Tata Motors Ltd (TATAMOTORS) Q1 FY22 Earnings Concall Transcript

Tata Motors Ltd (NSE: TATAMOTORS) Q1 FY22 earnings Concall dated Jul. 26, 2021

Corporate Participants:

Sneha Gavankar — General Manager, Mergers & Acquisitions

P. B. Balaji — Group Chief Financial Officer

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Girish Wagh — Executive Director

Shailesh Chandra — President – Passenger Vehicles Business Unit

Thierry Bollore — Non-Executive Director

Operator

Ladies and gentlemen, good day and welcome to the Tata Motors Q1 Earnings Conference Call. [Operator Instructions] During the course of presentation, if any participant intends to ask questions, they can use the Chat Box option appearing at the bottom screen to submit their questions to the speakers. All questions will be taken up at the end of the session. Please note that this conference is being recorded.

I now hand the conference over to Ms. Sneha Gavankar from Tata Motors. Thank you and over to you, ma’am.

Sneha Gavankar — General Manager, Mergers & Acquisitions

Thank you and good evening, everyone. On behalf of Tata Motors, I would like to welcome you all to our Q1 FY ’21 results conference call.

Today, we have with us Mr. Thierry Bollore, CEO, Jaguar Land Rover; Mr. P. B. Balaji, Group CFO, Tata Motors; Mr. Adrian Mardell, CFO, Jaguar Land Rover; Mr. Girish Wagh, Executive Director, Tata Motors; Mr. Shailesh Chandra, President, Passenger and Electric Vehicle Business, Tata Motors; and our colleagues from the Investor Relations team.

We will start the session with a quick overview of the financial and business performance from management followed by Q&A.

Over to you, sir. Mr. Balaji?

P. B. Balaji — Group Chief Financial Officer

Yeah. Thanks, Sneha. Firstly, thanks everybody for joining this call. Hope all of you are safe and sound. And as is customary, we’ll probably spend about 30 minutes going through the deck [Indecipherable] and focusing on the areas [Indecipherable] and thereafter open up for Q&A as we want.

Moving on to the Safe Harbor statement [Technical Issues]. Next slide, please. A period of intense activity for all of us despite the pandemic. And the key ones that follow-up here in Tata Motors is in the passenger vehicle side, the launch of the #Dark editions across the Altroz, Harrier and the Nexon. And in JLR, of course, pre-margin program continues apace and we’ve launched long wheel base of Range Rover Evoque and of course a record order bank that was 110,000 units close to about 29,000 [Indecipherable].

Next slide please. It’s fair to say that this has been a challenging quarter for us, having seen a solid recovery through the pandemic and coming out of the pandemic. But this quarter had to contend with semiconductor shortages as well as the second wave lockdowns in India and, of course, issues of wave two, elsewhere in the world as well.

On a year-on-year basis, the numbers are flattering because of the very low base. Therefore, we had given also the Q4 numbers for context. And therefore, you would notice that growth of about 132%, obviously lower than the [Indecipherable] last quarter with revenue of about INR66,000 crores lower as compared to the INR88,000 last quarter of about 107% on a year-on-year and a PBT before exceptional items of INR2,600 crore loss. EBITDA of 8.3% and EBIT of minus 1.3% basically showing the operating deleverage coming in because of the volumes coming off on a quarter-on-quarter basis. The free cash flow outflow was about INR18,000 crores, most of it coming out of working capital underlying because of the volumes coming off.

Next slide, please. We did see growth coming across all factors, [Indecipherable] price, transmission and others. And on a profitability basis, we did see significant improvement in JLR, TMS and others, basically Tata Motors Finance, which I’ll talk about towards the end. And our net automotive debt basis, the underlying debt was about INR34,000 crores last — at the end of last year. This quarter did deteriorate, almost INR16,000 crores of it is coming from working capital change as it unbound. And the business of course delivering about INR27,700 crores. So that is the situation on net debt. We do expect to see this return from second half onwards as volumes pick up.

Adrian, over to you.

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Good evening, everybody. Next slide, if you would, please. Okay. So these are our KPIs across the same information sets Balaji just took you through for the Group, so the points he made we’ve included this quarter for FY ’21. And I remind you, in our view that was a really good representative quarter for us. [Technical Issues] obviously a concern, which is why it’s a really good comparator. Retails actually in Q1 were higher in Q4, that is not a normal pattern for us. So it just reinforces the retail level we have in the marketplace today, pending supply issues, is very strong.

Obviously, our revenue is determined by wholesales, not retail. As you can see, already an impact on revenue in Q1, which of course will continue into Q2, and beyond our loss actually of GBP110 million and 0.9% negative EBIT was slightly better than I was indicating two weeks ago on the calls. And I’ll take you through the details of that, EBITDA 9% obviously suppressed by the volume levels as well and the free cash flow was the GBP1 billion outflow, within GBP4 million numbers which we announced on the 6th of July.

Next slide, please. Okay. So most of that I’ve already said, I think, the thing that I didn’t say was the order bank, just a reminder that’s 110,000 units at the end of June, 29,000 Defenders. So that product continues to be incredibly strongly received in the marketplace. And that number over the last two weeks has stayed about the same level.

Next slide, please. So these are the quarter one retail 124,000 units by major region. You can see a dramatic increase year-on-year. Of course, this time quarter one last year was significantly impacted by the dealer closures and the isolation of our buy in public along with the rest of us. The regional splits pretty much, as you would predict, apart from China, China of course returned to normal much sooner than other regions last year. But even in China, on a year-over-year basis, we were 14% higher. Overall, 68% higher at 124,500 units.

Wholesales were more impacted. Of course, these will be impacted sooner because we only have a pipeline before we hand over to our dealers and importers. And the important point that wholesale increase of 73,000 units were dramatically lower than retails. Normally, the only difference should we see JLR, the joint venture of course, where you would expect retails of about 15,000 units in this quarter. So we see a big fall off in wholesales. And I think the key point to take away from this slide now that pipelines under dealer stocks are falling, you will begin to see falls in retail sales from quarter two.

Next slide, please. So this is the slide on stocking levels. If I take you back 12 months, the blue line at the top there, that [Technical Issues] retailers owned, which of course then passed into customer hands. It was high at the end of April-May last year, of course, as those retailers were closed. And we did deliberately take it down to ideal levels. We talked to you about that on a number of occasions in quarter two and quarter three last year. You can see that the dealer stocks were around 60,000 units. They’ve fallen a lot since March. They’ve fallen from about 68,000 units down to about 42,000 units. And that enabled us to keep the retailers high in Q1. From that level, we would not be able to keep those retailers as high in quarter two.

