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Edited Transcript of TATAMOTORS.NSE earnings conference call or presentation 25-Oct-19 1:00pm GMT

Q2 2020 Tata Motors Ltd Earnings Call

Mumbai Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Tata Motors Ltd earnings conference call or presentation Friday, October 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adrian Mardell

Jaguar Land Rover Automotive plc - CFO

* Bennett Birgbauer

Jaguar Land Rover Automotive plc - Treasurer

* Girish Wagh

Tata Motors Limited - President of Commercial Vehicles Business Unit

* Guenter Butschek

Tata Motors Limited - CEO, MD & Additional Director

* Pathamadai Balachandran Balaji

Tata Motors Limited - Group CFO

* Vijay B. Somaiya

Tata Motors Limited - Head of Treasury & IR

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Conference Call Participants

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* Alexi Yannas;BlackRock Capital;Analyst

* Binay Singh

Morgan Stanley, Research Division - Executive Director

* Chirag Shah

Edelweiss Securities Ltd., Research Division - Research Analyst

* Gunjan Prithyani

JP Morgan Chase & Co, Research Division - Analyst

* Jinesh K. Gandhi

Motilal Oswal Securities Limited, Research Division - SVP of Equity Research

* Kapil R. Singh

Nomura Securities Co. Ltd., Research Division - Executive Director

* Priya Ranjan

Antique Stockbroking Ltd., Research Division - Research Analyst

* Raghunandhan N. L.

Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst

* Robin Zhu

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Sonal Gupta

UBS Investment Bank, Research Division - Director and Research Analyst

* Yogesh Aggarwal

HSBC, Research Division - Head of India Research and India Tech Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Tata Motors Limited Q2 FY '20 Earnings Conference Call, hosted by HSBC Securities. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Yogesh Aggarwal from HSBC Securities.

Thank you, and over to you.

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Yogesh Aggarwal, HSBC, Research Division - Head of India Research and India Tech Analyst [2]

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Yes. Thank you, Stephen. Good evening, everyone. On behalf of HSBC Securities, I welcome you all for the Tata Motors Quarterly Results Conference Call. I'm very happy to introduce the Tata Motors management team. We have with us: Mr. Guenter Butschek, MD and CEO; Professor Dr. Ralf Speth, CEO, JLR; Mr. PB Balaji, Group CFO; and Mr. Adrian Mardell, CFO, JLR; along with members of the Investor Relations team. Thanks again to the team for their time. We will start the session with some commentary from the management, followed by Q&A.

But before I hand over to Balaji, I would like to wish a very happy Diwali to everyone on the call. Over to you, Balaji.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [3]

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Thanks, again, and wish you the same too and wish all of you a very happy Diwali, and hope you get some time to spend with your loved ones over the weekend, which is what I intend to do in any case.

We have, along with a few people that Yogesh just referred to, we also have (inaudible), but I'm sure there's a lot of questions that you would want answered as well.

Let me cut as a Chair, that's like last time, you would go quite fast on the slide because time needs to be spent on the Q&A. And without further ado, let me draw your attention to the safe harbor statement. And then go to the key activities and developments for the quarter, which most of it you would have seen in the press, including the launch of the New Defender that we had, the new infotainment system, ZIPTRON, the new EV drive that we have. And of course, the new product launches that we have. So an exciting quarter, nevertheless, and that keeps continuing from our end.

On the numbers, really reassuring and delighted to see the JLR performance coming back and starting to improve. Unfortunate because of the Indian market situation, which we have been discussing for quite a while now, has been a very sharp market decline in the Indian business. And we'll talk about that more in the coming slides as well. And in the case of China, JLR, if you recollect, we did talk about the China recovery, happy to see, they're now translating in the numbers on our site. And as far as the EBITDA margin is concerned, it is almost the highest that we have seen in the last 15 quarters. And therefore, it is a good delivery of numbers that we have. On the JLR side, the delivery has been let out of a better mix, better charge delivery as well as higher wholesale, but in the case of India, almost the entire number decline can be attributed to the M&HCV slowdown and resultant mix being poorer because of that.

Overall, the cash flow at INR 1,500 crores negative, significant improvement from what we had in the same time last year. And JLR is almost now cash neutral for this quarter. And in the case of India has committed, the stock and debtor situation has significantly improved and creditors just saw optic of how the growth transmits into worker database. I won't spend too much time on the growth breakup, barring to say that highlight of our focus on retails being significantly higher than wholesales. We continue to execute in the case of Tata Motors, whether the attention in the (inaudible) and we'll talk about that in a subsequent slide.

So moving on to Slide 6, which is the EBIT, one of all that you have, the 1.7% EBIT improved by 4.4% because of JLR delivery, pulled down by Tata Motors by about 2.6%, and others being broadly flat. And that is how we see the performance there.

We'll stick a little bit on the time of the preferential allotment that has been -- the Board has decided to allot shares to the promoter, Tata Sons Limited. And business in a situation where the business has delivered both in JLR and in Tata Motors and potentially deliver a strong turnaround. And -- but the near-term demand situation, particularly in India being through it and the debt levels in standalone business being high. The Board has decided to raise this equity through a preferential allotment. And this is some of the combination of shares and warrants. And that will be at a premium to the last Friday closing average price of almost 11% at an issue price of INR 150 million. And there is significant premium to the closing price by almost 18% (sic) [11%]. And there is an expected proceed of close to about INR 6,512 crores (sic) [INR 6,494 crores], of which INR 3,892 crore will be received upfront, which is both for shares and 25% of warrants, and the remaining will be there when the promoter decides to transfer -- convert the warrants into shares. And this takes up post exercise of warrants, the ordinary shares, the promoter hold in the group's holding and the ordinary shares will be about 46.4% and the voting rights of 45.7%.

This is a very fundamental intervention because: First, it, of course, strengthens the balance sheet of the group as a whole and particularly the domestic standalone P&L -- balance sheet. It provides rating support for the group as a whole. It limits dilution because if it's the right (inaudible) for this even more and it limits the dilution and also signals a strong conviction of the promoter on the Tata Motors opportunity that we have, and of course, benefit all shareholders because it allows the business to continue to invest and also execute the growth strategy that is there. So this is a very key intervention as far as this quarter is concerned.

Let me pick up speed in terms of numbers. You've seen the JLR numbers, which is on Slide 10. With basically an EBITDA of 13.8%, a growth of 8% in revenue and an EBIT of 4.8%. This is, as you would -- you will agree with me, this is a well-rounded delivery that has happened from JLR, based on revenue, based on wholesale volumes. Retail is also broadly there. Strong performance coming through in China, albeit off a weak base, but the headline number starting to stabilize and improve. And the new launch is firing well. And of course, on a cost side, we see charge delivering as we had planned. And at the same time, we also have lower G&A overall. So let me now hand this over to Adrian, who will give you more flavor in terms of the performance of JLR, is probably the highlight of the day. Adrian, over to you.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [4]

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Thank you, Balaji. Good evening, everybody. On the call, as Balaji just said, that's our Q2 performance, revenue up 8%, a favorable mix as well as increased volume in the quarter. Retails were slightly lower with strong performance year-over-year in China and the Evoque (inaudible) blocks really well versus old modeling profit, as a result of which, would significantly better. Those volumes below a service charge impact of lower operating costs, G&A and favorable FX for the first time in a long time. And as Balaji also said, we were nearly breakeven in the quarter. A large GBP 559 million better than the quarter last year. The higher profits, the lower investment, and we did also receive a grant of EUR 65 million from the Slovakian government in the quarter.

On the sales volumes, 2 stories of note. It continues with the discussions we raised in the July call. China was much higher in the quarter, 24% in the same quarter last year. And we indicated that in July and also the overseas markets were much lower, as they were in the first quarter. And that happened in overseas, is likely to continue in the second half of this year. If I do the same by model, I've mentioned already the Evoque compared to the same -- the prior model in the same quarter was up significantly, 54%. The models that weren't doing so well, each of those are up for model upgrade 20 model years for Discovery sport and the excess under the model upgrade coming along on Discovery within 12 months or so, Range Rover Sport is doing pretty well. Again, as mentioned, really driving the high product mix.

Next page, if you would talk to a waterfall chart, that defies gravity, that's nice to see for a change. Last quarter, we were losing GBP 90 million in quarter 2 FY '19. The GBP 166 million is actually before exceptional items of GBP 10 million. The PBT was GBP 156 million. And you can see there are lots of positives and lots of places included at higher volume, higher cost and especially car part growth.

