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

Q1 2020 Tata Motors Ltd Earnings Call

Mumbai Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Tata Motors Ltd earnings conference call or presentation Thursday, July 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

* Guenter Butschek

Tata Motors Limited - CEO, MD & Additional Director

* Joachim Eberhardt

Jaguar Land Rover North America LLC - President

* Nigel Blenkinsop

Jaguar Land Rover Automotive plc - Director of Quality and Automotive Safety

* Pathamadai Balachandran Balaji

Tata Motors Limited - Group CFO

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Conference Call Participants

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* Chirag Shah

Edelweiss Securities Ltd., Research Division - Research Analyst

* Jamshed Dadabhoy

Citigroup Inc, Research Division - Director

* Jatin Chawla

Crédit Suisse AG, Research Division - Research 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

* Pramod Kumar

Goldman Sachs Group Inc., Research Division - Executive Director

* Prateek Poddar

Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity

* Robin Zhu

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

* Ruchit Mehta

SBI Funds Management Private Limited - Analyst & Fund Manager

* Sahil Kedia

BofA Merrill Lynch, Research Division - VP

* 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 Tata Motors Q1 FY '20 Results 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, Managing Director and Head of Research. Thank you, and over to you, sir.

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

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Thank you, Stanford. 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 management team again. Today, 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 management team for taking out time today.

We will start the session with some comments from the management followed by Q&A. Over to you, Balaji.

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

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Yes. Thanks, a lot, Yogesh. Thanks all of you for taking the time to join the session. As of last time, what we have tried to do is to get the data in front of you as early as possible, and we will try and keep the presentations as short and sharp as possible, just calling out with the areas that we would like to highlight and then spend as much time as possible on Q&A.

So without further ado, I draw your attention to the safe harbor statement. And then, of course, talking about the new developments in the quarter, particularly proud of celebrating the 10,000th consumer for the -- customer for the Harrier as well as a fair amount of action coming from JLR on Discovery Sport, which is now on sale as well as the BMW Tate, which we talked about in the Investor Day.

And on the CV side, I think the launch of the compact truck INTRA is something that's been special for us. So a lot of action continues this quarter.

As part of the FY '20 consolidated numbers are concerned, I am on Slide 4 at this point in time, the volumes came in down 20% and revenues down 7%, and that is actually coming out of a significant weakness across all markets that we have seen. And this, in particular, has -- if I go down 1 level below, the real absolute productions coming from China and India caused maximum impact for this particular quarter. And as far as the EBIT is concerned, that's fundamentally coming out of 2 areas and declines in EBITDA to 2.5% out of the negative operating leverage because of the volume decline that we saw as well as a higher warranty and marketing cost of JLR, which is something that we will talk about in slightly more detail. And we have managers with us who is going to talk us through that.

Overall, I think the good news is that cash outflows in JLR this quarter have been significantly lower than the same period last year, highlighting the impact of Charge as it starts to really bite in the business. And when India is concerned, it's a touch disappointing on our working capital, but we are very clear that we will get that right as we go forward. We couldn't handle the sharpness of the slowdown to the speed that we would like. Overall, China is now starting to stabilize, and we expect to see growth hereon and Turnaround 2.0, which is -- I'll talk in slightly great detail later.

From a volume side, what I really like to draw your attention on is the revenue decline of 7.7%. A good part of the JLR revenue decline has now started to reduce and getting more into a manageable space and then we expect to see growth going forward.

And in India, the retail performance is something that we have started talking about, and as we now go unabashedly retail is starting to get better than -- quite significantly better than wholesale for the quarter.

The EBIT margin fundamentally reflects on the Slide 6. The EBIT margin basically reflects the negative operating leverage in a large -- to a large extent. And both in India and in JLR as well. And in India, I think, one thing which I'll call out is the competitive intensity, particular in the CV business has really intensified and particularly in a situation of declining demand.

Moving on to the JLR. Let me now hand over the slide to Adrian. And I ask to take it from there, Adrian. Over to you. Adrian, I think you're on mute.

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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 line. And I'm actually on Slide 9. What Balaji just said is, of course, modeled within the Jaguar business as well. Revenues were 128,600 retails, down 11.6%, and the money along that was just in the GBP 5.1 billion, down 2.8%. I'll take you through some details later.

EBIT for us was 5.5% negative. There were 3 significant pieces of that, higher warranty costs. We do have Nigel with us today. Higher variable marketing costs mostly on older car run outs. And also, we had reduced volumes in 2 major areas: One, in China. We have worked through those year-over-year reductions. June will be the last month. And also as a result of our Brexit planning, I'll touch more on that later.

And as Balaji just said, the free cash flow was much stronger this quarter than the same quarter last year. And again, I will give you the texture on that next slide.

Here the volumes, you see the year-over-year units there for China versus last quarter -- same quarter last year, down 29%. As I've just said, we've now worked through our year-over-year deteriorations in China. And July is actually up month-to-date versus the same month last year and June was higher than May, even though the marketplace is deteriorating. U.K., was better versus the prior year, same quarter, 2.6%. Also, the disappointing data for us this quarter around on volumes were in overseas markets, 3 or 4 places. We're talking it of about 4,000 retails in total.

Next slide, if you would. Obviously, by nameplate or nameplates were down overall were down with the exception of the new ones, the new Evoque and the I-PACE. I will cover those details later on, but both were increasing during the quarter, April through June.

This is the financial page for us. Our loss before exceptionals was GBP 383 million. We did have GBP 12 million exceptionals for redundancy costs mostly as well. That's higher than last year for all these reasons stated. Half of the volume loss was China. The rest, a little bit more than the rest, actually was the Brexit planning.

You know we took a shutdown in April, where we took out about 8,000 vehicles that we didn't build wholesale and then retail. We also had some certification issues, relatively modest, a few thousand units at the end of June. But in total, our Brexit planning cost us just over GBP 100 million in the quarter. Net pricing, variable marketing increases up to 8.8% of revenue. You also know, Q1 is always our worst quarter, mostly because of model year runouts. And we had a lot of those this quarter: Discovery Sport, because of the refresh; old Evoque because of the new Evoque. And also importantly, the release of the final CN5 units in our China market, significantly some older vehicles there that we've now put through to the dealers. And we're confident the plans we have in place will retail those units in July.

Contribution cost, most increases were in warranty, and I'll hold that until we get to those slides for Nigel to take us through later. You can start to see the impact of Project Charge in several places, actually, but this is a structural cost impact. You can see there we've summarized it. Savings pretty much across the line, in all of our structural costs. And we also benefited from the impairment and the reduced G&A in this quarter versus last year, as you can see that 86 there.

Exchange was actually favorable this quarter compared to the last quarter, pretty much in all areas. Our operating exchange was better at the weaker sterling level. The amount of hedges we have on the books are fewer, and therefore, those losses are lower. And also net revaluation versus last year was favorable as well, although, we did take a hit on commodities. There were the details around the quarterly profit.

This is the really good story for us in the quarter. Our free cash flow was limited to GBP 719 million outflow, that was quite a huge GBP 954 million better than the same quarter last year. Within that, we did start to drawdown on our receivables financing facility to a value of GBP 305 million. Obviously, that favorably impacted that number. But the rest was pure Charge, inventory reductions and also significant reductions you see there on investments.

If you go to the next slide. This is the investment reduction, GBP 795 million in total, much lower than the GBP 1.066 billion of last year. And much of that reduction were real live projects, which we decided not to do several months ago as a part of Charge. So GBP 170 of that GBP 271 million reduction was a result of project activity that is lower in Q1 of this year than last year. And we also saw the favorable impact of reductions in our engineering, and our engineering facilities with head count as a part of Project [Sapphire] as well. Those costs were down GBP 100 million.