On the wholesale stock, the brown line is the stock that we own. Obviously they’re on their way through to the dealers. That’s down already to about 30,000 units. You can see it was lower when the plants were closed in April and May last year. And again, that number can drop a little bit, but the pipeline is very, very thin. And therefore, going forward for the foreseeable future, production will be a better measure of both wholesale and retail levels with the exception of CJLR.

Next slide, please. Okay. So retails by family in the quarter, Range Rover of course doing incredibly well, even though those vehicles are seven and eight years old. The bigger ones are — obviously the Velar is doing well, also up 56% quarter-on-quarter. The Defender entrance 12 minutes ago. Obviously that’s why that number for Defender was very low in the previous year, but we had a good 17,000 units. Remember, I talked to you for a while, it needed to be 5,000 retailers a month. We went through that in quarter four and that’s continued in quarter one. So, the appeal for those products is very strong for both Discovery and Jaguar were up year-over-year also for the reasons mentioned. Our electrification numbers were 66% in quarter one. Let me remind you that was 62% in Q4 and 53% last year. So, more and more units actually have an electrified offering, just as we said they want to do.

Next slide, please. So this is the bridge which takes us back to prior quarter profitability. We lost GBP413 million in Q1 last year, obviously heavily impacted by COVID. I think a lot of this would be expected. Our volumes were restricted by about 30% in the quarter just gone, but still significantly higher than the same quarter last year, up about 36,000 units. You can see a big number there for volume and mix. Mix is richer than the previous year.

Good improvements in parts and accessories as well within the quarter versus 12 months ago. But we did have restrictions on volumes in CJLR, don’t forget China wasn’t impacted as much last year as the rest of our regions. And the emissions numbers needs calling out as well. We call a compliance portfolio, we’ve explained that to you. When we had free demand in terms of those PHEV units and free supply. At the end of last year, we reduced the fines and the reserves. However, the semiconductor reductions and supply reductions are impacting our ability to build compliant units in the quarter.

And you see that within the order bank data which I’ve shown you previously, the 110,000 units in the order bank. The biggest order banks in Europe and the UK and underpinning those orders are customer requirements for hand over delivery of PHEVs. So when we can build those units and pass them over, we will have a compliant portfolio. That was not the case in quarter one and will not be the case in our quarter two either.

Other things highlights the VME. I’ve talked consistently about VME over the last two years. This time last year, where it’s 7.5%, some of that was one-off incremental reserves because of the marketplace being negatively impacted by COVID. We knew, out of 4.7%, let me remind you in Q4, it’s fallen again. The underlying data is just over 4%, but the actual reserve recorded data was 3.1% in the quarter. So that drop was more than we were anticipating, particularly towards the end of the quarter coming through, which improved our actual quarter one — reduced quarter one losses.

Warranty did better. As we said, we are suffering actually some added import duties as a result of the changes with our relationship with Europe, you see them there, and some commodity cost increases with the raw material costs you see there. The big year-over-year increase is actually in the category we talk as structural costs. A lot of that is furlough monies which we took from governments around the world 12 months ago. That of course was the job of retention policy and it served us incredibly well over that period. Unfortunately we weren’t able to retain all of our workforce through the Reimagine changes, but that definitely helped us to protect jobs over the critical period last year.

And as we said — and let me remind you, almost 20,000 people in whole last year, of course the amount of cost spend, overhead spend, fixed marketing spend was much, much lower and suppressed. And you are seeing the increasing — not back to the normal levels actually, but much higher than previous years. The other thing to note here is our engineering capitalization continues to be lower, just over 40% in the quarter. And again, we’ve explained that to you before. The policy was changed in FY ’18. And it’s — and those changes will ebb and flow depending on where we are on each of the product cycles.

What’s happened here is, we’ve completed the fund and we’ve completed ’21 model year. And those engineers are moving over to the new architectures which have not reached their capitalization point yet because of the maturity of the product. All of that is exactly as we’ve explained to you in previous years.

Operating exchange have bad news because sterling appreciation offset by the hedges we have in place. That’s totaled GBP1,010 million [Phonetic] loss and 0.9%. Underlying the breakeven point here is about 90,000 units. So I read that underlying is lower than we’re indicating a couple of months or so ago. And that’s a start of us just to optimize and maximize the position of supply shortages.

Next slide, please. In the circumstances, this was a really good result on cash. So this is our traditional work. The two numbers in the middle of the cash profit after tax on the investment. Still we look to balance out and obviously overachieve on. We were within GBP74 million of doing that on just 84,000 units, which tells me our underlying cash breakeven was just under 90,000 units. And we’ve set our intention was 100,000 units in the investor presentations in February and also in the May year-end presentation.

So, again, we’re starting to optimize our position in difficult circumstances. Overwhelmingly, the cash lost in the quarter was working capital. You can see it there. We’re not building cars and therefore our payables at the end of Q1 was lower. And you also know that will reverse the point we start building more cars. It’s exactly the pattern you saw last year, GBP1.5 billion outflow last year you see at the bottom line and not the working capital number was GBP1.1 billion. Let me remind you, last year that GBP1.1 billion reversed itself within GBP25 million on a full year basis. So once we’re able to build more cars, that working capital number will begin to reverse, that is a certainty.

Next slide, please. Investment — our investment numbers, GBP2.5 billion full year, I’ve said, ebb and flow around GBP600 million a quarter. This was slightly under the GBP600 million and I expect that to be the case in Q2 as well and then investments to grow in Q3 and Q4 as we start to bring our new MLA high products Range Rovers, first of all, to the marketplace and the finalization in the second half of the year.

Next slide, please. Okay. So, the business update — thank you — so, obviously a big focus for this organization is Reimagine under the transformation program of Refocus. This program is much, much more complete and holistic than the fantastic charge program we had. You see the pillars there. It really is engaging a lot more people than we engaged during the turnaround programs, across the six pillars with the three enablers. And really exciting news here as we’re starting to see value generation and value creation, particularly in pillars five and six, GBP150 million we recorded in the quarter.

If you were to go — I won’t take you back to the previous slide, but if you would go back to the previous slide, you will note that we’re recording here less than the value we saw in quarter one. So we’ve attempted to subdivide the quarter between what happened because of shortage and what happened because the power of the program. If I were to add it up everything, you can go back and record in the bridge, there’s almost GBP350 million actually worth of reductions quarter-on-quarter over the previous year. We’ve recognized GBP150 million of those in the Refocus program. But this is a really great strong super-start for this program. This is just the first full quarter, of course, of Refocus.

We also saw improvements on quality, down to 3.3%, that drove an GBP18 million improvement. And we’re starting to see improvements on pillar three. Although in a volume constrained environment, the absolute savings of material cost of course are going to be lower than in a free supply environment. So, the size of that number will partly be determined by the speed of recovery and volume and supply in half two, but a great first full quarter to the program. And let me assure you, momentum is building. Momentum on this program is absolutely building.