There's still opportunities for us to improve our China JV business. Firstly, it was worse in the quarter, again, as we indicated, we've done a lot to stimulate incremental volume. We have 4 new products replacements happening over the next 6 to 9 months, and we would expect that performance to improve going forward. VME was higher again. You've seen the other announcements, including the premiums difficult to sell cars in the marketplace. And VME is one symptom of that.

We did actually take the GBP 25 million residual value reserve -- additional reserve on a 16 model year Range Rover and Range Rover Sport products, which we booked in quarter 2 as well. Don't anticipate additional reserves required on the recent model years. Really good news on cost control in several places, driven by the charge program, as we talked on several occasions, manufacturing material costs, fixed margin, selling costs, all were lower than the same quarter last year. We did have a technical adverse on labor and overhead, which is code for inventory reductions this quarter versus last year. And our interest charges are higher as well as you would expect. As I mentioned earlier, FX was positive in the quarter versus the same quarter last year, and we're starting to see the operational benefits of the weaker sterling outweigh the contracts that are now running out over the course of FY '20.

Go to the next page. Cash flow, almost breakeven. The profits, obviously, the cash profits were higher than we've seen of late, GBP 870 million was of cash profit from -- through the income spend and EBIT line. Investment was a bit lower. We said the control on investment will continue. I do anticipate that growing in the second half of this year, but it was only GBP 841 million in the second quarter. And we have a series of events in working capital, the biggest of which was actually an adverse increase in our receivable balances versus the end June, notably is a result of the selling rates at the end of September being much higher than the end of the previous quarter, which drove free cash outflow of just GBP 64 million in the quarter, GBP 559 million better in the same quarter last year.

Capital investment. That's the breakdown of the investment, less capitalization of product development costs, as you would expect. And also, the capital investment was a lower number than last year as well, down GBP 154 million on the same quarter last year.

News on funding, we raised with you last time, we've completed the receivables facility early (inaudible) at the end of FY '19 and withdrawing money on that in quarter 1. No additional drawing downs on that in quarter 2. So it's still about GBP 300 million of that facility used to date. 2 additional loans have actually gone in place in October. So not in the quarter numbers, not in the quarter cash flow, actually happening in October. We completed quite a unique deal, which was backed by the U.K. export funding guarantee, 80% of that, GBP 625 million deal was backed by that guarantee. That was completed this week, and money has been drawn down this week. And we also just today completed the second deal with Black Horse financing on buyback, fleet deals, fleet vehicles we buy back from the marketplace, mostly our own management car vehicles, which basically funds at this lower base, which is a comeback before they refurbish and sold into the marketplace. That deal is short-term through to the 31st of December 2020, secured on the vehicles being brought back. We also will look to take the opportunities as we need to, over the course of the balance of the fiscal year, as again, we've discussed with you previously. Look a bit at the strategic areas, no change here. The reason why there's no changes, the plan is actually working. So the turnaround in transformation plan is underpinned by strong new product launch in pipeline. You see the impact of the Evoque as we launched over the last quarter versus the previous model. We've got an amazingly exciting Defender coming at us at the ending of this fiscal year in the spring, which we're really excited about. Project charge is starting to deliver in all facets of the program, investments, inventory, people costs and overheads are all impacting dramatically the data. To date over the 4 quarters, project charges delivered GBP 2.2 billion. If you compare the last 4 quarters to the previous 4 quarters, you see the improvement in cash is almost exactly that same number and then accelerate, obviously, will come along later, as we've discussed before, fixing some of those fundamental issues that we still have to resolve within our business.

Next, towards the Amazing Defender, I can't do a justice to talk to it. Well, I would like to say is we've had at least 640,000 complete configurations of this vehicle, which is significantly higher than other vehicles we brought to marketplace. So our anticipation on this vehicle selling well is cautiously optimistic, let me say. So if you -- any of you on the line are interested in taking one, you might want to put your order in quite early.

Next page. These are all the fantastic reports. We've had through the press on this vehicle. It's highly anticipated. It's creating amazing [buzz] on social media. And we're very, very proud of this new vehicle.

China. China, as you know, has been an area of challenge for us over the last 18 months or so. These are the KPIs we put in place. All of these KPIs continue to be positive. So the retail targets were again met through quarter 2. The retailers are profitable in quarter 2. They did have a dip in June, as we explained last time, this is the clearance of the old CN5 units. Very, importantly, most of those sales are local registration sales now, and that went through in September, our target of 85%, which is industry benchmark level, and retailer stocks were also falling down to our target areas of just over 1.5 months.

Finally, on the bottom there, you see the actual sales versus the marketplace where we are up over the previous year when the market is actually flat.

Project charge. These are the 3 areas. We said we would deliver 2.5 billion before March 2020, investment is already higher than that. You saw the relatively lower investment number in quarter 2. Working capital will go beyond this target in the second half of this year, and we're now starting the increases come through in the important cost and profit area.

Next slide, if you would. These are the areas for the GBP 1 billion challenge on cost and profit. Last year, we did $150 million. Of course, you're aware that the Sapphire program, we can then start to see for the last 2 quarters, significant reductions in people costs, (inaudible) in those 2 quarters, and material cost performance, always fixing as we go through the year, you would have seen that kicking in, in the waterfall chart on profits for GBP 40 million in quarter 2, and our overhead costs were a little bit lower than quarter 1, actually in quarter 2. So we're progressing really well with our overhead cost target.

And finally, because we know the EBIT side of the cash improvement is so important. We're already designing the next stage of project charge, even though they're still 6 months to go, but we do actually think we will complete the GBP 2.5 billion charge benefits even 3 months early, and we'll announce much more detail on the next stage, which will have more EBIT focused when we talk in January.

Finally, the targets have not changed from the targets we shared in June -- in July. So EBIT margin is still 3% to 4% range for this and next fiscal year, although, again, I will repeat, as July, we are likely to be at the lower end of the range. This fiscal year, PBT is increasingly positive and will be in half 2. Investment spending will be lower than GBP 4 billion is likely to be close to GBP 3.7 billion this fiscal year. Free cash flow is negative. You saw the negative again in Q2, but it is improving and will be stronger in half 2. And our gross debt-to-EBITDA up to 2.8% range. None of that guidance has changed. What we will do is we'll continue to focus on launching those new vehicles, which you saw in the anticipation in the market. We'll continue to improve profits in the second half of the year and to drive down the cash flow to our charge and accelerate programs, and we will actually design our next stage of project charge before the completion of the old program and bring you further details of that when we talk in January.

Balaji, we [dispatch it out].

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [5]

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Thank you, Adrian. Quickly, getting on to Tata Motors, I think the focus of this quarter has been having recognized the slowdown is now definitely upon us. And that focus has been in turn that we manage this slowdown by doing it right. It requires a bit of deviation from how we have been approaching the Turnaround 2.0. But if we rephrase Turnaround 2.0 is about retail system, viability -- not just our viability, I think, is just getting the right part of what we have to do. So the entire focus has been to ensure the ecosystem viability remains. So we are quite happy that we reduced our system stock by almost INR 3,400 crores during the quarter.

TML does not talk about INR 1,000 crores of stock and dealers not talked about 2,500 crores of stock. And we can talk about this later, if need be. Obviously, this does result in a deviation and what it does to our top line and the shape of the P&L is not a P&L that we really like, but I think it's a P&L that we have to lump in, simply because that is a correction that we needed to do on the systems stock deals. And we didn't want to do any underlying kind of number, but just to lay it out there for you, saying that we are happy to see retails being higher than wholesales of almost 130,000 units. And quite disappointed with the revenue drop of about 44%. At an EBITDA level, I think this negative EBITDA and thus Rincón in best quarters, and we are absolutely determined to correct it, but I think this was a bitter pill that we had to swallow this quarter. And this decline in the profitability is almost entirely explained by the M&HCV decline, which I'll talk about in a while shortly. And at the same time, we are also taking a -- we have to take a write-off of about INR 230 crores in (inaudible) business this quarter on those models and those platforms that we don't intend to take forward looking ahead. As committed last time, the free cash flow is significantly lower, burn this quarter compared to last quarter, and I'll talk about those in a while here.

So moving on to slide on the profitability, what a call that you have. You would notice, it's almost entirely volume and mix that is declining the number there. And out of the INR 1,500 crores that we see as a decline in the profitability because of volume and mix, INR 1,200 crores is a M&HCV decline can be attributed to that. So almost the predominant chunk of that.

