Tata Motors' (TTM) Q1 2015 Results - Earnings Call Transcript

Aug.11.14 | About: Tata Motors (TTM)

Tata Motors Limited (NYSE:TTM)

Q1 2015 Earnings Conference Call

August 11, 2014 8:30 AM ET

Executives

Hitesh GoelKotak Institutional Equities

Ramakrishnan – Chief Financial Officer

Vijay Somaiya – Investor Relations

Analysts

Kapil Singh – Nomura Securities

Hitesh Goel – Kotak Institutional Equities

Aditya Makharia – JPMorgan

Zhu of Bernstein – Bernstein

Srinath Krishnan – Sundaram Mutual Fund

Sonal Gupta – UBS

Jamshed Dadabhoy – Citigroup

Sahil Kedia – Barclays

Govind Chellappa – Jefferies

Operator

Ladies and gentlemen good day and welcome to the Tata Motors Limited Q1FY15 Results Conference Call hosted by Kotak Institutional Equities. As a reminder, all participants’ lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Hitesh Goel from Kotak Institutional Equities. Thank you and over to you.

Hitesh Goel

Thanks, Moshin [ph]. I am helping the management in terms of Tata Motors for 1QFY15 Earnings Conference call. We have with us Mr. Ramakrishnan, CFO of Tata Motors, along with the investor relations team which is headed by Mr. Vijay Somaiya. I would now like to hand over the call to Mr. Ramakrishnan for opening remarks. Over to you sir.

RAMAKRISHNAN

Thank you, Hitesh, thanks for hosting this call and thanks for all the participants joining in. Short while ago we announced the Q1 financial year 2014-2015 results for Tata Motors consolidated standalone and Jaguar Land Rover.

I will quickly run through some of the numbers and highlights. Many of you may have already been familiar with this. At a consolidated level, Tata Motors grew; the net revenues came in at Rs. 55,000 crores, up from Rs. 46,000 crores in the same Q1 period last year.

EBITDA margin came at 18.2 crores, up from 14.5 crores last year and profit after at the consolidated level £5,400 crores up from 1,700 crores. The Tata Motors India business have been continued to impacted by the macro conditions,

EBITDA margin came in again at negative to 0.8% compared to positive of 2.3% in the same period last year that is the immediately preceding quarter EBITDA margin which came in at negative 6% with certain incremental buy sell to the equity.

Profit after tax, after accounting for Jaguar Land Rover dividend in June, profit after tax for TM as a standalone came in at Rs. 394 crores.

Jaguar Land Rover, the numbers I am reading out as per IFRS financials in British pounds. Net revenue was 5.3 billion, up from 4 billion in the first quarter of last year. EBITDA margin came in at 20.3% up from 15.8% last year and profit after tax £693 million, up from £304 million same quarter last year.

In terms of balance sheet and debt to equity ratio, at a consolidated level, excluding the finance receivable from the Tata Motor Finance business, the automotive business between Tata Motors and Jaguar Land Rover, the net automotive debt equity was 0.09.

At TM’s standalone level it was higher at 0.73 and at Jaguar Land Rover, the net debt was negative.

As far as Tata Motors business is concerned, the overall demand factor in the industry, the macroeconomic factors continue to impact the demand curve for the entire CV industry including ourselves. The light commercial and small commercial vehicles continue to be significantly impacted due to external factors and also more recently due to financial pulling off of the automotive financing focus.

Passenger vehicle industry witnessed some revival on the back of growth in demand from rural and semi-urban areas. However, our passenger vehicle business, the company underperformed to some extent, mainly due to inventory correction factors across the channel of providing the base of the Zest launched shopping.

For the industry, marketing spend continues to remain high. In medium and heavy trucks, our market share continues to remain strong at 54%. In commercial vehicle business, we launched the all-new range of Tata ULTRA trucks in the quarter with intermediate and light commercial vehicle range between payload 5 and 15 tons.

In passenger vehicle, we launched the all-new Aria with the VARICOR 2.2 litre engine and other value-added features.

