Let us start with the big picture. In the management commentary, you are sounding bullish, you are confident of demand and margin expansion. What is fuelling this optimism? Is it demand or normalisation of the supply chain?
There are a few moving parts here. Number one, let us take JLR. In the JLR order book of 185,000, the kind of preference the new launches of Range Rover, Range Rover Sport and Defender, form almost 76% of this order book. The work that we have done over the last many years in running a tight ship and reducing the breakevens to 300,000 means that this business is having a strong top line and is able to manage its cost structure very tightly, which means we should be able to see the performance lift because of that. I think the journey going forward towards premium luxury is another important aspect of this game because the brands are very well positioned to get into the world of premium luxury where demand resilience to movements in the economic factors are lesser and therefore the demand is more resilient. It is going to help us in terms of growth going forward and the plans on electrification also means that we are securing our future in this turbulent period.
Domestically speaking, the demand environment on the CV front has had a very poor last four-five years due to multiple factors starting from the financial challenges of the IL&FS crisis. Then we had the BS-VI migration, Covid and runaway steel prices. All this is now behind us and the investments which the government is doing on infrastructure is also going to help from a demand perspective.
In the meanwhile, we have changed our strategy to start focussing squarely on profitable growth rather than just market share and that is giving us more degrees of freedom to play in terms of better branding, better innovation, better product offerings, better service and this combination of a good demand scenario and focus on profitability should play and augur well as far as the CV business is concerned.
On the PV side, it has been an extremely satisfying and remarkable turnaround amidst all odds and therefore, I am quite confident of a 100,000 sale this year with the launches also coming in. In EVs, the product is a number one priority and stepping up profitability in the second half of the year is the second priority.
So when you talk about the JLR engine firing on full cylinders, the capacity expansion number and the sales number, something which you have shared with us, have you ensured the supply chain and the semiconductor supply is also something which you have managed to capture and you have got promises which in a sense will not interfere with their launches or is that still a conjecture?
It has significantly improved. I will not say we are out of the woods. Having said that, we are significantly better than where we were before. We are getting much more visibility into talking in terms of visibility into the end of Q2 and beyond, compared to earlier it was just a week or two. So, things have improved substantially, but it is fair to say that not every issue has been nailed. Still a lot of last-minute firefighting happens to ensure supplies of September are secured right away. So, the situation is better, but not fully out of the woods.
If I say that for the next two to three years, Tata Motors would be enjoying a twin-engine effect – financial leverage impact and the operating leverage impact – because that is a very potent combination for any shareholder to get excited about. Are you finally reaching a stage where we will see both financial leverage and operating leverage uptick?
I think the de-leverage that we called out is starting to play out and we ended the quarter with about Rs 41,000 crore of debt and net automotive debt that we had and that needs to come down, in domestic Tata Motors is roughly about Rs 8,000 crore. That should come to near zero. JLR is sitting at about Rs 25,000 crore, that should come down to about Ra 10,000 crore. And, of course, Tata Motors Singapore still has about Rs 9,000 crore of debt which will remain and that will get taken out next year.
If you add it all together, then this Rs 41,000 crore debt, comes to sub-Rs 10,000 crore. That is our first port of call . It should definitely give benefit in terms of financial leverage kicking in as interest rates go up and then as volumes pick up and fixed cost controls continue, operating leverage should also play out. That is giving us the confidence that as we execute this plan better, we should see improved performance.What was the need for Tata Motors to extinguish their DVR shares? There was no financial urgency for you to consider it. So, what really prompted this move?
See, I think ever since we took out the ADRs, we have been looking at simplifying our capital structure and ADR was the first clear example because it was done at a point in time when the markets were different, Indian capital markets were different. Therefore, the ADR story is out and DVR is the next logical choice from that.
Now, DVRs were done in 2009 and then the new regulations came in which made them very unattractive and since then, the discounts on DVRs have been sitting at about 45-48% and it did not matter whether we paid dividends. It did not matter whether the share price went up or went down. The discount continued to remain. We tried all tricks to actually re-infuse liquidity. We did a QIP. We did a rights issue. We put this in the F&O. Nothing mattered.