Go to the next slide, if you would, please. This gives us a sense of where we actually are on our funding for this year. We did complete that GBP 700 million receivable facility. We actually did that in March, but we did not draw down until April. We are maturing a new facility, which is actually with a number of external banks. But importantly, it will be supported by the U.K. Export Guarantee Fund up to 80% of the value, and we expect to complete that GBP 625 million facility in quarter 2. And we're obviously working on a number of other options, which we would expect to move to maturity through quarter 2 and into quarter 3. Also, there are some bonds that mature this fiscal year. GBP 500 million will mature in November and GBP 500 million will mature in March, but we expect that funding to be net positive this fiscal year.

Next one, if you would, please. Okay. So our plans for turnaround and transformation are exactly as they were the last quarter. There's basically 3 strands of it. There's a strong new pipeline of products, I-PACE and Evoque, the first 2 there are in the marketplace. XE 20 model year refresh has significant interior and the Discovery Sport also a significant interior refresh, in part to overcome those quality concerns, where Nigel will talk you about. And of course, we have the amazing new Defender, which will be with us at the end of the year.

Also, Project Charge will continue. It comes to the end of Phase 3 at the end of July. We will continue that beyond, even though we are confident we already have plans in place to over-deliver the GBP 2.5 billion we have committed to you folks. And Project Accelerate is starting to fix the fundamentals, but will mostly be involved in future product launches rather than existing vehicles where Charge actually does its work.

Next slide, please. This is the new vehicles. You can see a couple of things here. Sales are increasing on the Evoque month-by-month as we go through Q1, as supply now comes on board for all markets. Launch of new Evoque in China is not until August. And you can also see here the I-PACE, again, the sales are starting to rise almost 4,500 units in the quarter just finished as well.

Next slide, please. This is obviously a fundamental one for us, the China market. We all know it. These are the KPIs and you'll start to see the KPIs have not only improved but are starting to stabilize that better level. We did overachieve our retail target for the first time in a long time in June, and we are ahead in July of last year's numbers already with 5 days to go. So that will continue.

Retailer return on sales have strengthened over the previous 12 months, although did taken up towards the end of the quarter as we released more of those CN5 units into the marketplace. That's also the same reason why our retailer stocking notes that dropped considerably over the last 12 months, did tick up again in June. Those issues will be resolved in quarter 2. And the good news, of course, is most of the retailers continue to sell most of their cars in their local registration area, which is really important to us as well.

Next slide, if you would, please. Obviously, Brexit is incredibly topical, particularly this week with the change in the U.K. government. We did have our plans in place for March, as you know. And I've already mentioned, they probably cost us just over GBP 100 million in the quarter just finished. We had been modeling 3 scenarios. But following these weeks' changes, the most likely is we are facing 2 scenarios, both of which will involve an exit from the EU on the 31st of October. We either leave with a deal, which of course, is what we want and what this company will continue to work towards. Obviously, that will give us a frictionless trade, which is fundamental, and we do expect an appreciation of sterling if that were to happen. In our headline case is a gradual appreciation, but that's something obviously we need to monitor and watch. And we also expect to continue with the turnaround programs as announced, irrespective of a deal or a no deal.

If there is no deal, of course, one of the core points is how much friction is actually introduced into the supply line. We would do our planning, but obviously, we need to maintain stability at that friction level and we don't exactly know how much that will be yet. Of course, the duty regime will kick in, and we will look to offset that and mitigate that and if appropriate, pass it on as much as we can. But obviously, the market will determine that one. And we would expect a weakening of sterling, which in time, would become a natural offset with our model to the incremental duty rates.

So in summary, we are expecting to leave on the 31st of October. We do expect it to be painful in the very short term. The considerations around that friction and the ability to pass on those duties will determine how difficult that is for us in FY '20. However, we do expect that to normalize with a natural offset of sterling depreciation going forward into FY '21. Hence, we don't expect a significant impact on our turnaround and growth programs.

Next one, if you would, please. This point, I'd like to just ask Nigel to talk us through the 3 quality slides we have in the deck.

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Nigel Blenkinsop, Jaguar Land Rover Automotive plc - Director of Quality and Automotive Safety [5]

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Right. Good evening. It's Nigel Blenkinsop, Director of Quality and Automotive Safety. I'd like to start by giving an overview of the performance in quality, one, and outline the key drivers behind the increased accrual associated with warranty between '19 financial year and '20 financial year.

You can see 3 elements on the left-hand side of the slide, fundamental issues driving the increase associated with campaigns solidifies the warranty to drive improvement and reliability on legacy powertrains. We've also seen an increase in true-ups and goodwill, ensuring that we retain customer loyalty. And thirdly, we're making, what I see as an investment in the deployment of software over-the-air to upgrade our customers to ensure that they can receive updates and bug fixes directly to their vehicles, both on the cars that are being released into the market now, but also some of the cars that are in the car park. And through that process also deploy an enhanced customer experience with the application or deployment of Apple CarPlay and Android Auto, which will create a significant improvement in customer experience.

On the right-hand side of the slide, just outlined a number of the elements that underpin the quality transformation has been driven. And on the current product side for the cars that are already in the hands of the customer, we're driving a rapid issue resolution process, which looks to streamline our approach and prioritize the resource and the focus on fixing customer issues rapidly. And we count SOTA as part of that because we're able to address and identify issues much quicker and have been deployed into customer vehicles directly and much quicker than we've been able to do previously.

We've also simplified strategy deployment around quality, reduce the complexity of quality reporting and improved the information flow on quality performance across the organization, and thereby, engaging a wider group of people in the transformation on quality.

On the future product side, we're looking at engineering for a quality outcome and focusing our engineering efforts on the critical core systems, 34 systems on the vehicle. And primarily driving the reduction of technical risk early in the life cycle to ensure that we've got robust products function demonstrated and durable products going into the market.

Reducing product complexity, we've a number of examples, both on the powertrain and chassis side, where we've reduced complexity, which allows us greater time for validation and performance demonstration in the prelaunch phase. And then finally, we're also enhancing our product governance around project management and delivery to ensure that we've got clarity and transparency around the risks and the delivery of the products and the product development.

Next slide. Just highlight on this slide the performance around how we're reporting in the U.S., the initial quality survey. We've made some very, very significant improvements. Jaguar and Land Rover ranked at 31 and 32, respectively. But we've seen the most significant improvements of all brands across that market and significantly close the gap with our competition, which we're very, very pleased with. And we've done that through addressing some of the fundamental issues that have been reported in prior surveys.

And then to the right-hand side, the J.D. Power China Vehicle quality survey, where we can see Jaguar reported very, very close to the top of the brand in terms of performance reported second Land, Rover in the pack and equal to BMW. And a number of our vehicles, including excess long wheelbase Range Rover and Range Rover Sport performing at the top of their specific vehicle segments. So positive reporting.

And then on the third chart, I just wanted to reinforce the fact that we are respecting and converting the information that's being fed through the J.D. Power Survey, and our new car buyer surveys and making sure that we're implementing changes to the way the cars are being developed and what is being contained in the development of the new vehicles. So entertainment, we're making the investment around SOTA that I described. And for the interior, where we've picked up some criticism from our customers. We've seen significant improvements in the midcycle freshers on XE, F-PACE and Discovery Sport. And we've also significantly improved storage user consoles and comfort on the vehicles that are going to launch in the near future. And that concludes the -- the warranty piece.

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

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Thanks, Nigel. So if I go back to the presentation. I'm on the Project Charge slide. You can see, we did GBP 400 million in the quarter: the GBP 300 million already talked to on investment, plus another GBP 100 million on costs and profits, which you saw on the page earlier also.

If I go to the next slide because you will see from the last one, we've already achieved our investment targets with 9 months to go. And we will overachieve our working capital target, that's why you've seen how much we've done in the quarter compared to prior year's GBP 750 million better than prior year. And so we're focused very heavily, as you would expect us to be on the EBIT. We did GBP 150 million last year that is done. We've actually completed our redundancy programs with 6,000 people leaving in total. That would be worth GBP 400 million. If we measure on a year-over-year basis, it's about GBP 250 million.