In terms of Jaguar Land Rover business, wholesale and retail volume, Q1 stood at almost the same £115,000 up 27% and 22% respectively from the same period last year. EBITDA margin which I reported a short while ago at 20.3% reflected the wholesale volume increase, richer market mix, with solid sales in emerging markets, rich product mix supported by the ongoing continued success of Range Rover Sports, Range Rover and Jaguar F-TYPE.

In Jaguar Land Rover, we continued to invest as we had indicated earlier in product developments and capital expenditures and for the quarter, the spend was about £682 million.

Our free cash flow after the CapEx spend stood marginally positive at £5 million. Cash and financial deposits on the balance sheet of Jaguar Land Rover stood at a healthy £3.3 billion and as I said earlier, Jaguar Land Rover paid a dividend of £150 million in June.

Looking forward, in commercial vehicle business, in India, we see positive investment and business sentiments picking up and supporting the demand for some of the segments, notably the medium and heavy trucks. M&HCV is showing improvement, even though it is on a small base compared to last year and we expect the trend will continue and we will see some further momentum particularly in the second half. Similarly in M&HCV buses, we expect the JNNURM – with the new launches across Prima and Ultra range of vehicles refreshes/variants in small commercial vehicles and pickups.

We believe this will provide a strong foundation for our growth when the demand kicks up in the market. In commercial vehicle, export growth will continue to be a high focus. We entered Philippines automotive market in Q1 and Malaysia and Vietnam will follow.

Passenger vehicle, you would know that we launched the Nano Twist, Vista VXTech, and All-New Tata Aria in the last few months and we are awaiting the significant launch of the ZEST in a short while from now. For this, the response has been extremely encouraging and very positive from auto journalists, auto enthusiasts, media and leading financiers who have seen and tested the product.

Our product portfolio in passenger vehicle have been finalized and received the board approval short while ago, it is a program running up to 2020, which demonstrates our commitment to improve this business significantly.

As in commercial vehicles, we’ll continue to focus on some of the opportunities available in the export markets at our passenger vehicle results.

Jaguar Land Rover, the sales momentum continues to build up or move the brand as we have seen in some of the earlier quarters. We are preparing for the launch of new Discovery Sport, Jaguar XE, the new family of 2 litre engines in the new engine plant and the new China JV will commence manufacturing between now and the end of the year. Our thrust in terms of product investment and capital expenditures will continue in Jaguar Land Rover and we expect for the year, the spend will be in the region of £3.5 billion to £3.7 billion and we will continue to monitor economic and sales trends to balance sales and production and focus on profitable growth and strong operating cash flow to support the investment.

With this short introduction, I will stop here and throw the floor open for any questions that you may have.

Question-and-Answer Session

Operator

Thank you very much sir. (Operator Instructions)

Unidentified Analyst

Hello sir. Congratulations for a very good set of numbers. A question now pertaining more to the JLR side of the business. Could you give us a sense of within JLR other expenses, what was the realized Forex gains? And secondly again relating other expenses only, I think that sequentially it has come down sharply, so clearly drove that? That’ll be the first question.

RAMAKRISHNAN

Picking up the second question first, and you will see volume growth and revenue growth are building up. You’ll definitely see some of this certainly it is coming down. About the expenses, our launch-related or follow-through expenses also will not witness in this quarter. So there is no major one-off gain or anything of that nature, but it’s more a momentum and this revenue growth is driving some of the expenses percentages been looking much better.

In terms of realized foreign exchange gains, what was that?

Vijay Somaiya

77.

Ramakrishnan

£77 million in the quarter.

Unidentified Analyst

Or – then you see, it had – third quarter, December quarter, your volumes are broadly the same as December quarter, your other expenses are down which means, so then the regional mix improved like this quarter you had a very sharp in (Inaudible) that is also the better marketing expenses or the other expenses go down or it is only the letting fee launch or something that is not there this quarter.