It is just that the instrument has lost its flavour and we are the only large corporate in the country with the DVR and that is where this whole thought process of let us do a capital reduction so that we extinguish these shares completely and in return pay them as ordinary shares. The thing that has not been appreciated is that the promoter’s voting is actually going down by 3% which is very interesting because given the governance standards of this group, we have done everything possible from a fairness perspective but that meant that the promoter was actually losing their voting rights which they have consciously bought into. Therefore, that is the best that we can do.
The advantage now from the Tata Motors perspective, is that if the discount that was there in the market cap of the company goes away, which means tomorrow if I am assuming we want to do a capital raise, we do not have this confusion anymore and it gives full flexibility because it is just one instrument. I do not have to worry about DVRs or ADRs. It just becomes a simple process and transparent pricing is possible and that gives us immense financial flexibility. With this, the bulk of the simplification initiative that we had undertaken has now been dusted. The company is now fit for the future.
Tata Motors did raise capital via the private equity invested in the EV business. Is there scope for you to raise more capital in the EV business purely for benchmarking purposes and valuation purposes?
We will never do a capital raise for valuation. That just does not sound right. If we have to do a capital raise for use in the business and the one billion that we did with TPG Capital was actually setting the benchmark for valuation, number one. Number two, it actually got us money which the business needed. And number three, it also gives a governance standard because EV is such an emerging space.
Having somebody holding us to account for our plans and also being a neutral party looking into it is something that we really welcome. All those purposes are served now. We have the capital. We have the investor. There is governance in place. We subsidise the business. We will be reporting results separately on that. We already started. So, all the objectives of the EV fundraiser are done. If at all we have to do a next round of fundraiser, it will have to be because we need the funds for some reason, which at this point in time we do not see a reason and hence not looking into it.
Those who track the JLR product portfolio very closely, are of the view that JLR has got very strong ICE engine models and their entire offering is not EV ready, given where some of the global luxury car makers have moved with the EV portfolio. How would you defend that?
It is a factual statement because currently our EVs have not been launched yet. But come October, we open bookings for the Range Rover Electric, which propels us right up to the front because we will be the first global OEM to launch their fourth and their best product on EVs. And for us, there is no more important product in the portfolio than Range Rover. That is the first one going electric, followed by Range Rover Sport Electric. Therefore, we are going all in, which we have already done in Tata Motors and same thing in Tata Motors.
The first product we launched was Nexon, which is our best-selling product here. We have a point of view that the electric vehicle is a powertrain. The brand is the starting point. People buy a brand. They want to buy a Nexon or they want to buy a Range Rover. Within that, they are willing to choose a powertrain, which could be an ICE, it could be a PHEV, it could be a V8, V6 or they want to do an electric portfolio, which means the experience they are going to get in our Range Rover Electric is a Range Rover experience. And it is not an electric car which is branded Range Rover. We are putting it the other way around and that we are confident will make a difference. That also tells us how much we are putting at stake because we are putting our entire brand at stake into electrification, which will help us leapfrog what is currently out there.
It is the other way around in India where the passenger car comeback for Tata Motors has been a function of your EV success. Now that your market share has gone from 4% to about 14-15%, what is next for the India PV business?
India PV business continues with their plan because we do expect that even if we assume that 30% of the auto market will become electric, the remaining 70% is still ICE. Therefore, we will continue to have offerings on that front. And we believe, there is a clear rub-off from the EV business onto the PV business in terms of brand salience, as well as the brand imagery, which is helping us drive growth here.
In tech, for example, Tigor, was only an ICE product, and then we launched an EV on it. Then the ICE started moving as well. Now when you put a CNG on it, all four are moving. Same thing with Tiago. Therefore, that is how we see this as a virtuous circle. We will continue to drive ICE as well as EV. And that goes back to my earlier point: we are launching brands within which these are all multiple powertrains.