Next slide, please. Okay. So the big news this quarter for us was semiconductors. We covered a lot of that in our announcements on the 6th of July and also in this special meeting we had with a number of you on the 7th of July. This is the page we used. The headlines are: the strong demand in quarter one for retails, I’ll take you through that. Wholesales were up versus previous year, but importantly down 27% from the level we would have expected to pass over to the dealers. And those orders was respected and underpinned. Those were 30,000 units. Quarter two will be the worst performance supply quarter than quarter one. A lot of the quarter one happened towards the end of the quarter, including new news at the end of June as we talked about. And we can see July production has been impacted quite significantly. August is better than July, September is better than August. So we are starting to see the end of the quarter better than the start.

Our volume — wholesale prediction in the quarter is slightly higher than I told you back in — two weeks ago. I said it was 60,000 units. We think it was slightly higher than 65,000. But broadly in that 60,000 to 65,000 range, I also indicated that point in time. The problem was fixed in quarter two. We are taking a number of actions. I talked to you through all of those two weeks ago. We have Emission Control Center, which is a permanent center of activity and energy, which we meet at the Board level twice a week. That really has been a rigorous engagement, right — led from the front by Thierry.

Actually today Thierry is on the road. He is listening into the call. But when we get into the Q&A, just be aware that he’s in a different location to myself. So there might be a requirement for a delayed pass over for him to make appropriate comments. But that’s supply engagement, it’s obviously at the first tier level where our contractual points are, but gone much beyond the end to end pipeline right back to semiconductor manufacturers we’re fully engaged with. So we have true visibility. And more importantly, they have true visibility of our requirements. And there’s no filtering that down through the end to end pipeline.

We will begin to prioritize the vehicles that we produce. At the moment, we have 110,000 orders. And therefore, obviously we want to make sure we do the right thing provide those cars to customers as soon as we can. But the new orders we take will start to reprioritize to higher derivatives within nameplate, if we have to choose between nameplate, more valuable nameplates, of course. But our big driver here is to increase the allocation of supply to Jaguar and Land Rover all plants. And we believe we’re starting to make traction and progress on that, although only a small amount is coming for us incremental in Q2, those 5,000 units so far.

Next slide, please. So, the outlook page, I know this is a difficult one because you want us to say more, but we’re not in a habit of misleading you. We have added more information than two weeks ago. So, the revenue of those 65,000, wholesales will be about GBP3.7 billion. I told you already, our breakeven point in Q1 was about 90,000. It might be slightly lower than that in Q2, but obviously 65,000 will be negative EBIT margin. Our investment of GBP2.5 billion, we do not plan to delay investments, absolutely full speed ahead on introducing those new products to the marketplace.

And free cash flow will be up to GBP1 billion or so in Q2. The actual status is slightly lower than that. But for the moment, if you hold that number, obviously if things were to significantly change, we’d bring that information for you. Half two revenues difficult because we’re not clear yet on supply, but it will be determined by supply because those customers awaited because we do however expect quarter three to be better than quarter two and quarter four to be better than quarter three. So it’s reasonable to assume as we start to reduce the breakeven point again, which we will do in half two towards the 80,000 unit level will be positive EBIT in the second half. And we’re also be free cash flow positive. At the point, we’ll build more units because obviously that working capital piece will reverse very, very quickly. And our underlying breakeven points have been brought down to a level where we’re not that far away from September’s activity to actually being cash positive territory.

No change in guidance for FY ’24 or FY ’26. Why are we super-confident about FY ’24? For the reason on the right hand side, this was our underlying data in half to FY ’21, 6% EBIT, optical was just over 7%, as you would know. So we feel very confident if you draw a line between H2 ’21 and FY ’24, as soon as we get through this [Technical Issues]

Operator

We request to all the participants to please stay connected. The line for Mr. Adrian Mardell is disconnected.

P. B. Balaji — Group Chief Financial Officer

Let me probably step in here because obviously he’s having a problem there, Balaji here. The numbers of — underlying numbers of H2 give us the confidence that from a margin perspective, we are clocking at the right level.

So, as and when the current semiconductor issue gets resolved, things start improving. We do expect to see an improvement in EBIT margin. And that’s something that should play through in our numbers. And of course, from a cash flow perspective as well, this is a big one there because the second half year did almost INR1.7 billion of cash. And so that will also feed through in our — as the year progress from second half of this quarter onwards.

So let’s then move on to Tata Motors. Next slide, please. Overall, the revenue of about INR30,900 crores, we obviously got impacted the recovery for the last three quarters, which are coming through quite nicely, did face a stumble when it — because of COVID, two lockdowns that we had. And so that resulted in full sales coming off from 195,000 units to about 114,000 units, it was a sharp drop there. And that’s translated into revenues also coming off from INR20,000 crores to about INR11,000 crores year-on-year of flattering, I will cover that. And overall EBIT margin of — sorry, EBITDA margin of 1.8% compared to the 7.8% EBITDA earlier and free cash flows of INR8,000 crores negative, almost entirely explained by working capital unwind.

Next slide, please. The key call out as far as the volume industry, we’ll talk about a little bit of market shares in a while and passenger vehicles as well. The highlight stand out for us is PV order book of about 53,000 units going strong. EV of course is really rocketing now, penetration at 3% with the portfolio, used to be 0.2% only two years back and highest ever quarterly sales of 1,700 units and moving on stronger. Profitability, the CV EBITDA was breakeven with the volumes being impacted, hence operating leverage as well as inflation playing out there. And on PV, the 4.1% is a continuing progress that we see. Cash flow is almost entirely explained by working capital with a very strong liquidity of INR5,800 crores.

Next slide, please. Just a waterfall here. Compared to last year, the volumes recovering sharply. And there, we see deterioration of the variable cost with a commodity inflation particularly still being greater, as well as some of the precious metal costing brief [Phonetic] and on fixed cost. This is the lockdown unlike last time, so we had kept all the guns blazing. We had IPL, therefore SME in the sense continued. And the investments in DNA did play out there. So we’ve not stopped any action here. And it also results in net sales [Phonetic] picking up, but that was needed to ensure that we serve this demand subsequently. So that was a conscious choice. So this time was the business agility plan and hence these things were kept going unlike last time.

Next slide, please. Cash flow is very similar to the JLR story. Cash profit after-tax and investment, we just had the two broadly there. And therefore, even at these low levels of volumes, this business is now able to hit cash breakeven, which is a good news. And everything explained as working capital and combination of payables, trade receivables and inventories, all of them going the other way. And Inventories in particular, we have consciously built up first of all to ensure that the semiconductor, whatever is coming away we are manufacturing cars, so you know demand is going to come and payables, just absolute volumes being low.