Ramakrishnan

You are right, the first quarter in the regional mix something that has been also a factor of the richer product mix although. The numbers and the margins may not convey fully. We have been able to – the demand has been more towards much higher in the products across markets and the growth and the full factor in the market across the globe has been quite healthy that contributes more both towards richer product mix within the same brands helping with lower expenses in terms of marketing expenses.

You are quite right. But I will just add the product mix and product content to the factor that you mentioned earlier.

Unidentified Analyst

I think the last question on China as a percentage of shares, how do you see that’s panning out for the rest of the year?

Ramakrishnan

Sorry, it’s difficult to predict. We see growth in practically all the markets and in the growth in other emerging markets in Asia also has been very encouraging. We have done highly well in US and if you will in Europe which has faced some challenging situation, we have seen some growth. So we see strong demand full across the globe. It will be a question of allocation and managing the demand and balancing it across the globe. But we do see momentum across our product range. The product has done quite well. The Range Rover the regular one or it will continually a strong for us.

Unidentified Analyst

So, my question was both across, we’ve always had very strong demand but the management internally cleaned the target about how much we want to send to each month, like in which quarter US gave that lining and China growing. But you have explained what is the level of China as a percentage of sales are you targeting?

Ramakrishnan

No, I would not be able to comment on that. It will be difficult to comment on it on a quarterly basis.

Unidentified Analyst

I don’t know, more like an annual basis for a size of in China that.

Ramakrishnan

Or would not be drawn into predicting demand and sales number analysis. It’s a function about the…

Unidentified Analyst

Thank you. Thanks a lot and congratulations again.

Ramakrishnan

Thank you very much Vinay. Thank you.

Operator

Participants are requested to restrict your questions to two per participant. We have the next question from the line of Kapil Singh of Nomura Securities. Please go ahead.

Kapil Singh – Nomura Securities

Hey, good evening and congrats. My first question is regarding your volumes. Is it that, at this point of time, there is no significant constraints because of which markets like US are being thought and in light of that, how do you see the fading out of capacity expansion if you could help us understand that?

Ramakrishnan

We are continuing to invest in tablet and capacity and the capacity in UK just that our main focus on, very shortly the – during the year itself, towards the end of the year, the China capacity will also come on stream and over time, that should relieve some of the UK capacity. So, should we do see demand fairly strong across markets. It definitely gives us an ability to manage the product content and the market demand and balance of our production in line with that. But yes, you are right. In tablet, we are also continuing to invest in our capacity.

Kapil Singh – Nomura Securities

Sir, any numbers you can share like, what kind of capacity could target and when they would start coming in UK? For example in this September or December and FY 2015, 2016, 2017 and what kind of capacities you would look at?

Ramakrishnan

It will be difficult to give a diamond cut number other than saying it’s a continuous one. We have been expanding capacities in the last two three years since 2010 and we’ll continue to do so.

Kapil Singh – Nomura Securities

Okay. And sir, secondly, there is being a lot of news flow from the Chinese marketing regarding discussions with the regulator et cetera. Is there further ongoing discussions happening with them or that issue has been closed for now?

Ramakrishnan

We continue to engage with the authorities not only in China elsewhere wherever we do business we have a healthy relationship and always dialogue in various markets including in China. Here in China, we have had the discussions and jointly in terms of the market and given the focus that we have in the China market, the freight reduction that we have announced on three of our products will definitely help us get a much more market competitive. As far as whether it is ongoing whether it will be further, I am not in a position to say how quick from the ongoing discussions with the authority. It’s not possible to predict that.

Kapil Singh – Nomura Securities

Right sir. And now, I just wanted to check whether it is still ongoing, so, I think…

Ramakrishnan

The other side of your question, it’s a dialogue that we’ll to have. It’s difficult to predict.

Kapil Singh – Nomura Securities

Understood, sir, understood. Thanks. I’ll follow-up in the queue.

Operator

Thank you. We have the next question from the line of Hitesh Goel from Kotak Institutional Equities. Please go ahead.