The cost savings are firing quite well, even if I look at the variable cost line, is almost with the bulk of the increase that you've seen there of increasing cost that you see there. Coming from the commodity price increases that we had to give last year same time, and this year, actually, there is significant saving that is offsetting that. On the fixed cost line, we have managed to keep it extremely tight, and that is why you'll see it almost entirely the depreciation and amortization that you see against it. End product is [confidential] so I won't talk about it at all. So suffice it and say that the investments of the P&L that are in our control and something that we really want to keep it tightly managed.

We managed to keep it tight. And as far the volume is concerned, it is primarily a correction that we have done to recognize the severe slowdown that we are seeing in the market today.

On the cash flow slide. Clearly, there is -- the cash profit after tax this quarter has been very poor, coming from the correction that we have done on the stock level. The previous slide talked to that. But I'm quite happy that, as a business, we are not focused squarely on cash flows. And despite having significant inventory across, we still managed to get receivables improved, inventory improved. The only decline that we see there is the payables side that is more offshoot of the correction that we are doing on the purchase price. So maybe corrected but will come back again. That is more optics for us as we go forward.

So CapEx continues albeit in the midst of a BSVI investment pace. We cannot pull it off at this point in time. We need to be there [and land this link] so that continues. But we will be calibrating our total CapEx this year (inaudible) and what we expect to bottom out on the CapEx side compared to the 5,000 that we originally plan. So that will be a correction that we are doing as well.

On the CV side, I think, as we called out, the retails being significantly higher than wholesale. And we are now -- the dealer stock levels are sitting at about 35 days and -- which is broadly where we'd like it to be. And we are focusing squarely on the dealer performance, their profitability, while ensuring the network expansion happens. And the ecosystem viability we have called out last quarter continues even in this quarter as well. So we've delivered that, and we now believe we're at a comfortable level as far as dealer stock level as the reduced retail levels are what these days are about. So the minute a turnaround happens in the market, we expect to see a pickup here as well. So we believe we are really truly ready for a transition to BSVI or by keeping us (inaudible) inventory quite high.

If I go one level below, the M&HCV performance. I'd like to focus a little bit on this particular slide. What really has played out in this quarter and this year is that I draw your attention to the left graph on the volume growth. This is a business that typically delivers about 6% to 8% volume growth. And we have seen that growing about 15% (sic) [16%], 12% kind of volume growth last year and this year -- and the year before. And this year, actually in the first half, and so far, we declined by 45%, which you're all well aware of. Under these conditions, what we are really sure is that our market share has continued to improve since we are not losing competitiveness in the market.

Interestingly, the portfolio of both HEXA and BOLT have actually dramatically shifted. What you see in the graph are those various tonnage points. So you have the 49 ton, the 55 ton (inaudible) or 46 ton. The payloads have actually declined both by introduction of HEXA and BOLTS. And all of us are aware that these are the most profitable segments in the market. And on top of it, you also have a situation on the absolute gross profit being generally higher on these vehicles compared to the other vehicles there. And when I saw a smaller tonnage point like 15 tons and 25 tons, those have actually increased.

So in this kind of a situation, there's also a structural change that we are seeing in the market. And so we need to correct for that in terms of the profitability of an individual segment as well as profitability of the other ILCV and SCV segment, which you can see those things starting to pick up as well. So we are focusing squarely on ensuring a competitive performance in a volatile environment from all sites. And quite confident that we will be able to pull-through with this, and I'm sure Girish would want to talk about it subsequently when you're having questions with him.

So that's probably what I have to say. There's an implication of the same thing on the respective CV and the PV portfolio as well.

On the PV side, the correction on retails have been severe because we've also corrected the dealer network -- distribution organizations we called out last quarter. So that annualizes as we go forward. The dealer stock levels of 48 days are high, but that is a mix of September is the start of the festive season. So these are the lower retail levels, these numbers are there. So -- but that is just the lens and we complete the BSVI. So dealer stock level has now come down to 30 days. And just as we committed on every other thing that we do, we'll get this down as well. It's just something that we have to (inaudible) festive season. And that's really -- the correction was slightly delayed on the dealer stock level.

So revenue, I mean, the key thing in that, I'm quite disappointed in EBITDA breakeven, something that we could not deliver this quarter. And that is -- can be attributed slightly with the corrections -- the dealer corrections that we had to take to ensure viability of the ecosystem. On top of it, we've also taken the one-off write-off that we had as well.

So as far as EV is concerned, I think our action continues. We continue to be an industry leader as far as volumes are concerned for the quarter. And the product range (inaudible) speed up quite rapidly. We now have the extended range, TIGOR, that has been launched at 213 kilometers. We also have the new ZIPTRON state-of-the-art technology of vehicle technology, which has got a series of concepts in terms of what we are going to deliver in terms of range, in terms of quality, in terms of [weighting debt], the whole piece there. And we also started to see strong profitability improvement in this as we start understanding this technology better and better. So quite happy with the way this has progressed.

And the next big event for us is the launch of the Nexon electric. So do await that. Quite excited. I do draw -- I draw your attention to Milind on an EV that's currently -- a test that's currently running out there to show how it's -- the first electric vehicle that will go from Manali to Leh, out there.

Tata Motors Finance. It's been a quite a change in the way that business is starting to manage itself in the midst of a severe slowdown where disbursals are down 37%. GNPAs are up 4.9%, but I'm not concerned about it at this point in time because the GNPA is better off. We are aware of the strategic suppliers who have had liquidity issues and therefore those are the people that started to improve from September onwards. And our own collections systems were undergoing a change as we go through Project Sparkle. And Project Sparkle has helped better disbursement, and we are seeing the benefits coming through in the P&L, which is, again, good stuff. But nothing takes away from the fact that, even though we've improved market share, the disbursals are down quite significantly, reflecting the performance of the CV and the PV businesses. The big news as far as Tata Motors Finance is concerned is the plan that we are now changing the dividend strategy over there to start moving to an asset light model while fixing the investment that we put into the business, and that had been substantially improved the ROEs going forward. More about this as we get -- as we start having the plans finalized, and we'll talk about this in the coming quarters.

So on a net debt level, you're seeing that the liquidity is adequate. And the reason why we had to intervene with the preferential allotment in that is what you see in the Tata Motors stand-alone metrics that are there on gross debt to EBITDA. But otherwise, with this correction coming through, we are confident that this will now start coming back under the full year.

So overall, and the market situation continues to remain challenging. You've seen this many times. I won't talk too much about it, barring the call-offs. That's the call-offs that have to do -- this remains the challenge. We still -- you will know as far as I do in terms of what might have happened there. So let's wait for the good news to play out there.

As far as India is concerned, the sharp slowdown is very much real. And it's all now depends on how fast industry (inaudible) are suspending starts coming through to take up CV and PV, of course, the more consumer sentiment issue. But of course, the government has given strong signals to intervene in this, and we are hoping for the best as far as the [business] is concerned.

And in this situation, how do you see the outlook? JLR, Adrian talked about it, no change in plans. We remain confident of achieving it. So I'll just leave it at that. As far as India is concerned, we remain confident of our medium- to long-term plans, but the near-term is fluid and, therefore, we are not in a position to comment. And we will, of course, focus on retail growth, the agility and (inaudible) growth, that's because we've been there for (inaudible). And our entire focus remains on BSVI migration, focusing on costs and cash and working on the liquidity across the entire system.

So the more we had to take (inaudible). So let me open it back to you again for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Kapil Singh from Nomura.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [2]

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Congratulations on a great set of results. Firstly, on JLR. I wanted to check on the sustainability of the numbers, if you could give some color, because we've seen the raw material goods sales ratio to the gross margins. Very strong improvement in this quarter. So are there any one-offs to call out there? And also, the other expenditure, if I see. Even with revenue growing nearly 20%, it's been largely flat. So if you could just help us understand that first.