Next slide, please, investment spending on track, around INR3,000 to INR3,500 crores of electrical line [Phonetic], somewhere in that range more towards the lower end. We’ll see where we land, but on track.

Next slide. Moving on to the commercial vehicle business, the market shares were key measure there. MHCVs have been doing very well for us. So now it’s third year in a row, things have — market shares have been increasing. And this quarter, we have picked it up further to about 62.7%. And we are quite happy with the way this category has been progressing for us. And ILCVs as well, we have now started to increase market shares and we’re consistently picking that up. That’s another good one that’s coming through. Our challenge has been small commercial vehicles.

Drawing your attention to the graph on the right hand side top corner, where we look at the SCV salience, it used to only about 50% of the business, now almost at 65% of the business given the current economic conditions. And there when you are losing shares and also at a lower level, it has impacted the overall market share at 40.5%. We don’t like the shift. And we are ensuring [Indecipherable] from that. We started that last year. We did end almost similar to the previous year. And at the same time this year, we’d want to really go ahead of that. So work is underway on that other particular front. Thus, this remains a sector where the salience has almost evaporated and we hope that come second half of this year, buses will come back again as schools starts opening.

Next slide, please. Commercial vehicle, the key call out between retails and wholesales broadly were same. And at the domestic level, our inventories are quite there and revenue is obviously impacted by the fall in overall market that you see. Hence, the EBITDA breakeven, which is disappointing. So the business was very comfortably coasting towards the double-digit EBITDA margin. So, combination of lower volumes and commodity inflation with cost griefs and hopefully this will start recovering from this quarter onwards. EBIT, of course, is just a factor of operating leverage.

Next slide, please. Let me pass it on to Girish to comment on the description and clarification. Girish, over to you.

Girish Wagh — Executive Director

Thank you, Balaji. And good evening, everyone. So, the first quarter of this financial year was going up and down. So we started the month of April with the second wave of COVID and volumes actually dropped by 50% over the month of March. And then, further in the month of May, there was another drop of 50%. So, from March to May, the volumes actually dropped by almost 75%. But the good thing is, in the month of June, the volume started picking up especially in the second fortnight and one saw almost 94% growth over May, which means that the volumes in June came back to April level.

At an overall level, Q1 volumes were 56% lower than Q4, but at a very good level as compared to the previous Q1 of FY ’21 when we had almost a complete lockdown. So, localized lockdowns across the country have actually helped the economy to continue and we were able to sell volumes almost 4.5 times of last Q1. As Balaji mentioned, I think M&HCV and ILCV market share momentum has continued and — which augurs well for us. I think, the focus now is on SCV and pickups, as Balaji mentioned.

At an overall level, I think the freight has started improving towards the second fortnight of June with e-way bills increasing, diesel consumption increasing, our internal metric of workshop job cards also recovering. As far as freight rates are concerned, I think, we are also improving from the low that we made in the month of May.

In terms of commodity inflation, I think, this was something which we keep on fighting. And as a result of this, we had to take two back to back price increases, 2.5% in April and almost up to 2.5% even on 1st July. This is in addition to the cost reduction efforts that we’ve started, accelerating further basis, the steel inflation and also some inflation in the precious metals.

With the increasing prices of diesel and gasoline, one has also seen an increase in penetration of CNG. So CNG penetration is not limited to a few pockets in the country with the CNG infrastructure also improving. Many areas in the country, the penetration of CNG is increasing. Because of this profitability of the transporters under stress, one saw the sentiment index of transporters also going down in Q1. And this transporter sentiment index is made up of two parts, one is satisfaction with the current conditions and the second one is expectations from the future. The satisfaction with the current conditions were actually negative, which means the transporters were completely dissatisfied with the current state in Q1. But the good part there was, they were optimistic about the future going ahead in Q2 and H2.

Government’s infrastructure trust continues. And this is driving demand in tippers and also in segmental cement, steel and mineral. We also see the e-commerce continuing to do well, which is for both hub-to-hub as well as last-mile distribution. In terms of availability of credit, I think financial collection ratios have started to improve towards the end of Q2. And after a good fall in April and May, this has also therefore led to increase in availability of credit and convergence in the month of June. And going ahead, I think with the diesel prices as well as where we are on the freight rate, the transporter profitability is still a concern. It is still below the levels of March, but the freight rates are continuously increasing with the demand increasing and the demand supply balance being restored. So, one therefore looks at the transporter’s profitability improving as we go ahead.

Semiconductor availability continues to be a focus area, so we are managing it from a war room perspective. And we are looking at almost every component where semiconductor goes in and tracking it on a daily, weekly, fortnightly, monthly basis depending upon how important that part is or what is the inventory with us. So we have taken multiple steps here, like engaging directly with the semiconductor suppliers, spot buying of semiconductors from the open market. We’re also developing alternate sources to ensure that at least over the latter half of the year, we’re in a better position.

We’ve also built inventory of a particular semiconductor-based parts in Q1 when the demand had gone down. And also apparently, we are looking at design interventions to optimize the semiconductor consumption or the footprint in the overall vehicle. So, these are all the steps which have been taken. And therefore, in Q1, we were placed better of course the demand had also gone down. And with the current visibility of demand for Q2, we seem to be placed better. But as I said, this is something which has been tracked almost on a daily basis.

And coming to the next challenge, the inflationary pressure, especially on steel and precious metals continues and more so on steel in commercial vehicles. And therefore, we are having a significant drive towards cost reduction by repurposing a lot of our teams to ensure that we are able to pull out whatever amount of steel convention is possible and therefore reduce the cost.

Finally, I think the CV passenger area, buses still continue to have a very, very muted demand. There has been good pull to some extent in ambulances. But otherwise, all of our buses continue to do very, very low. The only green shoot there is the manufacturing sector. So, employee transportation for manufacturing sector seems to be doing well. But all other segments, whether it is employee transportation for IT sector, school buses, even intercity transport is something which remains muted. But I think gradually the things are improving as we had also seen last year that Q4 was comparatively better. Same thing, we expect that going ahead, the bus demand should start coming back to some semblance.

So that’s in a nut shell summary for CV business. Balaji, back to you.

P. B. Balaji — Group Chief Financial Officer

Thanks, Girish. Moving on to passenger vehicles, market share of 10% remains high and the penetration of EV is now starting to tough 3% for this quarter. And even thin bar, I think, we are all seeing all our segments starting to do well, particularly in market shares of midsized SUV segment is up almost 800 bps with strong response coming from Nexon, Harrier and Safari.