Hitesh Goel – Kotak Institutional Equities

Yes, thank you for taking my questions. Sir, this is, or just continuing on Kapil’s question, so that even reading mid-term, the Chinese authorities are worried about the excess pricing that is charged in China which is okay. But how did you look at pricing? Because in UK you would be giving discounts as well. So just wanted to understand how they are looking at this – in the premium in the Chinese market and it should be market determined in my view or what are the interview with the authorities on that?

Ramakrishnan

Everything is appropriate for me to comment on how the authorities will look at or given the exposition on this. Pricing in China, not only for us, for all manufacturers tends to be higher then it’s a factor of high content of duties et cetera. So it’s an ongoing dialogue. It will not be appropriate for me to predict how they should be looking at or how they look at et cetera. It’s not a question that I can address for using.

Hitesh Goel – Kotak Institutional Equities

Okay. Well, sir, can you also tell us what would be your starting capacity on China and how will it ramp up in FY15 and just to get a sense on FY15?

Ramakrishnan

This year?

Hitesh Goel – Kotak Institutional Equities

Yes, FY15, because, yes, I mean, how will it ramp up in FY15?

Ramakrishnan

The …

Hitesh Goel – Kotak Institutional Equities

FY15 and FY16, sorry?

Ramakrishnan

That’s what I.

Hitesh Goel – Kotak Institutional Equities

Yes.

Ramakrishnan

Because the production started will be sometime in the later part of this year.

Hitesh Goel – Kotak Institutional Equities

Yes.

Ramakrishnan

End of this calendar year. Has we announced anything, I also shared with all of you earlier. In the first phase, the China capacity is at – it should be around 130,000 vehicles which is mainly intended for three of our models. The Evoque, the Freelander and JXF. From Tata production to reach full 130,000 capacity, I would think it will be about year-and-a-half to two years.

Hitesh Goel – Kotak Institutional Equities

Okay, okay sir. Thank you very much.

Operator

Thank you. And the next question is from the line of Aditya Makharia from JPMorgan. Please go ahead.

Aditya Makharia – JPMorgan

Yes, just on the India business, or you did mentioned that you are seeing volumes are expected to improve into the second half. In terms of profitability, we have seen the losses come down, hurt margins to come in negative so, when could we expect potential break-even or maybe even a recovery?

Ramakrishnan

First of all, Aditya did you send me a text message a short while ago?

Aditya Makharia – JPMorgan

Yes sir.

Ramakrishnan

Thank you very much for the message.

Aditya Makharia – JPMorgan

Sir.

Ramakrishnan

Yes, India business – as I said earlier, we do see some positive momentum and numbers sticking up in M&HC – medium and heavy trucks. In return if you take that as a lead indictor for a turnaround in the industry or the overall economic factors, it’s a good sign. But I look caution that it is off a small base last year. And we have seen that trend for about two three months now. I won’t hope it is a consistent and will continue. In parallel we have also seen some frictions coming back into the freight rates as well no longer going – down table or marginally freezing in some factors. If you take a combination of all these we do it, but this momentum hopefully should continue. I won’t tell that, think that we will see a greater impact on this maybe in the second half of the year and perhaps more sharply in Q4, we will definitely see some impact other than Q3, but I think more will be in Q4 and onwards. On the other parts of commercial vehicle, as a rule – not as a rule, as a general principle, I would say the small commercial vehicle would normally be later in going down when big trucks fall. The small commercial vehicles demand continues to have some momentum for some more time, then they started tapering down. When the recovery starts, I think we have seen the impact on medium and heavy commercial vehicles and I think the small commercial vehicles should follow, maybe within a couple of quarters thereafter.

Aditya Makharia – JPMorgan

Okay. And just internal – could you quantify the impact of the strengthening GBP in this quarter’s numbers?