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [3]

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Adrian, I guess, you can rank it. But we also have highlighted it in our press statement. Adrian?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [4]

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Yes. Okay. Yes, I will do. Yes. So sustainability, as you mentioned, we had a really nice quarter at 4.8% EBIT margin. We do expect to be profitable in the second half of the year. We do expect volumes to actually rise also in the second half of the year. Second half year is a better selling season for us. And we have this huge thing called Brexit still out there, which, of course, still has not been resolved. And I'm sure you're aware also that we will close our plants again in 2 weeks' time for a whole week, losing 12,000 units of production. That certainly will impact us in the short term, including quarter 2. When we actually asked the question last quarter 1, it was at least a GBP 100 million problem for us in that quarter. It's likely to be similar this quarter. However, we also expect over the balance of the year to trade through that, and so long as we don't have another attempt to Brexit at the end of January, which gives us a problem in February. I expect it to be able to trade through the issues that Brexit provides, assuming there is not a hard Brexit, of course. So cautiously optimistic. The underlying trade results are getting better in very difficult market circumstances, but we've got the B word out there, which, of course, could actually impact that in the second half year.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [5]

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Sorry. My question was in the specific line items, so the gross margins and the other expenditures for the quarter, which we have seen a very strong improvement as a percent to sales. So anything to call out there or these are sustainable, you think? There's almost a 200 bps-plus improvement on the gross margins and similarly, but whether it's going to go partially down from 1Q in last year.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [6]

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So back into the presentation, right? So we had a nice mix. We had higher Range Rover production -- products, which is obviously important to us. So 8% revenue growth with 2.9% volume increase tells you that was a good healthy mix for us in the quarter. Parts and accessories were also higher in the quarter, and the increases in the actual EBIT performance through Charge is coming through. In terms of a payer point, payer point within the data, the [B&E] levels, which, again, was [doubly] hard at 7%. But apart from that, would be -- the gap of the gross margin was positive for us versus the prior quarter data.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [7]

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Okay. And secondly, I just wanted to check -- one question I had from the Tata Motors Group results, better than -- for Q2 FY '20. I see that on Slide #10, we have realized ForEx exchange gain of INR 509 crores. And the stand-alone number is INR 20 crores. So there is a balance for realized ForEx exchange gains?

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Vijay B. Somaiya, Tata Motors Limited - Head of Treasury & IR [8]

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It's (inaudible), which is mainly sitting in Tata Motors' realized gain. So we had canceled some of the hedges on the ECB. And in Q2, we have seen a realized gain of INR 144 crores, which is there at the balance sheet at the realized level. I could request Ben to chip in.

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Operator [9]

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The next question is from the line of Robin Zhu from Bernstein.

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Robin Zhu, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [10]

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So I have 3 questions, please, if possible. The first one is the impact of FX. One thing that's quite missable is that pound sterling was 1.23 in the second quarter, which was quite a bit lower on a sequential basis. It has come back up again. Could you just clarify to what extent did FX impact revenue and direct material costs and what the margin of that -- the sort of direct margin move sequentially would have been had we had a constant FX environment from Q1 to Q2?

The second question is the China JV, I mean, the equity income number continues to look very weak. One of the things that, I think, is a bit of an issue is the fact there's too much capacity. That's obviously on your books. I mean there's just -- if you could share any thoughts on what the strategic plan there might be to try and lower those losses over time? Or is it just going to remain large, so long as your volumes remain really where they are today?

Question 3 is more just accounting. I think it was mentioned that you had a EUR 65 million subsidy. Just keen to know where that is booked and what that was in pounds.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [11]

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Let me take those in the order that you asked them. So FX, if you go back into the actual waterfall chart, you see us breaking that out. So we had -- definitely had some good operating exchange in the quarter. I think the number was 70 -- GBP 78 million. And of course, that's directly as a result -- the net effect of sterling actually being closer to that 1.23 and that 1.12 level on the euro. So that was positive operating net income statement in the quarter. We did have some hedges, of course. Our hedge book is rolling off from the worst, then back up in the paper on the roll-off of those hedges, but of course, as the sterling actually depreciates and the contract values increase. We had a large balanced revaluation, obviously moving from 1.27, I think, it was the end of June, to about 1.23, which hit us on the FX reval line on that page, about GBP 28 million. And we had some unrealized commodities. So net-net-net, the operating exchange was very positive. The hedges crystalized were neutralizing, and hence it is a balance sheet revaluation at the end of September. That was the partial offset. If we now move towards the 1.29, obviously, which we're currently at 1.28 this morning, the revaluation on the balance sheet reverses.

On the China JV question. Yes, it was a difficult quarter for us. We did say we were going to stimulate the sales on the JV. We've done that for several reasons, actually: one, because the selling [price] is just too low; but also, two, because there's a huge refresh of the products in the marketplace because in the last -- in the next 6 to 9 months. The first one of which, the Evoque did start to sell quarter 2. And we did -- we are going to -- seen an uptick in the sales rate and an improvement, we believe, in the transaction prices on all 4 of those products as we go through the next 6 to 9 months. Evoque is the first one off. The XE long was the second one. And then the Discovery Sport will be the third one that comes along. So we are expecting some improvement in the transacting prices, although it is a difficult marketplace for us. And they're certainly still work in progress. I'd expect to be able to report some positives from that work when we talk in January. And the third one is the grant received from Nitra that gets put to the balance sheet, obviously impacts cash, and improved cash by EUR 65 million in the quarter. It goes through to the balance sheet. And we think in the quarter, it's probably at a favorable income statement impact of about 5 million.

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Robin Zhu, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [12]

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Right. Got it. If I could just follow up on the China JV. Has the company given any thought to potentially writing down some of the assets like you did a few quarters ago? Is that even possible considering that it's a 50-50 arrangement? Because otherwise, you just have these big lumps of the debt that's just going to weigh on the D&A line at the JV.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [13]

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Yes. We look at it each quarter, Robin, actually. I think what we're actually doing at the moment has been clearer exactly where we think the trading performance is going to be over the next 12 months and then the planning period. That normally is the trigger for whether we feel we need to write down those assets. If we continue to trade, as we have in the last quarter going forward, there would be an asset write-down. But I think I'm signaling we don't expect to trade quite that way over the following 12 months.

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Operator [14]

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The next question is from the line of Sonal Gupta from UBS.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [15]

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A couple of questions. One, on the JLR residual reserve of about 25 million this quarter. I'm -- my understanding was that -- I mean, like in terms of you were not on the hook for some of these residuals on the lease book. But is there -- I mean, like, are you on the -- because right now, we don't really have much liability in the balance sheet. But is there -- I mean, like can there be a liability from these agreements? Or other following model years?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [16]

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Okay. Let me -- so yes, it was North American business. It was on '16 model year vehicles for Range Rover Sport and Range Rover. Prior contracts with Chase was a sharing 50-50 losses over 6.5% reduction rate. We've changed those contracts in '16 model year. So we don't expect any sizable increases on RV losses on our vehicles in the U.S. over the following periods. Where we're trading at the moment, we're pretty much on retail. So there is a sharing arrangement. That's the key point over a certain amount of losses, overwhelmingly or 100% before that is actually taken by Chase.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [17]

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Okay. And could you give us a sense of where your warranty costs was in this quarter compared to Q1 and for JLR?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [18]

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Yes. In Q1, warranty cost is 6%. If you remember back to Q1, we had 2 or 3 significant one-offs. One was the PV BSVI recall. Another one was the [exclusive] program software over the air. We actually pulled this in the marketplace, and we're rolling out over the course of this next 3 to 6 months. In Q2, there was a significant reduction in warranty as a percentage of revenue to just over 4%, improved by 2 points. Most of that improvement because we didn't have one-offs. The underlying rate on most of our vehicles as a coverage level of warranty is broadly the same as quarter 1 levels.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [19]

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So should we see 4% as a more sustainable level, I mean, given that there are no one-offs in this?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [20]

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I think I said in July, the range for us to be between 4% and 6%. So between the 4% and 6%, yes. Without one-offs, I would expect them to be closer to 4%.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [21]

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Right. And just lastly on the China volume outlook for JLR. I mean we have seen an improvement, of course, but we're coming off a very low base as well. So I mean just in terms of absolute volumes, do you think sequentially how things could pan out? I mean do you see significant improvement from current volume levels? Or do you think we'll see more gradual improvement from here?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [22]

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Firstly, gradual improvement from the levels we just delivered in Q2. But we do expect this to be positive in the second half of the year versus that level.

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Operator [23]

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The next question is from the line of Gunjan Prithyani from JPMorgan.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [24]

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I had just a follow-up on the China thing. Now at this level of volumes, the EBIT margin is still very, very negative. So how should we look at it? I mean does -- I mean if volumes were to improve only gradually, do you see the margin trajectory improving? Or we continue to see that this business will be -- will have a big loss portfolio?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [25]

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Just to check, I think you're talking about the JV rather than the import business...