And what we are noticing on the EV side is [Technical Issue] quarterly sale of the portfolio of 1,500 units and market share [Technical Issue] is 77% for this quarter, so good momentum building up on the passenger vehicle business and continues that way.

Next slide, please. On the financials, draw your attention to the wholesale and retail number. Wholesale is higher than retail, it’s the conscious choice because dealer inventory levels had dropped precipitously to just about six days. And we have built it back to about 17 days compared to industries looking at anything between 30 to 45 days depending on the player [Phonetic]. So, we intend to keep it around these levels at this point in time. There’s still waiting period for our car. And we’d like to obviously ensure that doesn’t go too much out of control. And profitability of course continues to do well at about 2.1% despite these low volumes. So this business is very much on a turnaround and should improve performance even further as we go ahead.

Next slide, please. Shailesh, over to you.

Shailesh Chandra — President – Passenger Vehicles Business Unit

Thank you, Balaji. As Balaji has already spoken about the last quarter performance, I’ll share with you the actions that we are planning for in Q2 as we witnessed progressive recovery in July and expect the quarter to be reasonably better than the same quarter that we had seen last year and also versus Q1 of this financial year.

So, on the demand generation side, we have identified certain micro markets where we are systematically working on focused levers to drive growth and also working on certain supporting interventions to recover in product segments and geographies which are — which was impacted in Q1. And as you know, we have the upcoming festive season. And to make the most out of it, we’ve planned for festive campaigns and also our presence will be felt in IPL, which restarts in September to provide better visibility to our products ahead of the festive season in October and November also.

Living to the philosophy of New Forever, we have been and will continue to launch exciting product interventions, the #Dark is what we launched this month is one such example, I would say. And this is getting excellent response. So there are going to be more such interventions in this quarter also. Our network is key to our growth. And we’re systematically strengthening it in terms of reach, in terms of dealer-customer experience processes and also channel health. So these are the actions that we’re planning for on the demand generation side.

On the demand fulfillment, we have progressively enhanced our capacity in the last two quarters. And we should be able to now realize the gains on the back of the strong demand that Balaji also mentioned about. The semiconductor supply has been an ongoing crisis. And we’re best trying to mitigate this through creating alternatives and we’ve been working very closely with our supply partners. We have new product lined up and we’re trying to accelerate the work on the same, especially those variants which are witnessing high demand, example CNG and also EV is now really moving very fast. Given the supply side risks due to various uncertainties in the environment, we’re also building strategic inventory for the identified components.

As far as profitability is concerned, we’re keeping strict control on cost as per the business agility plan that we have developed. In our supply constrained environment and where certain product segments are facing pressure, we are also trying to best optimize the mix to drive better profitability. We have also been organizing more than 300 idea generation workshops. In the last quarter, we did involving more than 1,000 employees to drive cost erosion ideas. And we are going to further accelerate this in this quarter also.

Finally, given the continued pressure of the rising commodity prices, we’ll be taking price increase to potentially offset — partially offset the same. And this will be done in a manner that we keep the competitiveness of our products intact.

So, this was a quick update on the actions that PV business has planned for in Q2. Back to Balaji.

P. B. Balaji — Group Chief Financial Officer

Thanks, Shailesh. So moving on to Tata Motors Finance. I’ll take a minute on this one, given the segment of the business that has got significantly impacted this quarter. And unlike last time, here we had a collection infrastructure, our people getting impacted by the pandemic. And more than 1,400 people were impacted by COVID. And unfortunately we lost about 15 of them. And so, we had consciously taken a call to slowdown physical visits to various places to protect our people. And that did cause griefs in terms of collecting efficiencies clearly dropping, as you’ve seen the line chart below.

And the good news is now we have more than 95% of our people vaccinated. Our infrastructure is now well and fully on track. And in July, we’re already seeing a 101% collection efficiency coming back again. And this meant that GNPA touched the roof [Phonetic], 5.3% to 12.3%. Last time same time, there was a moratorium of three months on, and clock has stopped ticking on the GNPA, but this time there’s no such waiver from RBI. So we have done our best in terms of protecting our people. And we also ensured that our cost to income ratio has been a bit tight even in this environment. And we now expect to see a significant reversal around GNPA provisions in the current quarter as collection efficiencies pick up, but this has been a — from a overall perspective, this quarter was a very, very tough one for the Tata Motors Finance team.

Next one — next slide. So, overall outlook, to summarize, I think, in our situation, we see continued improvement as vaccination rates pick up. Supply situation, of course it’s going to be challenging between semiconductors issues, commodity inflation and intermittent stoppages due to lockdowns and we do expect performance to improve progressively from H2 onwards.

For JLR, Adrian has already covered it, but we do intend to manage all the supply chain, this is the top most priority for us, execute the Reimagine strategy, this work is well underway and Refocus, as we’ve already covered it. For us, as things pick up, achieving an EBIT — positive EBIT margin and positive free cash flow for H2 is the key priority at an overall level.

For Tata Motors, I think, commercial vehicle is continuing to grow market shares across segments and SCV in particular is a key one. And for PV, we continue to accelerate the sales momentum that we are seeing. And in CV, we will watch driver penetration even further and accelerate [Technical Issues] setting up of the charging infrastructure on priority. And we are still confident in delivering a positive EBIT margin and free cash flow [Technical Issues]. This is what we have to say. So happy to take any questions that may be elsewhere.

Questions and Answers:

P. B. Balaji — Group Chief Financial Officer

Okay. Moving on to the — yeah. Moving on to the questions, I think, first one from Aditya Makharia, HDFC Securities. The aggregate China car sales has been declining since the last few months. What’s the reason for the above? Also how the luxury sales are faring in China?

Adrian, do you want to pick this up? I hope you have mic.

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Yeah. Hopefully you can hear me. Apologies we obviously fell off the call at some point during the end of my presentation, but hopefully you can hear me. So, I’m not sure which stage you’re referencing here. But let me tell you what’s happening to China in the day. So, the first point of course is, there is a peak selling period in China from the early part of November through to the early part of February, the period last year it’s basically Singles Day in China through to Chinese New Year. And that is the period which sales [Phonetic] and all other OEMs will be selling most vehicles. So you might be referencing a normal in-market fall-off after China New Year, i.e. February and March, our lowest sales always than December and January.

Maybe that you’re referencing. If I give you the datasets in quarter one, even though China for us had pretty much returned to normal last year. We were up 14%. So in a like-for-like period taking out premium selling periods in the market — in a particular marketplace like-for-like we were better in China. Last point to make, our China volumes will start to reduce in Q2 alongside other regions for the reasons said, i.e. supply is starting to be reduced as a result of the semiconductor challenges. That’s where we are in China.