Ramakrishnan

It’s difficult to talk about the current strengthening of the GBP, because as you know, we also had – or shared with you some of our forward cover and hit programs that we have for the immediate quarter at any point of time will be covered almost 60% 70% in terms of our forward covers and exposure. But in general, you are right, GBP is strengthening is not good for the business, because most of our revenue – a good part of our revenue is in dollar terms. But the immediate impact is somewhat masked by the hedge and the forward cover that we have in place.

Aditya Makharia – JPMorgan

Okay. So, fair to say that we will see the impact in the coming quarters?

Ramakrishnan

Into the future quarters.

Aditya Makharia – JPMorgan

Yes, thanks, sir.

Operator

Thank you. We have the next question from the line of Robin Zhu from Bernstein. Please go ahead.

Zhu of Bernstein – Bernstein

Hi, thanks for bringing up the questions. Congrats on a very good set of results. Couple questions. Will it be a significant starting cost in Q3 or Q4 for the JV and for the Jaguar XE in you will be starting more programs, is that going to be any sort of one-time costs as a result? And my second question is, last year in Q2 we saw this – sort of local incentives, is that going to repeat next quarter or is that – it turned to be a one shot payout?

Ramakrishnan

Sorry, there were two or three questions mix up in that, but I think the first question was the China JV starting production will there be a significant impact of the start-up cost et cetera on Jaguar Land Rover’s bottom-line. The start-up cost et cetera associated with the JV will be in the JV book. So, I am not sure whether I understood the question correctly. It will be in the JV’s book in terms of expenses or any…

Zhu of Bernstein – Bernstein

But, those will be income, right, from the JV? So that there was a lots…

Ramakrishnan

Yes, there will be some impact of that shuttle, and similarly when you have a major launch program in a quarter, whether it is XE or other models that we’ve been talking about, yes we will have one-time launch expenses et cetera coming into the Q3 and Q4.

Zhu of Bernstein – Bernstein

So could you quantify these impacts?

Ramakrishnan

No, I don’t think I’ll be able to quantify it.

Zhu of Bernstein – Bernstein

Yes, no problem.

Ramakrishnan

I think the other question, the last question as – I couldn’t follow that clearly. Can you please repeat that?

Zhu of Bernstein – Bernstein

Yes, the local incentives booked in Q2, FY14, I imagine – you guided the first to be various subsidies at the national sales company level? Is that going to repeat next quarter?

Ramakrishnan

Oh, you are talking about the local VAT and other incentives?

Zhu of Bernstein – Bernstein

Yes.

Ramakrishnan

Yes, there would be some of that turning in the coming quarters. But not very material or significantly of nature.

Zhu of Bernstein – Bernstein

Okay, I am sorry, and just one last follow-up. I mean, you mentioned the hedging gain was £77 million in Q1 and you have 70% coverage on your hedging books. But does that mean that the – the actual sort of sequential effects with the heads going around £100 million, £110 million, is that reasonable?

Ramakrishnan

Yes, £77 million is the realized gain in our hedge book.

Zhu of Bernstein – Bernstein

Well, and that, but your 70 has been covered. So, the organic, sort of, FX loss or FX has due to sequential effects, is that £100 million?

Ramakrishnan

So I am not sure I could be arithmetic. Can we take it offline separately please?

Zhu of Bernstein – Bernstein

Sure, okay. Thank you.

Ramakrishnan

Thank you.

Operator

Thank you. We have the next question from the line of Srinath Krishnan from Sundaram Mutual Fund. Please go ahead.

Srinath Krishnan – Sundaram Mutual Fund

Thanks. Sir, during FY14 you had a publicity expense of about £75 million for JLR. So, with entering into the segment (inaudible) anything as a percentage of sales would be increasing margin from here or how do you look at this publicity expenditures?

Ramakrishnan

We are talking entering newer segments, launching new products and three four programs are coming together, this year similar and also in the future years. I don’t commented on the percentages. Don’t look at the book of the revenues. But yes, the publicity is graduating the marketing expenses.

Srinath Krishnan – Sundaram Mutual Fund

Sure, this is a pretty large amount of 4%, 4.5%, was it significantly lower during the quarter?