We're very, very focused on our material cost improvements also. A modest amount in Q1. That isn't untypical actually, as negotiations continue into later quarters. We are highly confident of the GBP 250 million we have down for material cost as well. And the GBP 200 million overhead, you would have seen a great start to that in quarter 1 already. And we are still TBD on the final GBP 150 million, which to date are undefined, and we'll be working towards delivery of those during the second half of this fiscal year.

Next page, if you would. Looking ahead, this is the guidance page we gave at the Investor Day. If I go down the FY '20 position, given the deterioration, our expectations year-over-year in Q1, we are at the lower end of that 3% to 4% this year. I think we signaled that to you previously, both at the end of the full year results, but also on the Investor Day. But PBT will be positive. We will underspend GBP 4 billion, and even though, cash flow is going to be negative, it will be improving, of course, quarter-by-quarter and better than last fiscal year.

Our gross debt, EBIT number 2.8x is actually higher than we discussed last time. That's purely the IFRS data now coming on to our balance sheet. We added about GBP 534 million assets and debt onto our balance sheet. So that is the technical adjustment of that standard, moving us up from 2.5x to 2.8x debt-to-EBITDA.

So in summary, we've had a really, really positive last 6 months. Our cash has been almost GBP 700 million positive. In the first -- in last quarter last year and first quarter this year. Given our volumes are falling, we've had difficulties in China and just shows how the Charge program has impacted the cash disposition over the last 12 -- over the last 6 to 9 months of this company. Thank you. Back to you, Balaji.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [7]

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Thanks, Adrian. Just to close the point on JLR, I think one of the lines I do draw your attention is that we expect to see an improved PBT margins and cash flow in FY '20 as the year progresses. And upon -- and also with China stabilizing and now starting getting back to growth here on. So those are the 2 colors looking ahead as well.

So moving on to Tata Motors, I think the big point here is the way the market turnover this quarter has been challenging to say the least. And in this situation, what we looked at is how do we take care of our own destiny, and therefore, Turnaround 2.0 has actually delivered in full measure with our -- and we'll continue to focus on retail, cost reductions and cash flow going forward. That's our entire focus area.

EBIT came in at 0.8% of revenue. And to go back in time, the last time the similar number happened was in FY '18 second quarter. And there was another 0.9% EBIT at that point in time, but the only difference is that compared to that period to now, the inventory volumes have dropped by 30%. So our biggest profit driver went down 30%, and still we're able to hold our EBIT, which is clear delivery of the Turnaround 2.0 numbers there.

And we talk a little bit about where this is coming from. Moving into the following slide on PBT improvement. EBIT was down 330 bps, but if we actually split it up, almost entirely coming because of volume and mix going down. And then adverse mix because of the M&HCV portfolio going down caused the problem. The rest of it, not much out there.

On free cash flow, I think, this is an area where we are not happy with our performance at INR 4,600 crores negative, almost entirely in working capital. And this is attributable to 2 factors. One is the sharpness of the slowdown and also our inability to actually accept the fact that the market has actually come down so dramatically, we just couldn't see that kind of a -- we couldn't accept that kind of a number there. And therefore, we had to take actions. We waited for quite a while before it happened to be 100% sure that this is indeed the case in the market. And therefore, that is the single biggest agenda for us going forward as we will correct our positions here.

Moving on to investments, nothing new here in line with what we had originally talked about, bulk of it -- those increase coming squarely from the BS-VI investments that are out there.

Talking about CV performance. If you recollect, we talked about the focus on retail. So the retail growth higher than wholesale growth, which is reassuring. But it is fair to say that the growth has been severely impacted by the higher axle loads, liquidity stress, low freight availability, take your pick. It's not been an easy time for us. And in this time, we would definitely want to look at market share improvement, where the key segments like M&HCV, ILCV we are improving market share. SCV, in particular, we saw severe stress of liquidity within that particular segment. So fair enough to say that we've lost a bit of competitiveness there, which we need to fix as well. But that's more wholesale. So I'm not particularly worried about it for the immediate period, but we will keep a very close eye on that particular point.

On the turnaround focus, I think it is going to be retail, retail and retail from us, focused on market activations. And I think the time to really focus on dealer profitability, performance, working capital cycle has actually never been more current. At least -- the good part for us, we started at least 6, 7 months back. And therefore, inventory is going to be a very, very key factor for us as we transition into BS-VI and Guenter will talk about that as well.

Our cost production focus continues, and I think we will also look at getting into the market with customer finance solutions because we need solutions for the dealer, for the customer. So it's going to be a fair amount of work on that particular front, while at the same time, ensuring we do not increase risk in the marketplace.

So the implication of the M&HCV volume reduction we've seen in the EBIT line where at 4.7% EBIT, it's not something that we like what we see, but that is a reality of what the market is. And the negative operating leverage, combined with a loss in M&HCV markets size though we increased share, impacted the performance there.

CV has been a great story where, I think, first of all, we're now focused squarely on retail as we called out last time increase, there was -- retails declined by 7% versus wholesales declining by 30%. So we are very clear that we want to get the basic price and not go after temporary metrics.

We've also rationalized our distribution organization. So right now, we do not -- we have Tata Motors distribution legal infrastructure, that entity is now being wound down as we speak. And we have removed all the -- we sell directly now from here on, that will consolidate stockholding into Tata Motors and it will also simplify operations.

The retail growth is definitely impacted by low consumer sentiment and liquidity. And in this time period, I think our focus is going to be on strengthening the brand in the innovation intensity stemming out of the 2 architectures that we have, and again focus on dealer profitability and shift the focus to retail.

There was a new showroom that the new -- the brand image of Tata Motors in this PV showrooms. The first one got launched day before yesterday. So you're seeing it for the first time. And this is something that will roll-out across the country as the year progresses.

On the CV -- PV, the revenue growth though declining by 17.7%, very reassured and that tells me the strategy is firing on winning sustainably, where the EBITDA improved despite revenue declines by 1.2%. And this has be achieved fundamentally through cost reductions and improved product mix coming our way. And this is likely to continue going forward as well.

With this, let me pass it on to Guenter to talk about BS-VI readiness plus EV business.

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [8]

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Balaji, thank you. Good evening, everybody. BS-VI readiness respectively BS-VI, that was called out at the Investors Day, as the single largest challenge in the 15 years I've seen in my 20. [This is part of] the single largest investment for the Tata Motors have ever performed. And just as a reminder, the challenge is to convert by the due date 31st of March 2020, all of our product portfolio to be as fixed and to be launch-ready for the ramp-up of the capacity and to delivery and registrations, effectively as of the 1st of April.

Having said that and providing technical background, as part of the presentations on the Investors Day. A quick update on our development and design, which was reviewed it intensively yesterday afternoon with all relevant agencies within Tata Motors is perfectly well on track. All of our powertrains has already been certified. Now the vehicles are lined up in front of the authorization agency for testing all of the certifications of all the new products on time in order to go for phased launch in PV and CV in the coming months.

Manufacturing capability is also on track, but not only our own capability also the one of the suppliers. So the entire supply chain is already stress tested, and we will be ready to ramp-up capacity according to plan.

Inventory planning is a challenge not only as far as the phase-in of the [PV and CV] components is concerned, it's even more valid for the phase-out of the specified BSIV inventory, where we need to make a cautious call. And meanwhile, we have shortened our review process on the monthly review as part of an integrated SLOP process to weekly reviews in order to take latest developments in the market into consideration for the placement of the orders in order to keep full control of the BSIV-specific issues to prevent any kind of obsolescence risk by the end of the fiscal year.

But since BS-VI is a significant step-up in technology, we have already launched an intensive sales and service personnel training in order to build the skills and also make the special tools and infrastructure available. And we have also provided our customers' education programs in order to make sure that BS-VI is not only valid by retail, but also well received by our customers.