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [26]

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Yes, yes, yes. It's the JV.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [27]

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I think -- so there will be a gradual improvement. I think the big point to note, though, of course, is that there are 4 -- the model lines are actually pretty much on it or just being changed and therefore you are seeing the impacts of older vehicles at the end of their current life. And so I really expect even at these levels of volumes for transaction prices to lift and for the losses in the JV to reduce substantially from the levels you'd see in the JV.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [28]

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Okay. Any guidance you can give as to how should we see this trajectory improving? I mean do we see this turning positive anytime soon or this stays negative until we really see the mix in terms of new products coming through?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [29]

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Yes, we'll see. I mean the new products are starting to come through. Well, the Evoque is the first one through in quarter 2. That started selling, I think, in August. The XE long starts to sell later in this quarter, in December, I believe. So you will have to wait for those new products to come along. I think the important point is they are either here or very close to being here. And the job obviously with the old product is to make sure you run them out quickly and orderly, and that's what you're seeing in some of the data that we posted within Q2.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [30]

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Okay. And the second question I had was on the capital raise. Now this is entirely going to be used for your stand-alone operations, as I understand. Is there any thought process to look at -- to think about looking at the funding gap at JLR? Because clearly, your own guidance is that it stays negative for 2 years. And I mean what is the thought process that -- is there going to be any infusion to bridge the gap -- funding gap there?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [31]

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Let me take that. I think, first of all, to put this in context, I think this is first intervention happening to correct the group's overall debt levels and bring it down, is one. The other piece is also a strong signal to support, from a promoter, to support the business in terms of how these figures are our opportunities. Because it's well to note that there's return of premium for the current market price. And therefore, this is being done to actually signal as much as we fund, is one. Number two, as far as the usage of this fund is concerned, it will be used to repay debt. And the way the ratings works is JLR falls off into Tata Motors' total, and that's how the ratings work. And then so we are now intervening at a group level to get the ratings accordingly. Hence, it will benefit JLR and its bondholders as well.

So therefore, at this point in time, we'll use it to pay down group debt and the usage can be Tata Motors, it could be JLR, it could be (inaudible). And like totally, we run it as a complete group when it comes to how we want to manage the net debt overall. That's how the ratings companies look at it as well.

So that's how we are looking at it. And at this point in time, the debt reduction will really happen on a stand-alone entity because it is facing this maximum challenge at this point in time. As far as JLR is concerned, it's a very strong balance sheet as I keep repeating again and again. Their equity ratios are quite comfortable. Their broad-based EBITDA number is also quite comfortable, particularly as its performance is starting to turn. And therefore, we watch the space closely. The sign of the promoter is to say that we believe in Tata Motors, [the sales] intervention is coming.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [32]

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Okay, got it. Just last question, if I can squeeze in, on the alliance with BMW. And we've also spoken about looking at such more alliances. Could you show some more light on it? I mean what kind of alliances we are looking at? And does that mean that there is a case for CapEx to be lower from where we are currently at JLR?

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Bennett Birgbauer, Jaguar Land Rover Automotive plc - Treasurer [33]

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Overall, I can only really share a few opinions. We are looking for technological partnerships like BMW. But we also have different partnerships in more areas. We have found partnerships with (inaudible). We have found partnerships in China with Alibaba or Baidu. We have been really out in the IT area or in the bond. We also had a lot of support by TCS in going forward in the IT sector. This is very important because no company can really be perfect and meeting in every and each segment.

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Operator [34]

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The next question is from the line of Jinesh Gandhi from Motilal Oswal Securities Limited.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [35]

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My first question pertains to JLR. In fact, a couple of questions for JLR. One is on the material cost reduction, which you have highlighted in the presentation of GBP 300 million. How much of that has been achieved in first half? And second question pertains to JLR tax rate in this quarter. Any reason for tax rate to be so high in the -- in second quarter?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [36]

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Okay. Let me take the first question asked. I think you'd probably -- when you say the GBP 300 million, you're probably referring to the charge page, I'd imagined, happened within quarter 2, of course. If you go to the waterfall bridge, you'll see in quarter 2, that was about a GBP 40 million, I think, improvement in material costs, even though there's some commodity costs in there as well. So what we're signaling there is we, as a part of the Charge program a lot, we're expecting in a full year we like to reduce material by about GBP 300 million.

On the tax rate perspective, can you just repeat your question, Jinesh, if you would?

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [37]

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So if you look at the effective tax rate for JLR in this quarter, it's almost close to 36%. I know it's not the right way to look at it because of the addition of taxes and PBT losses at some of the entities. But what would be the sustainable tax rate for the full year?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [38]

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Okay. Can I comment here? I think (inaudible) I think the taxes do look for full year numbers. These are volatile numbers. Full year JLR tax, nothing has changed from what it has been done over the previous years. What you see is a console, where you see the tax number also being extremely high. And basically, the profits in JLR being taxed at nominal rates. Losses in Tata Motors, the first half of it is not recognized. And that combination [has seen] this number overall. So ETR is always better if we look at on a full year basis, and we will not see any changes for JLR ETR rates [at the moment].

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [39]

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Should that be around 25%, [30%] or higher?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [40]

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20% to 25%. 22% is [the figure] there.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [41]

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Okay, okay. All right. And third question pertains to India business, particularly on the CV side. And what are the changes we are seeing now after last quarter of -- while we corrected inventory? But retails, they're still substantially down from commercial vehicle business. So if you could just -- can highlight about how -- what are the emerging trends on the ability of your business and LC business and outlook for second half?

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [42]

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Girish?

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Girish Wagh, Tata Motors Limited - President of Commercial Vehicles Business Unit [43]

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Yes. Okay. So I think the last quarter was a pretty bad, as you can see. And in fact, the total industry volume in September was the lowest in a September over past 10 years. I mean that was the kind of savage fall one had seen. And if you look forward, it's very difficult to project what kind of growth or de-growth is likely to happen. But one is seeing some green shoots in the demand drivers, not demand, so to say, but there are some green shoots in the demand drivers. Some of which are like the freight availability post monsoon is looking up slightly, the freight rates are (inaudible) slightly. And we look at what we call is the transporters' sentiment index. It's actually the indication of their satisfaction with the current business and their like euro purchase going ahead. And what you've seen is this, for the cargo trucks, the transporters' sentiment index actually bottomed out in Q1 and have slightly moved up in Q2, which our transport of cargo. And if you look at deeper, the sentiment index impact has further gone down in Q2 over Q1. So that makes one sees in the medium and having too much to wait. I think post the relief package by the government, one has started seeing some selective fund disbursement happening on the infrastructure projects, which will gradually get things moving. We are awaiting actually start of some of the new projects and allocation of new projects, giving out some mining licenses also.

So therefore, I think there are some green shoots on demand drivers. If you look at the fleet operators as such, and more or less, I'm talking about medium and heavy commercial vehicles, they have actually started coming forward and buying a lot of things because it makes a lot of business sense for them to buy the BSIV vehicles now by replacing their 5-, 7-, 10-year award BSII, BSIII because there's a huge operating cost advantage when one moves to BSIV vehicle. And we can also avoid likely price increases, which is going to happen in BSVI.

So that's what we see in medium and heavy commercial vehicles right now in this month if we don't see green shoots in demand. But we will clearly see green shoots in demand drivers, so something -- so that you may stand out as we go ahead. If we look at the remaining segments, Intermediate and Light Commercial vehicles actually has been the one which has dropped the minimum [amount of installs] in the segment. And this actually continues to do well. Drop is less as compared to other ones, and it's -- that's how it is going ahead. And we see more customers coming here and asking about new vehicles, the BSIV vehicles, because we're getting to BSVI. I think small commercial vehicles, currently, the festive season is there and therefore we do see the annual improvement in retail. But we have to wait as to how the small commercial vehicles span out we go ahead.

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Operator [44]

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The next question is from the line of Binay Singh from Morgan Stanley.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [45]

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Just firstly, on China. Most of the press releases of [JV] are pointing out that China recovery being the key driver for profit turning. So is that coming from the import business? Because clearly, in the JV business, we've not seen any improvement in the wholesale dispatches to China, sequentially up very sharply, and all the pricing recovery going, recovery happening over there. So just to understand which part of China has seen recovery.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [46]

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Yes, it is the import, which you quite rightly said. It is having an impact in quarter 2, a modest impact, but it is having an impact in quarter 2. And when we look to, as I mentioned earlier, showed the value from our China import business steadily in terms of the balance of this fiscal year.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [47]

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Okay. So the retail dispatches in China, up only 1,500 units quarter-to-quarter. That means also you must have gone up significantly. So inventory levels in China would have gone up. Is that correct?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [48]

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No, no, no. That's certainly not correct. I showed you the China page. You can see the inventory levels. Not the...