Ramakrishnan

Yes, in this quarter?

Srinath Krishnan – Sundaram Mutual Fund

Yes sir.

Ramakrishnan

Yes.

Srinath Krishnan – Sundaram Mutual Fund

Okay, so, it’s just a timing, is it? For the forthcoming quarters, we could see it reverse?

Ramakrishnan

Yes.

Srinath Krishnan – Sundaram Mutual Fund

Okay, thank you sir.

Ramakrishnan

You said it’s much better, yes.

Operator

Mr. Krishnan?

Srinath Krishnan – Sundaram Mutual Fund

I am done. Thanks a lot.

Operator

Thank you. We have the next question from the line of Sonal Gupta from UBS. Please go ahead.

Sonal Gupta – UBS

Good evening sir, thanks for taking my question. Sir, just coming back to this chart, just a couple of clarifications on the JLR side. So China, I mean, do you see some other manufacturers take adjustments on the spare parts pricing? Have you made any adjustments on your end there?

Ramakrishnan

No, actually when you make any corrections or any adjustments what they have done, they will make a necessary announcement. It will not be possible or appropriate the comment on this ongoing discussion.

Sonal Gupta – UBS

Okay, and sir, could you just talk about on the MHCV side how did the discounting trends progressed on a sequential basis and in Q1 versus Q4 of last year and then any price increases that you’ve taken in MHCVs or LCVs?

Ramakrishnan

I’ll take the second question first. Yes, we have taken the price increase on MHCV, one price increase of 1st April that is of cutting across almost all our product lines. Which was about half – 1% which is on 1st April and one now on 1st of July. These are the two – as we have done in the past, we have taken these two quarterly price increases. It does have discount while it continues to remain high and yes, I think we have seen some account levels coming off on a quarter-to-quarter basis.

Sonal Gupta – UBS

Okay, and sir, last question is on the – your financing Tata Motors Finance has posted loss of Rs. 300 crores this quarter and the previously shown very high NPL levels. So I just want to understand, how do you plan to see, I mean, do you need to sort of inject significant amount of capital into this company given the NPL levels and deteriorating numbers?

Ramakrishnan

No, I think the, yes, let me put in the other way now. Yes the NPL levels as we have seen in other parts of the auto financing in particular in financing companies and banks in general, the NPL levels have increased for everyone. In Tata Motor Finance, considering that lot of the focus is on sustaining user and promoting some of the segment-leading products, if you remember a few years ago, Tata Motor Finance was – along with Tata Motors helped us in launching the Tata Ace in the market itself and that market head in Tata Ace is a first time user segment used to be very, very high. So they also supported many of the FTU segments and other segment-leading initiatives. So the NPA levels in Tata Motor Finance have tended to be somewhat higher. They are putting together a series of measures for bringing it down and taxing their collections and ahead in this high NPL levels.

Apart from that in terms of equity injection, it’s there to be a function of the growth. We catered to about on average about 20% to 25% of the total sales in Tata Motors that’s the market share they have and they limited an capitation issue. To the extent of incremental sales in Tata Motors into the market, there – because growth will actually together with the equity injection from time-to-time. If you remember, right, last year we increased it totally about Rs. 300 crores of equity for 2013, 2014 and annually the injection of equity but most of the supported growth in Tata Motor Finance’s own portfolio. Their portfolio stands today at well over Rs. 20,000 crores which have been built to this levels in the last five, six years and continuing to grow.

Sonal Gupta – UBS

Okay sir. Thank you so much.

Operator

Thank you. We have the next question from the line of Jamshed Dadabhoy from Citigroup. Please go ahead.

Jamshed Dadabhoy – Citigroup

Yes, good evening.

Ramakrishnan

Good evening.

Jamshed Dadabhoy – Citigroup

Sir, could you give some – hi, good evening sir. Sir could you give us some details on the Ingenium engines at the Volvo Hampton plant, what is the capacity? And these engines, are they going to be additive? I see only new models, or are they plus any of your current engine line-up?