P. B. Balaji — Group Chief Financial Officer

Thanks, Adrian. Next question from Jinesh Gandhi, Motilal Oswal. One question for Adrian. We have seen a quarter-on-quarter decline in gross margin despite a favorable mix and pricing. This is due to commodity price impact this year. What are the gross impacts in first quarter and expectations of second quarter? And second related question, we’ve seen the material benefit of stock cost reduction due to restructuring as well as depreciation due to impairment. Are we expecting savings from these levels? And then, I have a question for PV, which I’ll take it subsequently. Adrian?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Okay. Let me take them in the order you’ve asked them. So, commodity prices keep coming up. It isn’t the biggest influence in our margin performance by far. And even though commodities are increasing, if I give you a value in the quarter, give you a sense of that, it impacted just by about GBP30 million adverse on a year-over-year basis. If I compare that to the GBP243 million improvement year-over-year in VME, you can see relative to available marketing in the health of sale, it’s a small impact. And we expect it to be an increasing impact, but relatively a small impact going forward also. So please it’s not commodity prices that are going to influence and impact what we do in performing going forward. The VME pieces are much more impactful along with warranty, which is why I consistently call those as over the last two years.

And other point you referenced and then material benefit of staff reduction costs. Well, we’ve got a slide in the deck. You’ll see I think it’s Page 38. We don’t need to go to it. You’ll see our absolute costs in quarter one last year, which we had the furlough managed in there. We called out that number GBP150 million improvement year-over-year last year compared to this year.

There is a small cost increase versus quarter four. I keep saying quarter four as you referenced quarter here. So when you look at the impact of staff costs, they have gone down versus quarter four, some people did leave in the quarter and more people under the Reimagine redundancy programs will leave in later quarters also. You’re asking about D&A again. When you look at that slide, when you have a chance to look at Page 38, you will see that our D&A did drop actually versus prior quarter a little bit.

I think you’re probably referencing MLA Mid here. The point of MLA Mid of course is those assets were on the balance sheet not yet being depreciated. So, the savings for MLA Mid which you may be referencing here was actually a cost when at that point come through to our income statement. But what if we brought those vehicles to the marketplace. There is a small reduction on the D&A. What MLA Mid has done is stop that number increasing by about 0.5% of the EBIT going forward. You won’t see a reduction, you’ll see an avoidance of an increasing. Balaji?

P. B. Balaji — Group Chief Financial Officer

Yeah. Thanks, Adrian. Question on to Shailesh on PV. What’s the current capacity and utilization and what’s the scope of the capacity expansion at our existing locations. And other one, what are the [Technical Issues] taken in PV in first quarter or in July ’22? Does the CVT welcomed it? Shailesh?

Shailesh Chandra — President – Passenger Vehicles Business Unit

Yeah, Balaji. So, I would not get into the numbers in terms of capacity because it’s slightly complicated from a shop to shop when we go. But broadly if I have to give you the capacity utilization of those three locations in which we operate, I would say, Pune and Sun [Phonetic] would be operating somewhere around 65% to 70% now. And Pune is going to go upwards from there because of the new launch, which will be — which is slated under which as you know, is going to get launched in the coming months.

As far as Ranjangaon is concerned where which is the Fiat joint venture factory that we have, the capacity utilization would be greater than 90%. And our engine and transmission, which is power training capacity utilization would also be an influence of 90% is what I would say.

I would take the first part of the question on the price increase and then I will ask Girish to talk about CV. On the price increase so far in May, we had taken about 1.8% price increase in PV. And we are yet to take a price increase in the quarter two.

Over to you, Girish, for CV.

Girish Wagh — Executive Director

Yes. Thanks, Shailesh. So, if we took a price increase on 1st April, which was about around 2.5% across the range. And looking at the steel price increases, we have taken another price increase of around 1% to 2.5% starting 1st July. So those are the kind of price increases we have taken. I also saw a question on whether it’s easier in PV or CV to pass on the cost — cost increases. I think in both business units, it’s not that easy to pass on. And our focus also therefore has been to look at what we can do on cost reduction first and rest of course would try and pass it on to the market.

Balaji, back to you.

P. B. Balaji — Group Chief Financial Officer

Thanks, Girish. Next question is from Stephanie Vincent, JPMorgan. Because inventory is very tight, all OEMs are seeing pricings of mixed improvements during the specific year. However, I’m curious as to the ability to upsell customers with more marketing for ordering being done online. How does JLR management find customer behavior or additional options, etc, for example? Adrian?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Yeah. I’ll take that one, Balaji. Okay. So, a few things to consider here on this one. You’re correct, inventory is tight and become a lot tighter over the course of quarter one. That’s absolutely correct. You’re starting to see the first impact in that in our variable marketing. Obviously that’s the money we use to close deals. And the variable marketing support is starting to fall quite dramatically actually. So you will see already in quarter one, as a result of the pressure on supply. The deals we actually did with customers were more valuable to us. Now that was quarter one. And don’t forget this challenge unfolded in quarter one.

So going forward, in supplement to that i.e., in addition to that, we will also — and also to control our order banks of course, we don’t want order banks of four, five, six, seven months on average sales. We’re starting to actually take away the ability for customers to order either in dealer or online the lowest value derivatives. Temporarily some of those derivatives will not be available so they cannot be ordered, they would need to upspec [Phonetic] their request by nameplate if they wish to order one of our vehicles until we get back to normalization.

So those are two things, one already happening, no existing deals in the marketplace with less marketing support and now we’re going on to the next stage of taking away the lowest value derivatives within the nameplate, so customers if they wish those cars will need to specify their vehicles for us to be able to deliver that to them in the marketplace. Most of the second piece will start to impact in the second half of the year, not the first half of the year, because of course our obligation is to fulfill the orders we’ve received already in the order banks, those 100,000 plus units. Balaji?

P. B. Balaji — Group Chief Financial Officer

Yeah. Next question is from Pramod Amthe, InCred Capital. Should shortages help in JLR system and then increase drastically. Do you see an opportunity to structurally reduce system inventory or do you need to go back to March level? One. And second, China JV’s repeated slip into losses is a concern, any medium term fix needed here?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Okay. Balaji, let me take them in order it’s been asked. So, inventory at March, it was globally at GBP3 billion level. Let me remind you, two years earlier, it was GBP4.4 billion. So we’ve not only been impacted by this supply shortage, we’ve already drastically reduced inventory by just over 30% across all nameplates, all markets, all regions. Do I see an opportunity to reduce from that? It’s marginal, if anything, on a number of nameplates in a number of markets, we now have two low inventory and that will impact once — it’s level that is starting to impact the number of customer orders we can close at, hence the retail levels will be suppressed in quarter two.