Let me, on the next page the 2, the EV future. I think we all have read about the development on the EV front. First, a very important message was sent by the government and its intention to get all electric in India, passing the same through incentive of INR 10,000 crores, even before the elections. We are all quite keen to see how the government is going to translate it into action after the election. And what we have seen in the last weeks clearly demonstrates that this was not just an approval of an incentive framework, that this is strongly supported by company actions in order to boost the faster adaptation towards electrification in the months. I will almost say in the months to come and the years to come.

And there are currently 2 main messages, which are key ingredient for this movement. So one is the GST reduction from 12% to 5%. The GST council was supposed to decide on it today. We have not received any feedback yet but a basic assumption on all prior indications is that this is going to happen. What has already been decided is an income tax deduction of 1.5 next against the interest paid on the EV loans. If you take both together, it has an impact on the overall development of the EV business because the total cost of ownership going to be reduced by these 2 measures, which is going to close the gap, let's say, to a diesel or conventional petrol internal combustion engine in terms of cost of acquisition of [EV] in the private and the personal segment. And it finally creates a positive business case for the shared segment. So for shared mobility for aggregators in the Indian market, maybe, be the transport of large corporates or maybe the shared fleets available in different formats in the Indian markets.

As far as our share is concerned, although we have always been considered as getting late into the electric vehicle space. We said, although we are late, we are going to claim the leadership. And by all the contracts available in the market, largely in the travel and in the people transport segment of large corporates, we have claimed the market share of 60 -- 65% in Q1. Now some [times off] because 65% market share in Q1 equals 160 [equals] EVs sold. But this is the count reality where we expected these volumes will go relatively up triggered by the initiatives of the government.

But very important, is that we have been able to establish our strategy as far as a strong presence in the corporate fleet is concerned, with 60% of the market. And as far as the government is concerned, where we have currently 14 departments as customers, we even own at this point of time, 72%. We opened up to personal segment to 10 fleets across to 5 cities. So that means even with the small volume, we are currently rapidly expanding our footprint of electric vehicles across India, and that will get us well positioned for the next step or further volume increase in the months in years to come.

On the size remark because we have put a picture on the size electric bus on the left-hand side, we have won additional tenders as far as electric buses are concerned. And we currently claim 56% of the market in the EV buses. And in the first -- by the end of May, I don't have full and final figure end of June or end right now, but we had already a fleet of more than 250 electric buses across India in operation. And the feedback of the customers is extremely convincing so that we believe that in particular on the bus side or the mass public company transport side, we are extremely well positioned also leveraging the capabilities of the Tata Group, as far as infrastructure as far as charging is concerned, to further develop these business opportunities in the years to come.

Coming back to phase 2. As a reference, more than 7,000 electric buses are expected to be subsidized by phase 2, which is giving a huge boost to this business opportunity. And we have the strong intention to actually defend our current dominant market position in the electric bus business in the coming 3 years.

So having said that, back to Balaji as far as Tata Motors Finance is concerned.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [9]

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Yes. Thanks, Guenter. A few comment on Tata Motors Finance. I think that I've alluded to earlier results, the need to get fit for the future and get ready for the future disruption. We now started the Project [Sparkle] there, which is an organization restructuring [core] technology adoption core customer service, customer response and they rectify. They kickstarted from May of this year, and we are now seeing good progress on that. It's a temporary impact of organization changes, getting us closer to the customer and also getting us fit for the future, and this has impacted collections during the quarter. So I won't be unduly concerned about some of the deterioration metrics that we see, we had internally expected that. And as they stabilize -- as the things stabilize during October 2019, we expect to see a significantly improved performance thereafter. Market share has continued to do well. So no major concern on that particular front. And of course, the Tata Motors Finance is working to diversify its funding sources as well.

Overall, our net debt, nothing further to add other than that IFRS impact, maturity is well spread out, liquidity adequate and Adrian didn't talk about the U.K. funding as well.

On the outlook, let me quickly cut to the case. In terms of headwinds are likely to continue, we don't see any respite on that in the immediate future. But if I take the final slide in terms of our plan, JLR, I already talked about no change to what we had communicated in the past, continue to focus on 3% to 4% EBIT margin. We will return to profit in that range, a negative, but improved cash flow.

As far as Tata Motors is concerned, we are reflecting the changes that are there in the marketplace at this point in time. And new ones hitting a little bit where we expect EBIT to see slightly lower at 3% to 4% as far as this year and next is concerned, and getting back to our normative plans thereafter. As far as this year is concerned, we expect performance to gradually improve as the situation -- both demand and liquidity situation starts to improve. And we will continue to focus on retail in both CV and PV and work closely with the banks and NBFCs to start addressing the liquidity stress across the value chain in clever manners, which do not increase risk but provide solutions.

So with this, let me stop here, hand it over to you for any questions.

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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 Ruchit Mehta from SBI Mutual Fund.

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Ruchit Mehta, SBI Funds Management Private Limited - Analyst & Fund Manager [2]

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Just on the warranty side for JLR, could you explain this a little better? Because the delta cost that you've seen on the run rate basis seems pretty high. So my question will be one, how do you see this itself panning out over the next, say, 4 to 8-odd quarters? And how much of the increases are happening because of historical product issues? And when you say historical product issues, for example, powertrain quality campaign, what is it that you're incurring the cost on?

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

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Adrian, would you want to take that up?

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

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I think there are a couple of parts to the question. Yes, we can, in the midterm, see a reduction in the overall expense unit. And one of the primary drivers for that is the benefit of deploying SOTA to the fleet, which means when we have a software update on one of a number of modules in the vehicle, we're able to do that directly to the customer, and we don't need to bring the customer in at great expense for a hardware connection and the retailer. And that gives us a significant opportunity to reduce cost.

With regards to powertrain, and we outlined with regards to legacy issues, what we're doing is having to diagnose and in some cases, replace legacy engines in markets across the world. And that's picking up on issues that go back a fair way beyond the existing warranty period. But unfortunately, to the warranty accrual is affected by having performed replacement for those legacy engines.

And on the powertrain side, one of the positive opportunities that we have is also the transition into our own in-house make based engines. So we've fully transitioned into diesel 4 cylinder and petrol 4 cylinder in Ingenium family. We're launching and have launched over the last 4, 5 months, the Ingenium 6 cylinder engine, replacing one of our 4 legacy engines. And we're in the process of launching and going through the final validation of the new diesel 6 cylinder.

Again, we've incorporated a significant level of lessons learned from our legacy engines into the new engines, and there are -- and I review this on a very regular basis, personally, a significant effort in the prevent and recurrence of issues and the failure avoidance of issues in those new engines that have been incorporated into our vehicles.

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Ruchit Mehta, SBI Funds Management Private Limited - Analyst & Fund Manager [5]

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Okay. So for the legacy engines, can you give some indication of what percentage of your old fleet outstanding would -- that would necessitate these changes have already undergone those changes or fixes? And how much more is yet to sort of go through?

I mean, historically, you used to have per unit cost of GBP 1,500 or thereabout, and this is double of that. And I'm just trying to understand, how does it pan out in the future? Because if you're having to replace engines or engine parts for previously sold vehicles, I mean, exactly, when does this all stop?

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

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Sorry, I think the question is fundamentally, when do we think it stops. It stops when we transition into the new powertrains and we get the benefit from the investment in our own core engines and manufactured in our control. And the benefit, as I've outlined, is happening as we migrate into those engines.

In terms of the percentages, I think it will be very, very difficult over the phone to actually lay that outside, we would be -- we have to trust the implementation of our own investment in powertrain. And we're seeing that come through already in the costs.