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Binay Singh, Morgan Stanley, Research Division - Executive Director [49]

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No, just -- yes, it's really surprising that 1,500 units would make such a big difference. But secondly, coming to Project Charge, we were targeting a...

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Girish Wagh, Tata Motors Limited - President of Commercial Vehicles Business Unit [50]

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Binay, Binay, so Binay, can I intervene for a moment? JLR, I think, if you could see the waterfall chart slide on the EBIT improvement, you will notice that it is a pretty well-rounded delivery coming in from JLR performance. I wouldn't attribute this only to China, yes. And yes, there is a better mix coming in because Land Rover sold better than Jaguar. Charge has delivered. There's substantial pieces of the puzzle that have come in the right way this quarter. So therefore, China is definitely one of the important, but not only the one there.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [51]

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Right. That's helpful. Just on the Project Charge. You are targeting around GBP 0.8 billion of cost savings on the cost front. How much have you achieved in H1? And have you tracked to do 0.8 -- GBP 800 million for the whole year?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [52]

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Yes. So that GBP 500 million delivered in the -- so far under the Charge program, GBP 150 million of that was last fiscal year, which means GBP 350 million of that is the first half of this year.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [53]

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So we're on track to do the remaining GBP 450 million in H2.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [54]

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And the difference is in the second half of the year more of the material cost reduction as negotiations get closed down. And as I stated, more material cost reductions did come through in the second half of the year. So yes, we're on track.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [55]

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Right. And then just one question on the India business, one on CV and one on PV. On the CV side, we've seen discounts are going up quite sharply in the last quarter. So when the inventory pressures are eased down, do we expect discounts to ease down over there? And the question on PV is that market share has come down on the wholesale side quite sharply. So could you share some insights on retail market share?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [56]

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Let me comment here. As far as the CV discounting is concerned, you're right, the intensity of discounting in the market is indeed high. And I think to your question on how does it play out going forward, we are happy that our inventory levels have corrected to almost normal levels that we want it to be, but the levels of market discounting will totally depend on how each of the players' inventory levels are doing. We are not privy to that so we got to just wait and see how it plays out. So far, it is fair to say that from our point of view, we'll remain competitive to ensure that we do not lose market share. Girish, do you want to amplify.

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Girish Wagh, Tata Motors Limited - President of Commercial Vehicles Business Unit [57]

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Yes, yes. So what I would also add is that I think our stocks are now at a 6-quarter low. And the demand-supply mismatch, which was there in Q2, more towards supply being more than demand, is getting normalized as balance sheet, right? And I think this -- with some green shoots on demand drivers, I think one will see the realizations for these numbers will go ahead.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [58]

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And as far as PV market share is concerned, it's a conscious correction in the wholesale market share that we have. So please hand over to Guenter to explain the -- anything else?

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [59]

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As was already rightfully mentioned, it is true that the market share came down on wholesale. And it is officially somewhat uniquely measured in India. We took a conscious call in preparation of transition from BSIV to BSVI and because of the fact that the market had really collapsed in the second quarter, whether that's in particular an expectation that even it might get reduced and [the Chief -- current Chief Accounting, had its meeting in terms of] on the 20th of September, we decided to drastically cut production. With the cut of production, we also adjusted wholesale accordingly.

And since we have anyway shifted focus from completely wholesale to retail as of the 1st of April this year, all the -- we took [the conscious] impact on our market share, dropping below 5%. But for us, it was much more important to reduce the stock level. For us, it was much more important for us to actually stick to our commitment towards the dealer network to reduce the stock level and to unleash working capital on their side because as far as the retail was concerned, and we have seen a lot of [this apply] in our balance sheet, our retail was significantly higher than wholesale as to the size of the impact. So to reduce the stock on retail, although there is no official specific availability in India, it was officially completed, although we are pushing up even with SIAM and FADA, which is the association that's presenting the (inaudible) to actually focus on the ground reality as it is retail and that we have not seen any compromise in the product -- in our market share, which was during the first half of the year consistently between 6% to 7%, which actually confirmed to us that we are doing the right thing.

As far as the balance sheet presentation, in order to correct the market situation and to adjust the system stock, as we call it, so not only on the cap on the dealers, also in part of (inaudible) to the best possible extent. And by the end of the month, as we look forward -- end of the month of October, we expect to be back to the normal level, which gives us further comfort for transition from BSIV to BSVI.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [60]

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Great. Great. And the 6% to 7% is overall PV retail market share. That's your best estimate, right?

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [61]

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So that's what -- that's what we see for what they can be from the statistics available and what we can read on the market feedback. It's just an estimate.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [62]

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We have no idea of knowing the retail share -- retail growth of verifiable numbers, and this is modeled with the market intelligence. We believe it's about 6% at this time (inaudible).

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Operator [63]

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The next question is from the line of Chirag Shah from Edelweiss.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [64]

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Yes. Two housekeeping questions first. In India business, this INR 233 crores charge on the PV business you have taken, where has it been accounted for?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [65]

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It's inside the EBITDA line, other expenses that you see there.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [66]

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It's in the EBITDA line. And the second question is -- yes. And second is Girish Wagh, your comment on shift to lower tonnage, which is there in the presentation, is it more prevalent because of the slowdown that we are seeing? Or it is more to axle norms? Which is a bigger reason because both have coincided at the same time? So what gives you confidence to attribute more to axle norm rather than slowdown?

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Girish Wagh, Tata Motors Limited - President of Commercial Vehicles Business Unit [67]

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Yes. So see, the slowdown, which has happened, Chirag, is also different in different end-use segments, right? There's the 2-axle and 3-axle drive and especially those in long wheelbase segments are mostly used for the e-commerce segment, right? That is for logistics of e-commerce company. And this is one segment which has been growing pretty well.

And therefore, one sees that share of this segment has actually gone up as compared to the multi-accelerators and tractor-trailers. The multi-accelerators and tractor-trailers, which are used for cement, steel transportation or some of them are used in road construction for raw material transportation, I think both segments are -- end-use segments have gone down.

And as a result, the fall in these segments is actually higher than the overall industry volume fall. That's the reason that the smaller vehicles -- smaller-tonnage vehicles have gone up. As we go ahead, depending upon how one sees the end-use segments growing in the remaining half -- the second half of the year, I think different segments will kind of change their contouring of the overall industry volume.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [68]

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Yes, helpful. And a question on JLR. When I look at your EBITDA per vehicle as a metric, we have the best EBITDA per vehicle since Q2 FY '16. So how do we look at this number? Because EBITDA per vehicle, can we -- can it improve further from here on? Or there is certain business pressure which could come in for us? I understand that the current performance is driven by the new launches. So the sustainability of new launch and its impact on profitability, if you can help us understand.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [69]

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Let me take that question, if I may. So yes, we had a really good EBIT and EBITDA in quarter 2. I think it's back into the answer I gave earlier in terms of the second half of the year. I do expect volumes to be stronger in the second half of the year. Mainly because of the volume higher there'll be a little bit of a weakening in the mix on a per unit basis, we won't quite get the same level of profitability. There was a big issue called Brexit coming out in Q2 and Q1 again, which will impact -- we only sold in 120,000 cars in the quarter. That would certainly have an impact on the quarterly results.

So I would encourage you to wait in shape -- to see what the shape of the quarter is when we talk in January. However, the underlying profitability on the vehicles are stronger than they were earlier in the year. And I'll go back to quarter 1 to help you understand that. In quarter 1, we had a VME of 9% [of GVR] that was down to 7% in quarter 2. And I expect that level going forward this fiscal year. And in quarter 1, we had a warranty of more than 6% of GVR . And that's down to 4% in quarter 2, and I'm expecting the level closer to 4% in the second half of the year. So there's basically a 4-point improvement in those 2 areas in quarter 2. And it's that level of spend and coverages I expect in the second half year.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [70]

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And Chirag, I think just to close the point, I think the reason we are confirming that we hold our full 2-year plan, that is 3% to 4% EBIT. And all the interventions that we are making is to ensure that we get more and more robust in terms of delivering within that particular corridor, and we'll reconfirm how we are performing against that in every quarter as we go forward.

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Operator [71]

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The next question is from the line of Alexi Yannas from BlackRock Capital.

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Alexi Yannas;BlackRock Capital;Analyst, [72]

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This is a more JLR-focused question. What are your plans regarding potentially accessing the bond market? And if so, what are your thoughts about whether secured versus unsecured financing would be more likely?