You have lost market share in the domestic market in the CV business. Do you think that is some seasonality at play and you will get that share back in the domestic CV business?
We did have a few challenges this quarter with the BS-VI phase 2 migration in terms of availability of products because we had done extensive product changes, bumper to bumper changes. And that was a part of a conscious plan. But we did not execute it to the level of flawlessness that is required and hence, we had a few gaps in terms of availability, which cost us market share.
It has started improving from June onwards. We believe by the end August, it will be more or less completely fixed. Therefore, one should see improvements from Q2 onwards. And from Q3, we should expect to be back on track completely. As far as CV is concerned, profitable as well as competitive growth, are non-negotiable. You would see us executing on that basis.
When N Chandra, the Chairman of Tata Sons shared the vision of Tata Motors becoming net debt zero by FY25, the conditions were very different. Your CV portfolio was not that strong, JLR operating leverage had not kicked in, the PV market share was not that great, now everything is firing full cylinders. So will it be safe for me to assume that your guidance of net debt zero by FY25 should be met earlier than what you had projected?
Let us give it another quarter before I can confirm from a JLR perspective but I think for now it is safe to assume it is FY25 and rather than bringing it earlier than that. Let us execute it.
If I am thinking on those lines, I will not be incorrect because there is a marked improvement in operating leverage and financial leverage.
That is correct. So I am not saying no to it; all I am saying is that let us hold the guidance and deliver. Everybody loves a pleasant surprise, let us deliver that surprise rather than getting ahead of ourselves.
If I look at the PE multiples of passenger car in India, let us say Maruti or Mahindra & Mahindra, and the PE multiple of CV business in India – Ashok Leyland and others and if I look at the PE multiples of luxury cars globally, BMW, Volkswagen and Audi, they are strikingly higher than what Tata Motor currently has. Would you be tempted to unlock some of these businesses separately now that all businesses are ?
In order to give clarity, we split the EV and PV businesses. Second, we also said we want to subsidize the PV business so we give full visibility of the P&L of PV and make it fully independent. In terms of unlocking by any corporate action on that, at an appropriate time the board will decide if it’s worth doing it and right now we have no such plans.
The Tata Group is now setting a large battery manufacturing unit in the UK. The battery component is the most important component for any electric vehicle. How advantageous would that be and could there be a permanent decline in the EV operating costs for Tata Motors?
You are absolutely right and that is the reason why we did it the way we did it where we have to ensure the OEM invests because the balance sheet is not strong enough and more importantly we have to supply to other players. Being an OEM, you will never be able to supply to other players and cannot build scale. So keeping it within the house is important and a differentiator. Building a very core ecosystem will make us the only player in the world with a very transparent joint business planning between the OEM and the cell manufacturer which means we should have full visibility on what are the chemistries that are available. This will include the chemistry that we should be experimenting as an OEM, the chemistry that they should be tying up as a battery manufactureror what should be the form factor that maximizes productivity and cell manufacturing, which will also help us in structural design of the vehicle; that is the second possibility.
The third possibility is what should be the volume that they should be tying up for various materials that we cut over so that it is fully consumed and the risk goes down. In all of this, there is a theme that is emerging which is that if the right experts manage their risks, the overall systemic risk goes down and opportunities in terms of creative execution goes up.
It also means that as some of the technology investments that are happening everywhere in the world, the cell manufacturing company has the ability to dip into it and do it in a manner that the current manufacturing technology is resilient to those changes in chemistry that happens and that form factor is appropriate for the car manufacturers. That is what we want to play going forward.
If you roll forward to 2026 and beyond, you will realize that securing supplies is pivotal for successful launching of cars and that is what we have done. At the same time, we’ll also realize that it cannot be just any battery, securing power sources also becomes important, making it green power is important, securing mineral source is important. The entire back-end value chain risk is now being given to a company that is going to do it as a day job every day while the OEM can focus squarely on the customer. This is a significant differentiator that we would have and that is something that we intend to leverage to the tilt both in the OEM and the battery manufacturing process.