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Operator [7]

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The next question is from the line of Pramod Kumar from Goldman Sachs.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [8]

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My question is to -- for Mr. Balaji. Just one clarification, sir. The EBIT margin guidance for 3% to 4% is for FY '20 and '21. So if you can just split that for FY '20? Because I do see that the unrealized savings of almost GBP 760 million could give you another 4 percentage on the EBIT front, but we had a minus 5.5%. So theoretically, if we have to get to a 3%, we need more than a 10% delta from the first quarter. So I'm just trying to understand, what are you looking for in FY '20 as an EBIT margin guidance, sir?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [9]

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It's fair to say that we'll be on the lower end of the range as far as 3% to 4% of the FY '20/'21 in JLR, and so in the case of Tata Motors as well. And the intention is to see how much further we can improve on that. But at this point in time, it's fair to say they are at the lower end of the range.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [10]

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So because even at 3, you need a 10%-plus delta from the first quarter levels. I see 4% coming in from the various cost reduction initiatives. But I'm trying to understand is, what kind of a volume number are we projecting here for JLR? Because the rest has to come from necessarily operating leverage and some kind of mixed improvement. So if you can just help us understand what kind of a volume number are we working here for the lower end of the guidance?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [11]

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If you recollect that we didn't talk about China stabilizing and returning to growth hereafter. And that's part of the plans that we have put in place, and those volumes are baked in into this revised plan. And you can rest assured, these are a fair amount of sensitivities that have been done before. We are reconfirming and rating -- reiterating our guidance range for JLR after backing us.

And if you recollect, there are also called orders. As far as Q1 is concerned, there's nothing new in those numbers. This is exactly what we have signaled when we started the whole thing. It was a one-off issue that we had planned at that point in time, and that's what is playing out as we speak. So there's no change from what we had originally planned.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [12]

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Okay. And the second question is on the India business. There has been dramatic collapse in the -- sorry, for the use of such strong words, but our commercial vehicle margins have seen a major hit. And how do you see that evolving over the course of the year, given that economic slowdown has kicked in? We have seen category-wise a demand deterioration. So if you can just help us understand what kind of guidance are you providing for the industry growth numbers? And whether, in that context, are we expecting a meaningful improvement in the pricing environment for us to kind of get to the guidance level for India business?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [13]

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Yes, 2 things on that. I think the sharpness or the slowdown that one saw in the M&HCV segment is something that did catch us by surprise. It's fair to say that. And that's the reason you saw the working capital also shoot up on that. And along with that is the intensity of competition, because I think if all of us are reacting to just couldn't believe the speed that this particular segment has gone down. And that's a -- it's a very significant part of our absolute profitability as well as a percentage profitable -- absolute profits and the percentage profitability. And that adverse mix is what came and hit us.

And despite that, I think the work happening on cost-out over the last period of time, meant that the remaining parts of the portfolio are starting to lift and take it forward. And as we look ahead, I think, we do see this now gradually coming back to the measures introduced by the government on liquidity easing as well as the infrastructure investments starting to unlock and move again. So one does expect to see -- and of course, the festival season starting to come through as well for this company. And that's something, which we are working on -- we are making assumption on. I think there is, of course, an outstanding question on the pre-buy that will happen on BS-VI, how far it will be and how deep it will be. Very difficult to predict at this point in time because the sentiments are also not necessarily great at this point in time in the market. But it's fair to say that whether increase in pricing coming through on BS-VI, the market will pick up and move.

And we know these markets move very fast when they decide to move because it's an easier conversation. It's -- people see the value -- I mean, how to do the business case and they put it forward. It's a -- it will move fast as well if it starts to move.

So your guess is as good as mine in terms of how do we see the -- how much of the demand go back to. But it's fair to assume that the worst is behind us as far as the CV piece is concerned. And there is a fair amount of interventions happening at an economy level, which would also help us lift this going forward.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [14]

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And final clarification on the India's. If you can just explain quickly, how much has been the impact of the EBITDA level for the India business?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [15]

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Broad -- both businesses are broadly about 35 bps at an EBITDA level and that knocks off, at the PBT level, not much of an impact because it just compensates for the interest cost line. So no, not material at a PAT, PBT level, but broadly about 35 bps at the EBITDA level. It's not soft at a EBIT level. In any case, bulk of it also goes out in depreciation.

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Operator [16]

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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 [17]

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Couple of questions for me, please. One, you mentioned that the potential of a weak comp could benefit JLR. I just wanted to understand the latest situation on FX hedging. How big is the hedge book at the moment? How far you're hedged-out into the future? And to what extent do you expect FX hedging to offset the benefit from a weaker pound in the next -- assuming that we have an answer in the next few months and the pound weakens?

And second, I noticed that the savings on Project Charge, I mean, the working capital and the investment savings seem to be coming along nicely. But the cost and profits saving appears to be quite limited so far. I just wanted to get your thoughts on at what point will that change? What will it take for that to change for the cost and profits, the savings to come through and for that to improve the overall performance?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [18]

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Adrian, do you want to take that?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [19]

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I can take the FX piece of it, Balaji. So the answer on the FX piece is that the hedge reserve in total was about GBP 611 million at the end of June. And most of that is maturing in the next 12 months. So a good portion of that is current portion.

And in terms of FX, how far we hedged out? So we do hedge out as far out as 5 years. Although given the uncertainty of Brexit, we have been scaling back on the hedging percentages that we've actually been doing and how far out we've been hedging. And so what you actually saw in this last quarter was that we actually saw improved operational exchange, GBP 58 million from the weaker pound, but you actually also saw reduced hedging losses with the weaker pound, GBP 63 million reduced from a year ago. And that's just because the percentage hedging that we've been doing has been reduced to reflect the uncertainty around it.

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Robin Zhu, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [20]

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[Could you spell that out, please?]

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [21]

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Sorry.

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Robin Zhu, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [22]

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Sorry. Yes. And so if you could spell out what -- how much you're hedged out for the next couple of years in terms of your revenues, that would be very helpful.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [23]

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Look, I think that's a question probably it's almost better covered up. And we've said our policy is to hedge up to 70% -- 55% to 70% over the next year and then descending percentages thereafter. And that is what we do. What we have been doing is hedging at the lower end of that range just because of the uncertainty of Brexit, as I described. As I said, that's ultimately reflected in the overall hedge reserve being at approximately GBP 600 million.

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Robin Zhu, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [24]

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And then the savings, Charge savings, please.

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

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Yes. I'll take the Charge savings, but I'm mostly going to repeat what I said earlier, and that broadly is this 4 categories of major activity. One is done, which is the Project [Sapphire]. If you go into the detail of the income statements, you can see an absolute to absolute GBP 77 million reduction in the quarter on that. We think the full year impact of that will be GBP 250 million. The action is done. It's just the time of the money coming through.

The second piece is our material cost savings. This is on Slide 25 for folks listening. Second piece is material cost. We are highly confident of getting to that GBP 250 million number this year. Only a small element of that was in the first quarter statement. So that will progressively come through, actually in half 2, but the number will be bigger in quarter 2. Based off the work you've seen already in quarter 1, we're also confident of getting to that third piece, the GBP 200 million. And then, we do not yet have plans for the fourth piece, which is the last GBP 150 million, about GBP 170 million as we stand and we're working on those. So they are more likely to come through at the back end of the year, certainly into half 2.

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Operator [26]

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The next 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 [27]

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Sir, firstly wanted to check in terms of your growth -- volume growth guidance for JLR. 1Q hasn't been good. We've seen a 12% decline, while we target to grow ahead of the premium industry. So if you could talk about market-wise, where you are looking to be on track? And how are each of the markets developing?

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [28]

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I can take this kind of statement from my side. Can you hear me?

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [29]

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Yes, sir.

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [30]

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Overall, we cannot give you a very precise number for the quarter. That would mean at the end of the day that you can describe our discussion in China and the U.S. is in the end or Brexit at the end of the day will influence the U.K. and/or Europe. So therefore, we cannot -- I cannot give the volume figure, okay? And by the way, we never have done it anyhow.