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Bennett Birgbauer, Jaguar Land Rover Automotive plc - Treasurer [73]

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I'll take that. So this is Ben Birgbauer. I'm the Treasurer of JLR. So in terms of accessing the bond market, one of the slides in the JLR presentation shows what we've done to date in terms of funding and that we will be looking at other funding options for the rest of the year. And one of the things noted there is definitely looking at bonds. We will continue to do the same thing we always do, which is monitor the bond market and decide when the right time to access it is. We'll obviously be taking a look at the market after it absorbs these results. And we'll look at whether it would make sense to go sometime, yes, this year or maybe we'll wait until next year. So I think at this point, that still remains to be decided.

In terms of the question of security, we've been very, very clear that we have no plans to issue secured debt. Our strategy has always been around funding on an unsecured basis, and there is no change to that strategy.

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Operator [74]

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The next question is from the line of Raghunandhan N. L. from Emkay Global.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [75]

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Congratulations on a very good set of results. My first question was on JLR. If I look at the market share between April to September in various geographies, there has been a reduction in market share when I calculate market share and taking the top 4, 5 players and seeing how the market share has changed for JLR. So just wanted to understand, how do you the strategy to recover this share going forward?

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [76]

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At the end of the day, I'm most interested that these are more costs but these are profitable costs. Market share is important for us on a, I think, different level and quite clear [we are seeing more cost] and this ambition is all over the place. We have some, let's say, critical items in the other country. It was a negotiation in the regulatory issues, especially in overseas. But in the rest of the markets, we see a stable area. The issue is also now in the U.K., where we see that the customers were impacted because of this kind of Brexit debate. And this is more or less a statement, and we will continue with another stronger third and fourth quarter.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [77]

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My second question was to Greece. There has been a lot of news on the scrappage policy of late. So just wanted to understand how you see that. And what are your thoughts about that?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [78]

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So there are 2, 3 things on the scrappage policy. First of all, for you to make any meaningful difference on the demand. The life of the vehicle should be somewhere, 10, 10 years. I mean right now, there is -- initially, there was a top of 20 years, and there was a top of 15 years. I think if the period is made anywhere between 10 to 15 years, then it would be helpful. And if it goes more towards 10, 10 years, then I think it will have a good impact on demand, number one.

Number two, I think the policy is yet to be fully fleshed out in terms of definition of what is end of life, right? So end of life will not necessarily be by number of years, but it can also be in terms of usage, the number of miles the vehicle ran and so on and so forth. So there is also a need to flesh out the policy better so that it actually ends up into defining the end of life properly.

And certainly after the end of life has also been decided, there is a need for a good number of scrappage facilities across the country. So this is something that cannot be localized at one location with high capacity the way [cars or] metals are made. So this is another requirement which is there. And on the scrappage facilities, alternate scrappage facilities, I think things have just started moving.

So all these 3 things need to fall in place, either in terms of clarity or in terms of capacity. And then one can see a good impact happening on demand. But as an EV OEM, one would certainly look at this coming in when there is a transition to BSVI. But this will certainly lead to a good incentive for people to come forward and buy new vehicles.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [79]

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That was helpful. One last question, if I may. How was the festive season on the car side?

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [80]

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I'm going to take this question. Festive season is not yet over. And we got (inaudible) first instance that we marked in the month of September. The month September, as mentioned, we were really up, up to the 20th of September [which is the accounting meeting] literally not [so much of investments are seen visible] and how do you see any improvement on the inquiries and certainly not on conversion in retail because we expected a movement of GST.

The situation actually changed as of the 21st of September where we saw in the last week of the month of September there had been an increase in inquiry and also a good improvement on the conversion. Retail was still somewhat below because lots of Indian customers preferred -- actually seem to be buying typically in the month of October for a kind of a different reason. In the month of October, as we speak, we have seen a continuation of the positive trend.

As far as the inquiry level is concerned, the inquiries were almost on the level of what we have seen a year ago in the same festive season. The only thing which we have seen is for a continued trend of a change in the mix of the inquiries. So what we call the [natural] walk-ins and the (inaudible) inquiry is more towards digital inquiries, digital leads where I think overall in the industry, it's a matter of fact that although the number of inquiries is higher, the conversion rate on the digital leads is not close yet from what we are used to from the natural inquiries and the walk-ins. But it is something that Tata Motors had addressed.

As far as our digital -- the follow-up on the digital leads is concerned, dedicated position lead team was established with most of our dealers because it's a particular skill set required to analyze the leads, to talk to the customers and to finally offer them test drive. Where we need to match the digital leads is specifically a reality of our business.

As far as conversion rate is concerned, the conversion rate in general has improved in the month of October. The retail has picked up. And so therefore, we expect a significantly better month than the month of September. But I think the same caveat like Girish, this is a festive season. All of the players that eventually took effect moves forward as far as festive season offering for our consumers. This is certainly not going to continue in the quarter until the end of the year.

So that's actually been that as we get all through the festive season and we actually get back to the business as usual, how strong the demand situation is going to be. We expect in line with the normal seasonality that November is most probably going to be somewhat on the lower level. But towards the end of the year, as far as the calendar year change is concerned, we expect further that retail is going to increase, which will give us actually the best starting point on the transition from BSIV to BSVI because as of the next quarter, we are going to introduce the BVI, we believe, in preparation of the transition effects as of the 1st of April 2020.

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Operator [81]

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The next question is from the line of [Rahul Doshi] from Pinpoint Asset Management.

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Unidentified Analyst, [82]

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This is [Rahul Doshi] here. Congratulations on the good set of numbers. Just one question. When Mr. Balaji in the opening remarks said that the government is contemplating more measures in terms of boosting demand, what exactly are the guys referring to as in some color in terms of the steps that are being taken apart from the scrappage, which has already been discussed?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [83]

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Yes. I think there's a combination of factors. Recollect the combination of the last 1 month out there in the public domain. I think the big one medical infrastructure reinvestment that the government achieved in the front end, and that will effectively have a significant impact on the contract segment for us and the production of effects thereafter.

Then, of course, the intervention is happening on payments and liquidity is getting too [thin]. And that again will be a big area for us to actually see the unlock of the month. We have already seen some of the (inaudible) starting to come back against those impacts, generating demand.

So I think -- and therefore, the entire cycle of -- the multiplier effect of all these things coming from the rest of the economy as well. So we remain cautiously optimistic that these are things that should start benefiting us going forward. Then on top of this is CapEx and then, of course, on the (inaudible) changes (inaudible) BSIV (inaudible).

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Unidentified Analyst, [84]

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So what, according to you, is a rational time frame in terms of the margin improvement apart from the scrappage? Like the scrappage is not announced. What, according to you, would be the time frame over which you'll see the demand getting back to normalcy?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [85]

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I think your guess is as good as mine. The earlier the better, which is the reason we left the same outlook as the near term is fluid. So we are, I think, more than waiting for demand to come. Our objective is to say that we remain as agile and as nimble as possible so that if the demand does come, we're able to jump onto it immediately. So that is our entire focus at this point in time.

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Operator [86]

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The next question is from the line of Priya Ranjan from Antique Stockbroking.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [87]

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One question is on the material cost reduction on the JLR side. You've talked about EUR 400 million. So where do you see -- I mean what are the scopes in terms of where do you see the reduction can happen? Second part is on the warranty cost. I mean you have talked about that there is a 2% reduction. But when we look at the [call out] in the waterfall chart, it's saying around 5 million worth of negative impact of warranty costs even in this quarter compared to last year.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [88]

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Let me take the first question first. So material costs, we are expecting actually GBP 300 million reduction on a full year basis compared to prior year. Quarter-by-quarter, of course, more negotiations get closed down, and the claims mostly get backdated to the start of the fiscal year. The number each quarter grows. The number -- net number in Q2 was 40 million. It will be bigger than that in quarter 3. And it will be biggest in quarter 4 as the final negotiations get closed down and backdated through -- back to April 2019. So we're relatively confident that the material numbers on a full year basis in charge will be delivered. And you can see what we actually did in quarter 2.

And warranty cost, I think there's a clarification there. When I answered the question earlier, I was answering versus the level of spend in quarter 1 '20 fiscal year, which was just over 6% as a part of the losses that we talked to you about in July for quarter 1. The level in quarter 2 is just over 4%. Now the page you're referring to here has nothing to do with quarter 1. It's actually the same quarter last year, i.e. quarter 2 FY '19, and the absolute level was about the same of $5 million there. So it's a clarification around which quarter you're comparing to.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [89]

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Yes, yes, right. Got it. I mean the warranty cost each and every quarter, it has been going up. So I mean is there any end to it or the top line keeps growing? I mean the number of vehicles, et cetera, will keep increasing. So will it be increasing? I mean what are we doing to change that, I mean, the entire direction? The percentage to sales looks nice. But I mean in terms of the absolute number, if it can be reduced, that will be...