Ramakrishnan

That’s a good question. The plant will just intended to have capacity of 240,000 engines annually. As we have said before, it will have both gasoline and diesel versions in a couple of configurations. It will be for the newer models and gradually it will also fill in some of the requirements for the running models. Eventually we see this engine had a total vehicle portfolio to be of the increase or build up time.

Jamshed Dadabhoy – Citigroup

So what can be ultimate capacity instead of 250k could we look at it going to say, 500,000 in three years?

Ramakrishnan

I wouldn’t want to put a timeframe into this. time horizon to this. If you recall at one point of time, they also talked about setting up a second capacity at somewhere else possible in India (Inaudible) But right now, the focus will be to start this engine capacity and introduce our variable vehicle program and you add as and when the demand justifies for the expansion of capacity.

Jamshed Dadabhoy – Citigroup

Okay, thanks. The second question, on the China pricing angle…

Ramakrishnan

Hey, Jamshed that was – there were four questions.

Jamshed Dadabhoy – Citigroup

Second issue, on – so, could you give us a sense of what buy behavior is like, if you cut prices at that extremely high end by say 10%, 15%, what is the impact that you see or you think will happen on volumes? Is there elasticity of demand or not really at that price points?

Ramakrishnan

I am not sure that I am competent to answer that and also to put down in specific quantitative terms, the next you will ask me is, by how much we’ll – how much percentage will the volume grow up, because of this, it’s not the scientific or engineering equation. Definitely the reduction in prices on a comparable set, the product should become competitive significant in terms of our customer-focused in wanting to respond to the market and the other requirements. And I am not sure that there is a formula I can tell you that if prices cut with this, price reduction the volume will go up x percentage. But yes, I think there will be a greater pull in the market.

Jamshed Dadabhoy – Citigroup

Okay. I’ll come back, sir. Thank you very much.

Operator

Thank you. We have the next question from the line of Sahil Kedia of Barclays. Please go ahead.

Sahil Kedia – Barclays

Thank you for the opportunity. Sir, you have always maintained that on JLR side reads that margins should be in that 14% to 16% EBITDA margin range. Surely that change is now what are you looking there in terms of a sustainable profitability given that what we have seen in Q1?

Ramakrishnan

The 14% to 16% is haunting every quarter. But I guess, I think the margin commensurate as the volumes as the growth factors as these margins has been quite satisfying increasingly in JLR. Rather than put a percentage, I think I’ll answer it more in terms of the positive and the negative influences on the margins going forward. And draw your own conclusions as to where it will be. We on our side would tend to be more cautious than optimistic and aggressive on this. Yes, with the expansion in the model and the platform model strategy, being able to introduce more and more vehicles in different white spaces of similar configuration or basic product configuration I think we are able to influence the cost of the margins quite favorably. I think I have also shared with early how the model – number of models in JLR have been in the marketplace. They are increasing at a time and a number of platforms are actually coming down. With the various data sharing and integration and architecture sharing at our platform and across models, the influence of the cost should be positive. At volume build up, I think we will also have a better say on our material costs and our negotiations to the (inaudible). On the other side, the cost factors have been fairly benign in the lot of last year, both on the material front and other on component side and in this industry, naturally you will have some operating limited advantages as the volumes grow up sequentially like this. All that was good. On the other hand, I think we need to be cautious about the exchange front on which we have no control at all. As it is, in the last couple of years we are seeing that changing move from 1.5, 1.55 range to 1.65, 1.7 range, that’s one factor; and secondly, we should be cautious about marketing expenses, as our various marketing in particular. They have been fairly low at the lower end of the range in the recent past, as volumes build-up, as you enter newer segments that may become pressure on the marketing expenses and so. Rather than giving you a number, I would caution on both – our aim will be to grow with a healthy margin not growth at any cost, yes, this focus on margins and operating cash flow generation to support our future programs. And beyond this, it’s difficult to give a precise number on a range.