So, what you will find is, it will continue to drop. There is no drop to an unnaturally low level and we do need to bring it back appropriately actually to levels we were seeing closer to February time, I’d say, rather than March time actually, February last year time as we normalize this position. Just around GBP3 billion is a good place for us to pay their marginal gains beyond that.

China JV repeated slip into losses is a concern. Any medium-term fix, so don’t forget the China JV has been impacted by the semiconductor supply as well. I did say to you, I think, at the year-end, we formally kicked off a charge improvement structural cost program in China. Our breakeven point going into the start of the year was above 70,000 units. We’re challenging ourselves to get down to 65,000, a 10% structural cost improvement and then below that.

And the other key metric in China, you wouldn’t see obviously our quality of sales, this is for local cars of course and health of sale. There were 30% discounts on a number of our products. Two reasons for that, there had been oversupply. Inventory at the dealers were 2.5 months. They’ve now dropped to 1.3 months at the end of June. That’s another great sign. The discount on average is reduced from 30% to 26%. That’s another great sign. And don’t forget finally, of course, we’re replacing two of the products, Range Rover Evoque extended wheelbase is now new in the marketplace and the XF Long as well. So both of those vehicles — effectively brand-new vehicles will start to improve. So, a mixture of all of those actions we’ve taken and taken on structural costs. Together with supply, we think we’ll improve the position in our China JV considerably.

P. B. Balaji — Group Chief Financial Officer

Thanks, Adrian. Well, our next question from Kapil Singh, Nomura. Let me give you a bit of [Technical Issues] I’ll take the India questions first and I’ll come to JLR subsequently. You can have glass of water in between. India business, with definitely some media quotes today, can you please let us know how much investment does a company plan in its charging infrastructure and traffic units in India? And what is the scale we plan to build? What’s the current EV order book in India?

So, Kapil, yes, you’re right. We did allude to that today and we haven’t quantified the amount of investments that couldn’t play. So this is obviously a sensitive information, we’d like to keep it there. And very clearly, we see excitement in the EV portfolio and we know that as and when charging infrastructure comes in, you are able to break one of the barriers to the adoption and we are working closely with Tata Power on this one and we would definitely want to play a role in capitalizing the charging infrastructure as I noted in the outlook slide as well.

On scrapping units, we do see — with the scrapping policy now formally announced, we want to work with our vendor partners. And our job is to definitely to come in terms of being a technology provider for that working with the world-class leaders in scrapping, whom we are already getting into conversations with. And thereafter, the job is to ensure consistency of technology being adopted across the entire ecosystem. And the ecosystem partners will be the ones for whom the investments operated and also make the profits out of it. And we are able to ensure standards in terms of how scrapping is done, how recycling is done, how reuse is done and ensure that this is so painful [Phonetic] and it is world-class in terms of what we are doing in scrapping.

Pricing wise, we have said as people go on want to bring who already have intense conversations with our ecosystem partners, we have two or three should definitely come through during the course of this year. And over a period of time, it will get up to at least 10, if not more. But that’s over a period of time as we start getting the unit economics right on that. So that’s the work on this.

Current EV order book in India, Shailesh, do you want to pick it up?

Shailesh Chandra — President – Passenger Vehicles Business Unit

Yeah, Balaji. I’ll pick that up. So, the current supply rate whatever we have been supplying in the last two to three months, if I have to take that as the basis, then our order book would be anywhere between to 14 to 16 weeks, I would say. But this is going to get improved in terms of reducing this by increasing supplies. But in the last one or two months, this has really shot up. It has doubled to what bookings we used to receive. So this is a really good impact.

Back to you, Balaji.

P. B. Balaji — Group Chief Financial Officer

Thanks, Shailesh. Adrian, continuing on the DLR question, chip shortages, what are the specific factors affecting Tier 2 suppliers as referred to in your PowerPoint presentation? Do we expect a sharp revival in production in Q3 FY ’22 and more than breakeven level of 90,000 units?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Okay. Thanks Balaji. I’ll start this question and then, if I may, I will ask Thierry actually to — he is leading this from the front. I’ll ask him to comment, but bear in mind Thierry is actually on the road. So we’ll see how this works.

In terms of the Tier 2 what we would specifically have had in mind as we wrote that was a couple of significant issues we brought to your attention previously, i.e. the Renesas plant fire in Japan which happened in the middle of March and gas production is now back and being built back towards the 100% levels. So we do expect that to increasingly improve as we go through Q2 into quarter three.

And another one would have been the Texas snowstorms, which again were around that same period in late February, early March or so. And similarly, we would expect those facilities to be coming back onstream progressively as we go through Q2 into Q3. We’re not in a position to confirm the production levels in quarter three at this point. We have said to you breakeven is lowering, we expect it to be better than the 90,000 units by the time we get that marginally. But we just don’t have those confirmations from suppliers yet and I really don’t want to mislead you by saying probably. So, once we get to a point where we get those confirmations, if it’s significantly different to what we’ve communicated, then we’ll communicate that to you. However, I would like to hand over to Thierry if he’s able to hear me. As I said, he is on the road, he has a first-hand flavor of this and I’m certain there are things that I would have missed from that response.

Thierry, if you’re there?

Thierry Bollore — Non-Executive Director

Yes, absolutely. Thank you Adrian, what I think — what is very key in this — very severe crisis that all OEM have at the moment with the chip supplier is that we are — let’s say, we are learning and we are learning very fast. About the way our chips suppliers are working, what is their modus operandi and what are the needs they have in order to make it such that capacities and allocation of capacities is stable and efficient. And we also learned that Tier 1 not necessarily are playing the same music as the ones that the chip supplier would like and that we would like to play with it. That means, for example, having long-term contracts with them, we should take okay approach. So far, the capacity is there whatsoever.

And the good news is that we’re getting direct and we’re doing that with our key offender at the moment. We speak so far in the future we have a clear structural fix to the problem that we have at the moment. And JLR is well-positioned to a certain extent because our size is considered to be quite small compared to some of our big customers, especially outside the OEM world. And as such, it’s also a very interesting approach that we are following at the moment with the chip suppliers and with our Tier 1.

Back to you, Balaji.

P. B. Balaji — Group Chief Financial Officer

Thanks, Thierry. The next is from Gunjan, Bank of America. Few questions. One is, guidance for the full year for FY ’22 for JLR, are they looking at SCV [Phonetic] breakeven at 2% EBIT — 4% plus EBIT as guided earlier. Can you please clarify on this one?

