today, Balaji.
P.B. Balaji
Thank you. One additional question is on the VME. Do you see any pressure in China and EU on RR portfolio? Non-RR portfolio, sorry?
Adrian Mardell
No don’t, I mean, particularly on the web as we buy a set of products towards the higher end of the business you know, the discounting at the higher end of the business is lower. And therefore again, it will be a part of the margin improvements, which we’ll start to do in the second half of the year, once pre-supply comes through. And we start to build greater quantities of you know the smaller vehicles, the SUV threes, that’s when I expect it to be more competitive. And that’s when I expect VME to start increasing as an average percentage of total revenue.
P.B. Balaji
Okay. And one more question before I move back into CV here. JLR has the revised wage settlement at JLR. Has it been reflected in this quarter’s results? One and two, timeline for the debt repayment of the GBP 1.7 billion in ‘23?
Adrian Mardell
Yeah. So the wage settlement is effective from Q3. So you know there’s no impact earlier in the year on this reported period that will kick in the second half of the year. And as a part of the explanation even though I recognize that some of that will go into the margin rather than other expenses. That was a part of the last explanation but it’s in front of us rather than behind us and the profiling of the debt kicks in in February – between February and June there’s GBP 1.5 billion in sterling equivalent we pay back.
P.B. Balaji
Okay. Second, now this is coming back into India, Shailesh your way. Customer profile of the Tiago EV bookings versus Nexon. Any interesting anecdotes there? And are they first-time buyers? What are the mix first car versus second car?
Shailesh Chandra
You know, we would not have that real picture of the Tiago, but for Nexon, I won’t have to split off first only car but you know between the only car in primary car it is nearly 70% which has grown significantly for what it used to be, it used to be 25%, otherwise, it was generally a second car. People who are now using the Nexon only buyers were using it as the only car or primary car is nearly now 65% to 70%.
On Tiago EV, we have only regional kind of a mix which is very strong we have seen in states like Kerala, Andhra, Gujarat, NCR, Rajasthan, and these kind of places in Telangana. So, pretty I would say a similar kind of states where we had been selling, but also you know some of the states in East have also started showing interest in EVs. So that’s what we have so far information on Tiago.
P.B. Balaji
Thank you. I think there’s one question that’s coming back again and again. So let me pick it up in terms of what are the reason for lower profitability of CV and PV despite better volume? And I think there’s a – talk about questions in the how much is the commodity impact for the current quarter? How’s it likely to change the next quarter?
I think let me cut the problem into two. As far as CV is concerned, the main reason that we had the residual commodity increases, the last lap of it is just the way negotiations closed. They just overflow into July, August and those are not settled and completed. And we should see the decrease coming from Q3 onwards. That’s how the negotiations happen.
Additionally, on top of it in CV going forward, we should also see realizations increase as we move to a demand pull strategy. So that will also keep increasing the profitability. And therefore we would expect like Q3 this business to ramp up in terms of profitability and intention is to get as close to double-digit EBITDA as soon as possible. So that is the plan there.
Coming to PV. Yes, the residual impact is also there in that, but on top of it, there also one-offs which were taken respect to obsolescence that we had to write-off. And that’s almost 50 bps of write-offs that got taken there. So those are the two reasons why the profitability came down. And both are now behind us. And therefore, that’s something that we should expect to see the things changing hereon.
So moving into a set of questions that are coming in terms of ADRs, DDRs, basically saying that if you’ve simplified the structures through delisting the ADRs, what are the plans on DDRs? At this point in time, there are no plans and as and when there is something coming up, we’ll definitely share it with you.
In terms of CapEx in India, first half of the year, we spent about 15 billion but we are guiding for about 16 billion. What is our current plan? I think this is up to 6 billion – 60 billion is what we have said, INR 6,000 crores and we do have plans that are rear-ended typically that’s how it invariably happens as a proposals clear. We will keep a close watch on it and we’ll spend as a student and rest assured, we are not cringing on investments and the intention is to keep supporting the growth there.