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [90]

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Yes. We're working hard to reduce the absolute number. If you're on the call in July, you'll remember our Quality Director, Nigel Blenkinsop, basically talked to 15 minutes of this is what we're doing about it. The quarter 1 was specific recall and goodwill actions. So the absolute number will increase as our volumes increase. And therefore, the warranty car park out there gets bigger. But obviously, 4% of revenue isn't acceptable. And we're working hard to reduce that, mostly in the powertrain and infotainment areas. That's where the higher levels of warranty challenge are that we have on the vehicles.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [91]

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And one thing on the write-downs. I mean do we need to take the write-downs for engine plans, sometimes in future as well with more -- I mean the diesel engine plans, et cetera, which we have set up immediately?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [92]

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So I think if you recollect the conversations on -- and it is the impairment. I think for us, we have now put our best foot forward in terms of what we think is an assessment that we see on this service, and we don't see anything further effects coming up in front of us. So that's it.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [93]

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And second part is on the India business. I mean what kind -- I mean in terms of PV business, I mean in wholesale and retail, I mean, you have now been correcting what the problem might have been occurring since last 1 year. So how much do you attribute to the built but not delivered kind of scenario, which is a very normal practice in the industry? I mean typically, when your Concorde has faced some kind of issue in recent past, so how do you see that?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [94]

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I think from a retail perspective, the focus on retailers ensure that we keep a front-end team and ensure that it's done in the right manner. And that's where our focus remains. And as far as measures on how we ensure that the wholesale reflect those of retail and don't get ahead of themselves, that is the correction that we've been putting in place. So therefore, we believe we are in the right place on that one. And that's how we intend to take it forward.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [95]

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And last one with -- from Greece. I mean how do you see this -- in the entire decline, how much do you attribute to the entire construction, et cetera? I mean the construct segment going down in the last 6 months or so. Because I guess the last year, the entire M&HCV volume was driven by constructors that might differ, et cetera, primarily driven by constructors.

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [96]

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Yes, that's right. So within the M&HCV drop which has happened, which is almost around 45% in H1, I think the [triple] segment has contracted more. And as I mentioned in the beginning, even the sentiment index for reported customers is actually going down, permanently going down. And in Q2, it was even lower than that of Q1, whereas in cargo, the sentiment index has increased, which means that they are looking forward from buying possibly ahead.

In Tata, as I said, what's going to help start the buying season again is actual funds disbursement from the government for the various projects, number one; number two, expediting licensing of some of the new infrastructure projects; and third is also renewing or new mining licenses to be expedited. I think these things will kind of bring back the demand for Tata. But with the government's focus on infrastructure and the amount that they have indicated they will invest in infrastructure, I think one does see in medium to long term that Tata should do very well.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [97]

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Okay. And one, I mean, a little longer-term question, I mean, if I can. It's on the impact of DFC. There has been a lot of talk about DFC impact on the commercial vehicle side, at least on the Delhi-Mumbai corridors. So how do you see and what's your reading on that?

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [98]

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Yes. So see, there are 2 corridors. One is Northeast, and the second one is Northwest. The Northeast corridor when -- dedicated freight corridor, when it comes up, will be used mainly for transportation of minerals, right, minerals and coal, et cetera. And actually, to a great extent, these commodities are anyway being transported by rail train. They're like the best means of transportation for these.

Therefore, the impact of the Eastern corridor is going to be muted. If you look at the Western corridor, which is Delhi-Mumbai, this is the internal traffic related to export in both, which happens on this corridor. And therefore, there is likely to be some impact happening on the tractor-trailer market, which is a container for transportation. So one does see some impact happening on the tractor-trailer market in the Western corridor. But even there, I think the impact is not going to be huge, more than -- maximum, it will be around single-digit shift happening back from roadways to railways.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [99]

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Lastly, if I can, just on the PV side. And there has been a lot of talk or debate on the diesel petrol for BSVI stock. And there has been a lot of cost differential, et cetera. So what's your thought?

I mean on that front? Because market leaders is trying to move out of diesel, so your strategy on that.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [100]

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We have seen a (inaudible) proposition on it as to you might recall, seeing diesel for the time being is a valid proposition for certain use cases, in particular, as far as higher mileage -- accumulated mileage for [NMR] concern. But we expect further review of these cases. It will become an option on the pure comparison on TCO, taking the higher execution costs of the diesel after this into consideration.

This whole discussion is certainly going to be under accelerated term when we look 2 years forward, so that will be April 2022, the (inaudible) Phase 2 because they need to become even more stringent, which requires an additional piece of technology to be added where we expected, in particular, the lower diesel displacements. That's largely the discussion will become more even more extended so that even bottom line use cases today, which would justify a diesel engine, actually might not make strategic [regulation].

So therefore, we have decided to continue with diesel. We do see these use cases, although we expect a lower percentage of diesel after the transition to BSVI talking about those displacements, larger displacements only present to our 2 leading diesel user, for example, on the heavy. They will -- this kind of displacement is going to continue because there is, honestly speaking, no real option available as far as petrol is concerned for these class of vehicles below the 4.6 meters SUV. It's best equipped with diesel engine and gives the customer the best driving pleasure in terms of power and convenience.

But we will very closely and carefully monitor the situation at the lower end, and we'll take our decisions accordingly. But for the time being, we're going to move forward as just described.

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Operator [101]

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We take the last question, which is from the line of [Stephanie] from JPMorgan.

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Unidentified Analyst, [102]

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You've answered most of my questions. Just one quick question about the emission mandates that are coming through starting in 2020. Just wondering what your view is. We have seen some articles about, for example, perhaps some of the heavier vehicles being pushed, I guess, towards year-end and the start of next year as the mix needs to change for most of the automotive OEMs. And I didn't know if you could perhaps comment on that. And just as well looking at the sustainability of the cost-cutting exercises that you've done. You may have already said it on the call, so I apologize if you're repeating yourself. How are you looking at that also in the context of like raw materials as we move through the back half of the year?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [103]

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Yes. Let me just clarify your question first. Are you referenced it was BSVI migration in India or the emission laws in Europe?

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Unidentified Analyst, [104]

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For JLR, the European Union, yes.

(technical difficulty)

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Operator [105]

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So the line for JLR team is disconnected, trying to call them back.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [106]

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Okay. Fair enough. So let me comment on the material cost (inaudible) sustainability of the profit improvement there. You can notice that Adrian just talked about that in terms of why we believe that some of the number corrections that have happened are continuing, particularly from the point of view of warranty cost increases and decreases as well as some of the charges I mentioned coming in the way we want it to play, and of course, the benefit of the overall volumes starting to pick up.

The flying element of course is Brexit. We just need to wait and see how that plays out in the coming months. And that could spoil the picture if it doesn't -- we are supposed to do one more round of stock correction. So that's what we need to do in the next transition. As you are aware that we are taking one in November and because that's something that we need to watch and see. Other than that, I think we believe the underlying performance is now starting to improve, and we like what we see there.

As far as emissions in 2020, the compliance is concerned, we are comfortable with the compliance amount of 2020. And our plan and the road map for the future is also factored in. The ongoing compliance will come up in subsequent years as well. And given the mix of products and the launches coming in, particularly with the 3 new architectures coming in, it does give us confidence that we are on the right track there.

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Yogesh Aggarwal, HSBC, Research Division - Head of India Research and India Tech Analyst [107]

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And to answer just one question, I think Adrian has joining back in, the one question on the emission compliance for JLR for the year 2020 and what's your confidence on adhering to that.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [108]

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Well, we know what the targets are. We know what the challenges are. At the moment, all of the actions we would need to take next year haven't been taken. But we're reframing our plans and our expectation is overwhelming. We will be compliant next year.

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Operator [109]

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Ladies and gentlemen, I now hand the conference over to the management for closing comments.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [110]

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Yes. Thank you. Thanks, everyone, for joining the call. Once again, wish you a happy Diwali and season's greetings to others as well. And hope you get to spend some time with your loved ones in the coming weekend. Take care, and catch you soon in the next quarter.

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Operator [111]

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Thank you. Ladies and gentlemen, on behalf of Tata Motors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.