So -- but I see that Europe at the very moment is weak still this season, but this is not stabilizing. And you know that we have a higher [seasonal] percentage. So overall, this is a positive direction.

I see North America coming a little bit back. It was going down, and it will slightly go down overall for the complete volume segment. So that the premium segment still can be stable.

I see also China stabilizing again. We have seen the latest figures last month. They are really encouraging. So also China is going to come back. We had some very special elements in overseas. I guess, there's always something in overseas and so I guess, we can cope with it.

Then the overall, I see the complete volume output. And the forecast, cautiously, very cautiously getting tough, but we have an outstanding product portfolio. We are bringing more awards than any other car company. We have an outstanding, and we are leading in electrification and the vehicles are really standing out also from a design point of view. So we can whether this very good vehicles [and too are forming].

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [31]

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In conclusion, are you confident of achieving this target that we have of growing higher than premium industry growth?

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [32]

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Yes. I'm confident that we will come back to a solid statement.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [33]

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Okay. Great to hear that. Second question is on the China JV, some color there in terms of what exactly is hurting? And what to expect over there over the next couple of years in terms of profitability?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [34]

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All right. So we think we -- and evidence, actually, when you start to see our second quarter sales, both import and local, we will start to see year-over-year improvements in China, which broadly means that the levels of volumes will start to increase. We are monitoring very, very carefully, the transacting prices in the marketplace, particularly on the local products. And of course, we're determined to ensure that not only ourselves but the dealers make money on those products also. There will be incremental marketing costs in the local JV during the course of quarter 2 to support those things, and we will take a view later in quarter 2, whether those marketing costs need to continue through the balance of this calendar year.

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [35]

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In addition, I can say we are at the very moment, reorganizing IMSS, so that we have a lean and better approach and really can tackle the issues in the market. [TP] price as mentioned by Adrian already, are also starting with really improving the dealer in terms of training, capability and sales. We have reduced the stock level quite also drastically. We have reduced, let's say, aged vehicles also so that we are doing it in a way that we can really do it in a full version, like premium cost, and we haven't pushed anything into the market. So I guess, we are on a good trend and you will see it maybe on the chart.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [36]

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Any guidance there on profitability? By when do we hope to achieve profitable financials over there?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [37]

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Maybe let me comment here because we would love to stick profitability at an overall level. There are multiple levers that we pull, and therefore, wouldn't want to split it out by line item and it becomes very difficult business to manage thereafter. But having said that, it's very clear that the road to profitability there also is an equally important one. But I would rather stick to our overall plans on that, yes, if you don't mind.

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Operator [38]

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The next question is from the line of Jamshed Dadabhoy from Citigroup.

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Jamshed Dadabhoy, Citigroup Inc, Research Division - Director [39]

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Could you give us a sense of what your dealer inventory is in volumes in China and the JLR overall and also on the CV side in India? That's my first question.

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

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Let me comment here. From a China perspective, the dealer inventories that you've seen in the slides is now at a multiyear low. And we are happy with the way that it's turned out and we intend to keep it that way going forward as well.

As far as India is concerned, at an absolute level, inventory levels are very similar to what we've been seeing during the course of the year. And our intention is to bring it down further to reflect the reality in the marketplace of a significantly slower demand situation that we see. And those interventions are happening as we speak, and we intend to continue with them, which is why you'll see that the wholesale numbers are significantly lower than retail, both in CV and in PV.

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Jamshed Dadabhoy, Citigroup Inc, Research Division - Director [41]

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So just to clarify, this number that you said on China, this is 1.7 months, yes?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [42]

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That's correct.

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Jamshed Dadabhoy, Citigroup Inc, Research Division - Director [43]

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Okay. And about 2 months -- and when you look at it, what is the base that you will use? You will use the retail sales for that particular month? How do you measure this? I'm keen to understand what's the basis?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [44]

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Two levels on this. In our internal planning, we look at stock covers basis future orders that we have. That's how we do the planning. And as far as external reporting is consensus here only the officially announced sales numbers. So we go by the past historical 3-month trend.

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Jamshed Dadabhoy, Citigroup Inc, Research Division - Director [45]

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3-month trend?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [46]

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3 months trend, that's right.

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Jamshed Dadabhoy, Citigroup Inc, Research Division - Director [47]

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On retails.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [48]

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That's correct.

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Jamshed Dadabhoy, Citigroup Inc, Research Division - Director [49]

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Okay. Second question on the VME expenses, almost 9% of sales now. When do you think we start to come off by? What -- in which quarter, or which year would we actually see VMEs beginning to trend down? Or do you think this is sort of -- it was earlier 5% and it became 7%, now it's almost 9%.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [50]

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Let me take that one, if you can. And quarter 1, you would look back historically is what was their highest level of variable marketing. And a significant amount of that is our business, our older model years come towards their close actually in quarter 1 of our fiscal year. And then we refresh and replace the model years as we go through into quarter 2 mostly. That was increased this time because of the CN5 points that I raised earlier on. So within that quarter 1 number beyond the normal level of increases, there were certainly some further costs for China for those older CN5 units. So no, you shouldn't expect this to be a trend going forward.

However, we also know the marketplace is getting more difficult going forward. And therefore, the historical levels, it would depend on how we balance out and how good we are estimating those volumes and making sure we keep really lean on inventory, which is ultimately the big trigger for the excesses.

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Operator [51]

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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 [52]

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Just continuing with that question. The VME expenses, like you said, in the chart is going up from [GBP 6.9 million to GBP 8.8 million]. And I know you called out to China, CN5 impact. But last year also we had a special impact of about GBP 100 million in China because of the tariff price cut. So I'm just curious to understand, I mean, despite that exceptional base, why is the VME going up so much?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [53]

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Well, again, if you take it to an absolute level, and you look at the levels of VME we've had over the course of the last 2 to 3 quarters, you will see in this quarter the increase is about 2 to 3 points. And I've been explaining away a significant amount of that 2- to 3-point increase. It is really unlikely that our VME is going to go back to levels in this marketplace of sub-6%, I would suggest. However, obviously, it really just depends on the significant control points within the individual markets. For example, overseas, VME will likely be higher in quarter 2, simply because you can see we didn't sell at the levels which we're expecting in that quarter. Instead, I would expect China VME to be lower in quarter 2 because our CN5 units are now in the marketplace. And importantly, we have programs to ensure that they get retailed by the dealers as well. So we'll have inflow. 9% is not the norm. 6% and below is most unlikely -- it will end up in Q2, somewhere between those points.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [54]

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Okay, sure. And just related since you're discussing China and before my -- the other part I had was just on this warranty cost. But just in China, I mean, like you've indicated, because of the CN5 discount, and you've put some more CN5 units in June. So how much of your retail boost has come because of the CN5 clearance really speaking, and which potentially will sort of wither off, right?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [55]

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Yes. Retail, less clear at this stage. The programs are in place, but all those units have not retailed. That's why you actually see the dealer inventory increasing at the end of June because we've wholesaled those units to the dealers. From a wholesale perspective, we only have about 150 cars left in our network in China to pass through. So overwhelmingly, they've actually been pulling to the dealer network as a wholesale, not yet as a retail.

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Sonal Gupta, UBS Investment Bank, Research Division - Director and Research Analyst [56]

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And just lastly, on -- again, on the warranty cost, like GBP 319 million in this quarter. So I mean, this the GBP 125 million, I mean, do we see some part of that as a one-off? Or do you think that the warranty cost on a quarterly run rate will still be somewhere between GBP 250 million to GBP 300 million, I mean, on a full year basis.

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [57]

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The warranty this quarter was 6% of revenue. That was the -- that's the GBP 300 million of GBP 5 billion in revenue. Previous to this quarter, warranty were 4%. So my expectation, again, in quarter 2, the level of warranty will be between the 4% and 6% level, but not at the 6% because there were significant one-offs in this quarter, just as Nigel set out.