I think one question coming your way, Adrian. Euro 6 emissions that are there. Are there any additional expenses that we have to undergo to meet the new emission NOx?
Adrian Mardell
Yeah. Well the Euro 6 legislation is behind us, Balaji. I think we’re looking ahead towards Euro 7 at this point in time, which I’m told is delayed by 24-hour announcements until later this week. Well, I think E 7 ones – the ones we’re looking forward to you know, if they get confirmed in the timeline, then there will be additional expenditures which will be contained within our investment targets will give you going forward.
P.B. Balaji
Okay. So, Ben one coming your way. Given the bond depreciation against INR, shouldn’t there be an exceptional gain sitting in the P&L due to debt on the JLR books? Is it okay, I know that’s related to INR or is it USD that you’re referring to, because JLR has its debt in USD. What you also see is that there’s a translation impact of that, not disability of the P&L. And as far as the OCI is concerned, we do see it’s in the OCI in JLR. Ben, anything further you want to add, assuming the question is vis-a-vis USD?
Unidentified Company Representative
Yeah, I mean I think it’s harder for me to answer the question relative to INR, I guess all I can say is that, I’d go back to the slide that we looked at earlier that showed exchange and basically it showed that the exposure benefit net of hedges was favorable, about GBP 55 million in the quarter compared to a year ago. And we did have – the revaluation of the debt in the end of the day, debt is largely hedged either by derivatives, by foreign currency cash holdings or in some instances designated against future revenue.
So we don’t really – you know I really think about foreign exchange revaluation on net debt, including hedges and that is broadly neutral. We did then have about GBP 90 million of balance sheet revaluation for other non-sterling liabilities that showed up in the income statement. It’s all on that slide that we looked at earlier.
P.B. Balaji
Okay. One question to you, Adrian. In terms of announcement from another OEM related that the high inflation in Europe could result in moderation of demand next year? Do you share the view or the undecided as to volume or pricing, given discounting currently is at a record low?
Adrian Mardell
Yeah. Okay, Balaji. I think I touched on this actually when I talked through the VME explanation right for the larger vehicles, the Range Rover, the Range Rover Sports coming through. We’re not seeing any discounting. We’re not seeing any fall off in demand. There is a flat lining of new orders, but not fall away of new orders. And the flat line is absolutely consistent with the profiles we have in the demand books, order books we have in place.
I think once supply starts to free up for us above the level that we’re currently indicating in the second half of the year and we will be building more of the units. Let me say in the SUV, three segments. I think those segments are more competitive, always, from a support VME perspective, from aggressiveness of supply of other OEM actions. So I do expect higher VME at some point in time on those nameplates, but clearly we need the supply to play with them at the moment, the ones where we will be building over the next six months in time. I don’t see this as a risk at all.
P.B. Balaji
Okay. I think there’s a question from on a – slightly different question. But again, linked to the high energy cost. Is there a risk of shortage of components due to gas shortage or very high energy costs from vendors?
Adrian Mardell
No we’re not seeing any of that at the moment. We’re seeing cost increases flowing through, of course, you know just to give you a sense of that base energy builds around GBP 200 million a year and therefore, no, that’s certainly increasing, it’s in part in their first half year. And it will be a reason I talked to inflation earlier.
I said the numbers broadly going to be the same. And if you put together the two responses, we’ve given, Balaji, the commodities are going to start to fall, a lot of the cost categories, including utilities and including pay awards will start to kick in, which is why I’m saying overall the costs are broadly be the same in the second half of the year just come at us in different places. We don’t see risk of supply at this point in time.
Obviously, as a nation, we’re less reliant on supplies from Russia, of course, most of our supplies come from other places like Norway, we do have alternative supplies, particularly for the buildings outside of our processes, production processes like paint shops, and we have other alternatives for other sources. We don’t have gas storage, if you wanted to get into gas storage.