Sahil Kedia – Barclays

Sir, you mentioned that costs have been relatively benign, I just want to understand, sir, in that case, why have our gross margins or R&D to sales being largely ranged upon despite improved product mix? Is there something here that we are missing or mis-reading here?

Ramakrishnan

It’s difficult to comment on that on a quarterly basis. The leverage can come in a variety of line items. Where – except the operate – the material costs have been fairly benign. It also depends on the model mix in any particular quarter and the regional mix. But trending-wise, you see the last couple of years, the material costs have been fairly under control.

Sahil Kedia – Barclays

But on a year-on-year basis, I mean, that, R&D actually has gone up and also on a Q-on-Q. So, just wanted to understand are we missing something here, because, if your product mix is getting better which is respected in a higher profitability, ideally your contribution margins also should improve, so just wanted to make sure that we are understanding this, as some percent we are missing here?

Ramakrishnan

So when we say product mix, even within a particular brand, the content which can be favorable, but across brands, the miss can be slightly differently. If you have more of one particular model rather than the other particular model, it could make a difference.

Sahil Kedia – Barclays

So, one last question if I may. Can you just tell us, what is your China distribution footprint currently? And where do you intend to take it by the time you new JV starts to ramp up or thereabout?

Ramakrishnan

Taking from my memory, I think the current distribution footprint in terms of window to the customers, is about 140 or so. I believe it has crossed 150 as we speak and it should cross about 200 plus in a short while.

Sahil Kedia – Barclays

So this would be, short while would be probably close to the launch or the manufacturing starting?

Ramakrishnan

In this year.

Sahil Kedia – Barclays

Okay, thank you sir. That’s very helpful.

Operator

Thank you. We have the next question from the line of Govind Chellappa – Jefferies. Please go ahead.

Govind Chellappa – Jefferies

Yes, hi sir. Good evening.

Ramakrishnan

Hi.

Govind Chellappa – Jefferies

Yes, good evening. I had a couple of questions. One, on the domestic side, can you comment about how the resale prices of heavy trucks are moving? Have we seen a sharp increase in the recent past commensurate with the small recovery that you have seen? That’s my first question.

Ramakrishnan

No, since we are seeing any sharp or otherwise increase in the retail price yet.

Govind Chellappa – Jefferies

Okay, okay. My second question was on China, and two questions to that. Would the variant mix of individual models in China be vastly superior to what you see in rest of the world?

Ramakrishnan

Sorry, Govind, Can you repeat the question?

Govind Chellappa – Jefferies

Yes, the variant mix within each model at this point in time, it did happened for example when you launched Evoque…

Ramakrishnan

Yes, with the variant mix on a market-to-market basis?

Govind Chellappa – Jefferies

Yes, would it be much superior than China, than rest of the world?

Ramakrishnan

My intuitive answer is, yes. But I need to reconfirm that.

Govind Chellappa – Jefferies

Okay, now there will be lots of questions about China and I asked one as well. But, I’ll ask one that everybody is trying to figure out without having much hope on whether you will answer it or not. What proportion of your EBITDA comes from China right now?

Ramakrishnan

I think you answered it for me.

Govind Chellappa – Jefferies

Yes, could you give us any guidance, I mean, that’s pretty much the most important…

Ramakrishnan

We do not discuss – we don’t – I need to be careful about the information that we share with everyone, we do not discuss market-wise profitability, because there is so much in terms of cost allocation and so on. It will be difficult to talk about that and we do not do that.

Govind Chellappa – Jefferies

Okay sir. Thank you.

Operator

Thank you. Ladies and gentlemen, due to time constraints, no further questions can be taken. I now hand the floor back to Hitesh Goel. Over to you.

Hitesh Goel

Thanks you Moshin [ph]. I would like to thank Tata Motors management for giving another chance to host this conference. Thank you very much.

Ramakrishnan

Thank you. Thank you everybody.

Operator

Thank you. On behalf of Kotak Institutional Equities, that concludes this conference. Thank you for joining us and you may now disconnect your lines.

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