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Operator [58]

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The next question is from the line of Sahil Kedia from Bank of America.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [59]

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I have 2 questions. There has been some talk about a shortage of China fixed components and that likely to affect production. Are you facing any of that? That's number one.

Number two, there is also an article or an announcement that said that you will be making electric car components and assembly in the U.K. Any sense on what kind of investments will be required for that?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [60]

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Let me take the first one first. There has been some talk. Clearly, we have all of the information to make sure that talk is managed with our internal processes. And our volume position that we had for Q1 and Q2 will unlikely to be affected from any of those potential shortages. If we do get into a shortage position, we manage those in the same way you would expect us to do so.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [61]

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So if I may ask a follow-up question on that. The shortages that are being talked about, are they for more the local production? Or are they for -- from the imports as well? I would assume it would be more for the local production. Is that correct?

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

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That's not correct. It's really covering the complete product portfolio.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [63]

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Okay. And the second question?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [64]

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Could you repeat that second question, if you would? I think it was about investment levels or...

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [65]

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Yes. So there is -- there has been a press release from you guys saying that you will be making and assembling electric vehicles and some components in the U.K. as well. Would that require a fresh round of investments? If yes, how much? And is that part of the kind of longer-term outlay that you guys have done?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [66]

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Yes, sure. The investment levels that we have announced in the U.K. earlier this month at Castle Bromwich are fully contained within the investment guidance we've given.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [67]

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Okay. Can you -- sir, can you recap the specific amount that you will be putting? And is there a capacity, et cetera, that you have also outlined? Or that information is not public yet?

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Adrian Mardell, Jaguar Land Rover Automotive plc - CFO [68]

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No, we don't put that information out on calls.

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Operator [69]

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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 [70]

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So 2 questions. On the Tata Motors Finance, you indicated that there is a INR 10 crore PBT loss. And one of the reason is the stress in the market. Credit loss, I mean, credit loss of around INR 10 crores. Can you just indicate what exactly -- what kind of stress you are seeing? And is this -- all the stresses are continuing stress? And you can expect that kind of number going ahead also?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [71]

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Yes. Let me clarify. Maybe I wasn't clear, apologies for that. What we are seeing in Tata Motors Finance is a PBT of INR 10 crores positive. The INR 10 crores positive PBT when I compare it against the [INR 4 crores to INR 6 crores] of PBT last year, one of the areas we typically look at the new IFRS standard is if collection efficiency is something as a metric that needs to be measured. And depending on the collection efficiency where we take provisions. And therefore, this time, you saw a different collection efficiency of about 96% this quarter, and that's fundamentally coming because we had a significant change in our collections organization as we were rationalizing and restructuring the organization.

This is something that we had -- we knew that there's going to be a bit of a wobble on this one, but we are comfortable of what we see in terms of the new teams coming on board. And they'll be taking charge of this during the course of this quarter. So that's what you're seeing there. And otherwise, nothing structural that we are worrying about. They are getting the funding that we are requiring. The AUM continues to be strong at INR 38,000 crores. And that provision that you see is what flows into the GNPA number as well. So our agenda #1 is to get our collection efficiency back to the 100% level, and we are confident of getting there. Does that clarify?

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [72]

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Yes. And you are saying that by October 2019. So from October, you will be at normal collection efficiency levels?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [73]

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Absolutely. This is more an internal issue, nothing to do with the market or anything. It's just internal. So far, we just need go through the organization changes. It's just people coming on board, training and getting into new jobs within the organization and getting back to the efficiency levels, but the relationships can go forward. It is important for us to do this because our cost-to-income ratios are not necessarily where we would like them to be, and that is a -- this is an intervention that's happening to get back on track, which will then help us in the long run. This gets us ROA of greater than 15%, which we are quite comfortable and as we look at our plans on doing that.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [74]

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Yes. So just to clarify that there are no external stresses where your customers are unable to meet your...

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [75]

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That is not a -- at an overall level, there is [always is] there because we do see a better external market stress over there. But I wouldn't externalize this problem at this point in time because we had an internal issue always in these scenarios. But let's look internal first, before we look external. But it is fair to say that there is external market stress. We have called it out. But I would attribute this to only the external market situation, if you know what I mean.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [76]

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And just second question, again, it is a housekeeping question on stand-alone business. In the current quarter, there seems to be a good amount of improvement in gross margin on sequential basis also, while our EBITDA margins seem to be still on the weaker side. Is there any accounting issue that we have seen in the P&L? Or it is largely because of inventory accretion that has happened in our -- in books also?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [77]

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I think if we look at the -- there are 2 things in this. Passenger vehicles, you're absolutely right, continues to see significant step-up in contribution margin. As far as CV business is concerned, the mix went against us because of the M&HCV decline of 30-odd percent. This automatically means that you will see stress as far as contribution margin is concerned for the CV part of the portfolio, but you don't disclose this individually.

But fair enough to say that, as we combine this all together, you're going to see a slight different contribution margin, which I'm explaining if I look at my PBT work that is there. If you look at our volumes, add our material and net pricing is add the 3 together, that's a decline of almost 310 bps that you see, which is on all practical purposes is a contribution margin that you will see. And against that, we did see benefits coming through FX and other fixed cost structure there, which also the lost operating leverage. Combination of operating leverage and adverse mix is what caused the EBIT margin to move.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [78]

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Okay. And just a clarification on commodity cost benefits. So if you can share some input on that, how much we have gained and how much we can...

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [79]

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About 80 bps. You can see the Slide 31, I've called it out, set it up in individual pieces. 80 bps is a benefit which we are seeing on the variable cost line, almost entirely coming from commodity cost reductions and the cost savings measures that we put as part of the Turnaround 2.0 plan. But we are seeing soft commodities at this point in time, unlikely to recollect last year same time when we were concerned about some commodity cost running away. Since then, that is not the situation because, obviously, the demand situation where it is, it's not -- one is not expecting to see normal inflation at this point in time.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [80]

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So we can expect a similar kind of benefit in the subsequent quarter all year?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [81]

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Yes. As we look forward, we do not see, at this point in time, any dramatic shift as far as commodity situation is concerned. There could be a few upsides on that one. And the same with the currency as well. Rupees are not expecting any significant moves at this point in time unless, of course -- I'm not a currency expert, but this is what we are internally planning with.

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Operator [82]

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The next question is from the line of Jatin Chawla from Credit Suisse.

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Jatin Chawla, Crédit Suisse AG, Research Division - Research Analyst [83]

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First question is on your EBIT margin guidance. Just wanted to check if the EBIT margin guidance hold in the case of a hard EBIT as well. Or if a hard EBIT were to happen, would you be forced to come and write it down?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [84]

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I think that's realm of pure conjecture where only -- we can only prepare for -- we have given you our plans from a risk perspective. Let's see how it plays out because I believe there will be -- things will settle up.

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Jatin Chawla, Crédit Suisse AG, Research Division - Research Analyst [85]

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Because it seems like a reasonable probability right now. It was a low probability when the probability has definitely gone up so hence the...

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [86]

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I'm sure if you ask every person in this call, everyone will have a different perspective on this. That's the reason why it's an event risk. Let's see how it plays out. Our job is to prepare for it, and rather than be definitive about -- but we're not in a position to be definitive on that one at this point in time.

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Jatin Chawla, Crédit Suisse AG, Research Division - Research Analyst [87]

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Sure, sure. No worries. You also pointed out some WLTP issues. I thought this was something that was well settled a few quarters back. So on what products have they exactly cropped up? And is this more to do with the WLTP compliance deadline for this year? Or just exactly what the issue with it?

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [88]

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Joachim, do you want to take that?