We know our facilities in Europe and our governments in Europe do have a gas storage, which will get them through most versions simulated of a winter. So we’re not actually expecting shortages of supply to impact our production facilities over the second half of the year. We haven’t seen any yet. But we are expecting cost increases. This is a summary of where we’ve gotten to be on gas in the second half of the year.
P.B. Balaji
Yeah, thanks. I think the question on the Ford plant acquisition, Shailesh, When are we going to see production out of the Ford plants that we have acquired? Just to clarify, we have not yet acquired. We will close the transaction, the intention is to close it by end of this financial year or early in the next year – sorry end of this calendar year or early in the New Year. Everything’s points to that kind of timeline. So all systems go on that one production.
Shailesh Chandra
Yeah. So, Balaji so we’re right now in the process of government approvals and not at final stages of finalizing the model location mix, which changes now, because whatever we have produced in the other factories are going to relocate to some extent to this factory also. And the new Indian models which are going to come. So FY ‘24 is where we are going to see some start of the activity in the later part of FY ‘24 is the current what to say, estimate of when we’d be able to retool this plant for the new models of all the models that we are going to shift to this factory and some of the new EVs which are going to be made there.
P.B. Balaji
Okay. There’s a question on – this probably I’ll take it. What how important is JLR to Tata Motors and the wider group’s growth strategy and what level of support does the former envisage going forward?
I think it’s absolutely categorical. We made that many statements that Tata Motor – JLR is absolutely core to Tata Motors, and it enjoys as much Tata as any other companies and therefore within the group as well. It’s a crown jewel, and we will keep it that way. In terms of one interesting question, post the launch of Tiago EV, do you see any pressure on demand on Nexon EV? Shailesh?
Shailesh Chandra
You know, Tiago EV is a very different product segment with very new customers. And so we don’t see any impact on the Nexon EV demand.
P.B. Balaji
Thank you. So, maybe this is the last question unless there’s something comes up now. This is on Tata Motors Finance, how much of the incremental loan formation is dependent on Tata Motors PV, CV, EV? What are the plant into the operation Tata Motors Finance?
I think let me take a few minutes to explain this one. There are a few things that we are working with Tata Motors Finance. One is, the underlying business which is the running portfolio is in a good quality. There’s no concern on the running portfolio, but we’d like to step it up further in terms of reducing the level of GNPA there and ensure that we step up the quality of sourcing.
Thereafter, of course, in parallel, we are also working to tighten the collections infrastructure there. And you should see these playing out in the coming quarters. And it’s very clear, it’s an independently managed company out of our – Tata Motors and Tata Motors foundry, we’d love to keep it as from a decision framework separate, but, of course, as much synergy as possible they should drive. But intention is to ensure they take their own decisions on credit and decide whom to fund or what to fund.
Their portfolio from a new vehicle perspective is entirely Tata Motors, but their used vehicle portfolio does have sourcing from other OEMs as well, because that’s the market so we get a fair share of our – of the vehicle park that is out there. So this is clearly a task for the team there. And I’m sure given their commitment, they will come back on track it is only a restructured portfolio that is giving us the pain.
And that is completely related to the pandemic and the fact that we are back-to-back pandemics for two years in a row, the MSME particularly small commercial vehicles, some ILCVs and MHCVs, those individual fleet operators have been in stress. So we will need to deal with this. And we are committed to deal with that as well and bring this business back into the pink of health. It needs to get to a double-digit return business, ROE business and we will be there.
So I think there’s more or less done for the day. So thanks, everybody. We have no further questions. So thanks everybody for attending the session. And also thanks to the team around the table as well as in JLR for a lively Q&A session and the response there. And in case you do have any further queries, don’t hesitate to reach out to us. We’ll try and respond for the best of our abilities. Thank you and have a good day. Take care. Bye-bye.
Question-and-Answer Session
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