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Joachim Eberhardt, Jaguar Land Rover North America LLC - President [89]

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Yes, we have to recertify every one of our nameplates. So in terms of in what product does it turn up, every nameplate needs to be recertified. In terms of our end of June position, we did not complete that certification on a small number of those products. We believe it impacted our revenue and volumes by just under 3,000 units at the end of June, maybe GBP 30 million, a little bit higher perhaps just for that piece. We know we will work through these issues as we get through Q2. So we should not be talking about this again when we talk on the Q2 talk -- call.

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Jatin Chawla, Crédit Suisse AG, Research Division - Research Analyst [90]

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Okay. And one more quick one. You had this on the employee cost savings. You mentioned GBP 60 million delivered in 1Q FY '20. Now is that a net number, like the GBP 250 million number? Or is it a gross number, like a GBP 400 million [direction] number for employee cost?

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Joachim Eberhardt, Jaguar Land Rover North America LLC - President [91]

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I caught the end of that question, could you repeat the start of the question, please?

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Jatin Chawla, Crédit Suisse AG, Research Division - Research Analyst [92]

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So that GBP 60 million that you've delivered in 1Q FY '20, I'm saying is that a net number comparable to the GBP 250 million number, in which case, this number will not go up in the future quarters? And if it is a gross number comparable to the GBP 400 million number, then we should expect more from this going forward.

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Joachim Eberhardt, Jaguar Land Rover North America LLC - President [93]

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Yes, excuse me. You should expect more going forward.

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [94]

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Maybe I make a statement of this kind of WLTP. We have now to certify, as Adrian mentioned, based on, let's say, preparing also for Brexit, not only in the U.K. why we are saying but also in Europe. And in this time, we didn't have to do it. The very first time in Spain, and it's waiting. And at the end of the day, everybody worked hard for the coordination in between. And all the time needed to coordinate this is taking more time, and that was the reason at the end of the day why we lost this kind of volume. Given that means also that we will be -- also the authorities will be better prepared next time.

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Operator [95]

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The next question is from the line of Prateek Poddar from Reliance Nippon Asset Management.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [96]

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Two questions, both are on China. One is, last quarter, you had given some disclosures regarding the premium segment, the premium market segment-wise in China. So SUV-5, SUV-4. Please give a bit of color about that. How are we -- or how is the industry positioned over there? And which segments are seeing growth? Is it still the entry premium segment, which is seeing growth? That's question number one.

And second is, last quarter, if I were to look at the local registration rates versus this quarter, there has been a drop of almost around from 87% to 79%. Any specific reason for that? Yes, those are the 2 questions.

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Joachim Eberhardt, Jaguar Land Rover North America LLC - President [97]

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So yes, on the first question, we are seeing the premiums hold up better. So we actually do expect to continue in SUV-5 sales into quarter 2. SUV-4, a little bit difficult. So I'm less clear on exactly where the SUV-4 segment will be short term. In saying that, these are all just estimates and expectations. We do know the marketplace in China has continued to suffer. And it's really, really difficult for us to estimate quarter-by-quarter exactly what the impact will be, given the external political environment. So that guidance is always given by a huge care point because, like a lot of markets, there's huge unpredictability in that market in the near and the short term.

If you could repeat your second question, please?

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [98]

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Yes, sorry. Just a clarification on this. So you are seeing some reversal when it comes to -- I mean, within the market, I mean, the end markets for SUV-4 and 5 are seeing some reversal, right, in the quarter 2? And you expect this to further strengthen going forward, right?

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Joachim Eberhardt, Jaguar Land Rover North America LLC - President [99]

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We expect our position in the marketplace in quarter 2 to be consistent to quarter 1.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [100]

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Okay. And sir, what kind of visibility do you have on China at any point? I mean, just from a forecasting perspective, I just wanted to understand what kind of visibility do we have really on China? Or it's very difficult to predict. For example, in India, I mean, at least, we can do some work or something with that. But in China, is it easier for you to have any visibility on that?

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Joachim Eberhardt, Jaguar Land Rover North America LLC - President [101]

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It's no greater different to anywhere else. We are diligent in collecting information on a day-to-day basis, and we do that in China, like we do everywhere else. So we have the ability to track and predict day-to-day, week-to-week how we're progressing, which is why I was able to say to you earlier that versus last year, our sales in China will be higher in July.

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [102]

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Understood. And the second question was, if I were to look at your China operational KPIs, local registration rate in the March quarter was higher than what it is in this quarter. Is there any specific reason for it? So it was 87% in the last quarter. It has dropped down to 79%.

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

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Let me comment here. I think what we are trying to put out there are direction trends in this whole market, and wouldn't want to get into each metric by quarter. It just becomes the multiple market mechanisms that move on this. So you will be able to track this, and we'll share it with you as and when they become relevant. So do bear with us on quarterly number explanation on every metric that's out there. This is more to explain what we are trying to do there, if it helps, yes?

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Prateek Poddar, Reliance Nippon Life Asset Management Limited - Research Analyst - Investment Equity [104]

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Okay.

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Operator [105]

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Ladies' and gentlemen, we'll take the last question from the line of Jinesh Gandhi from Motilal Oswal.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [106]

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My question pertains first to JLR. In this quarter, we have seen almost 3.5% Q-o-Q improvement in realizations. So is that a reflection just of mix? Or is there anything beyond that?

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Joachim Eberhardt, Jaguar Land Rover North America LLC - President [107]

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So just to be clear, are you asking that the -- are you asking whether the revenue has dropped less than the volumes? Is that the question?

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [108]

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Right.

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Joachim Eberhardt, Jaguar Land Rover North America LLC - President [109]

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Yes. Our average gross vehicle revenue has increased in part, of course, if you remember, when I went through the explanation of where we are in terms of the position on sterling. In the longer term, a weak sterling is actually a good thing for our business model, a significant U.K. exporter with significant overseas revenues. That is starting to impact favorably in Q1. If you go to the slide where we talk about changes year-over-year on profit, you see it clearest within the top line operating exchange, GBP 58 million.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [110]

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Okay, okay. That answers my question. Secondly, with WLTP 2 norms. How are we prepared? Do we expect similar disruption as WLTP 1? Or broadly, we are fully prepared and we should not see any disruption during WLTP transition?

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Guenter Butschek, Tata Motors Limited - CEO, MD & Additional Director [111]

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In anticipation of this kind of, let's say, additional, let's say, work, we had certain conditions. We will increase this kind of Chinese contingency even further to be more solid. We're working also with different agencies in different countries to make it stable again.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [112]

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Okay, okay. Understood. And last question pertains to India business, more of a housekeeping question. If we look at depreciation in this quarter, it's almost INR 100 crore or almost 12%, 15% lower than the previous quarter, fourth quarter. So is there any one-off? Primarily, this should have been higher just because of AS 116, but there seems to be something missing or way out.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [113]

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Sorry. Can you just repeat your question? We missed you there. Can you just repeat that, please?

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [114]

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The depreciation on Q-o-Q basis in India business has come off by about INR 100 crores or roughly about 12% on Q-o-Q basis, despite AS 116 implementation.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [115]

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Can I take this on the off-line because I don't offhand remember anything moving on this particular part? It's a pretty routine line item there. And as you rightly said, only the IFRS 15 implications are the only one that's coming through. Can I touch base with you off-line? Apologies for that.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [116]

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Sure. Not a problem.

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Operator [117]

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Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference over to the management for closing comments.

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Pathamadai Balachandran Balaji, Tata Motors Limited - Group CFO [118]

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Before I complete, I think we just want a quick confirmation. I don't -- we don't see this coming, but let's take this offline on the depreciation. You just catched me by surprise on that one. But having said that, let's quickly review 1 minute. Just stay on the line for a minute, please.

Depreciation and amortization, last year to this year, up by INR 72 crores. So we will have to check back with this to see what it is. We will figure that out off-line.

So all of you, thanks a lot for staying on the line. I hope you found the engagement useful. Do feel free to reach out to us if you believe there's any further clarifications needed from us or any further explanations on any front. Thanks for that, and see you soon. Take care. Thank you. Bye-bye.