Shailesh Chandra — President – Passenger Vehicles Business Unit

Gunjan, I think that as Thierry and Adrian has referred to, I think the things are too fluid at this point in time. It doesn’t make sense to call a number of which at the position we are not able to read. So what we are calling out is, what it is that we are seeing at this point in time and obviously as clarity emerges, we would put it back again. And we will definitely ensure that this obviously miscommunication happening from us on that front. That is number one. Then any change to the launch timelines in JLR due to lack of visibility on the semiconductor availability? Adrian?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

No. No expected change in the timeline of the launch of our new products. Let me remind you, each time I communicate this, the timeline gets shorter. Now, we expect some of that new product now to be in the marketplace within nine months, which is really the Range Rover and then the Range Rover Sport six months later than that. We don’t plan to, in any way, slow down the launch of these vehicles. Whether we find as we launch that some of those semiconductors are a problem on the new vehicle or not, we haven’t got to that point yet, of course, because we’re not yet clear enough on Q3 supply. So, our intention is to absolutely push ahead in delivering those wonderful new vehicles to the marketplace when they’re ready and that’s likely to be in around nine months’ time.

Girish Wagh — Executive Director

I think, Thierry, if I may, Balaji, add something and complement again so from Adrian. I think the company at the moment is experimenting a huge intense fees, a path of progress through three imaginary focus. And the fact that we are on the retention because of supply doesn’t change at the contrary that intensify all efforts there to go faster in our plan of our progress, so which means that the company is getting more muscular, is getting faster, is getting better synchronized. And that’s the reason why we are just making such that the supply is coming back. And then we will show the progress that we have made during this period of time as well.

P. B. Balaji — Group Chief Financial Officer

Thank you. Thanks, Girish. The other one, the Indian business, things the market demand post reopening in the domestic market. Is there any volume outlook for CV and PV business for FY ’22 that we can share? Wouldn’t want to conjecture on volume outlook other than the fact that both Shailesh and Girish did allude to significant pick up that we’re seeing in the market as we speak. Business has been on a roll. And as far as PV is concerned, we are seeing gradual demand coming back on top of segment?

A question to Adrian. VME levels in JLR are very low, given supply shortages and it’s an industry phenomenon, how sustainable is the number of VME and warranty for the mid-term? And the second on emissions, how do we think the powertrain makes us reach the — move to comply with this?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Okay. Thank you, Balaji. So, VME, I’m going to interpret mid-term post-supply shortages rather than during supply shortages. And we take you back to the announcements I’ve made previously. We were expecting variable marketing at that point in time to be at or around 6% and warranty at or around 3.5%. So once we get to a normalized marketplace, assuming there isn’t a permanent correction here, then I would anticipate that that guidance is still good guidance. Although VME in the foreseeable future over this constrained period will be closer to the 4% or below level until supply has been adjusted to be commensurate with demand. I think it’s reasonable for you to take that message away from today as well.

From an emissions related penalty perspective, I’ve mentioned to you today, the quarter one data, our total BEV and PHEV numbers in quarter one shown in the presentation on Page 9 was 8.5%. So at that level, it’s actually non-compliance. So we would need that number to grow through to double-digits. Let me say in total, about 12% just to get to a compliance portfolio. We know and when we look at the older banks from our customers we are at that level with a strong requested demand for our units. So again you know it’s about 12% not the 8.5%. And we can see that within our customer order banks, it’s just our ability to build those cars today, which is holding us back and penalizing us from the potential size perspective.

P. B. Balaji — Group Chief Financial Officer

Thanks, Adrian. Similar question on mix, where you are saying that — this is from Satyam Thakur, Credit Suisse. JLR ASPs [Technical Issues] quarter-on-quarter, is this big mix? Can this include further in the near-term? How do you see this shaping up once the supply starts normalizing from third quarter?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Yeah. Okay, Balaji. Thank you. Let me take that one. Look, again, I think you’re asking me on this chip’s piece. I think there’s two levels here actually. I’m going to stay within the supply shortages for the first half and talk half two because there will be shortages in half two. It’s just the extent. I do believe the actions we’ve taken trying to moderate the increase of the order banks trying to reduce the lower derivatives within nameplates. Of course, that’s going to have a natural impact to reaching those average selling prices and improve even more the net transacting prices because of the low VME. So, I see those two items actually increasing over the second half of the year once we’ve supported the orders that have been put in place.

Again, as we normalize post-crisis, it’s more difficult, but don’t forget and listen to Thierry’s words, this will inspire us to actually even further accelerate our Refocus transformation program. And we’re very focused within that program for all regions improving health and quality of sale and you will see that coming back has increased transacting prices — net transacting prices. So there will be a legacy as we roll out the program. Those transaction prices like-for-like on exchange rates of course will continue to be strong, if not improving going forward.

P. B. Balaji — Group Chief Financial Officer

Thanks, Adrian. Question from Nishant Vass from ICICI Securities. Can you shed some more light on the strategy of 10 new launches on EVs in India till 2025. Are new launches going to be steady equally across the year or is it going to be more back-ended? Any breakdown of target segments? How the battery supply chain being planned in India?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Nishant, I think, the way I would like to look at it, this is the war. This is the plan and aspiration hereafter. We’re pretty excited by the speed at which the country is moving into electric. And particularly with rising fuel prices and charging infrastructure starting to come together, the barrier is also falling. And therefore, we believe the customer needs to be given choice. And given the choice, we will be at all-in player. We’ve already called that out any time over. And we’re just quantifying it that we’re able to — some meat to the bone that we have. So the 10 new launches is definitely part of the plan by 2025, reasonably well spread out. And we wouldn’t want to put out any specific target segments other than think wherever the customer is going that’s where we want to be, otherwise we wouldn’t be an OEM to begin with. And obviously, back ended will be fully integrated to ensure that we have supply and security of supply [Technical Issues]. At this point, this is what we’ll be able to share and assure that as and when we get closer to it, more and more color would be provided as we normally do. I hope that helps, Nishant.

P. B. Balaji — Group Chief Financial Officer

Next question is from Jay Kale from Elara Capital. Even if things improve in second half of JLR, is it fair to assume that FY ’22 net debt for consolidated will be higher than INR40,000 crores seen in the end of FY ’21?

Great question. I think the point to be made is that at this point in time, out of the INR18,000 crores outflow that we saw, more than INR15,500 crores is just working capital. And we’re sure both in JLR and in Tata Motors that the operating cash less capex is actually near breakeven that is there. And therefore, at this point in time, I wouldn’t want to comment that for the year end debt would be. We have made it very clear that as far as Tata Motors is concerned, we will be cash positive in the year — free cash flow positive. And JLR on a full year basis, work is still underway to actually figure out where exactly we would land and we’ve clarified Adrian has said it many times today, saying that we see improvement in second half, how big, how far, how much revenue and how much profitability all that depends on how fast the recovery on the semiconductor side comes through. In fact [Phonetic] we’re in a good place, now we need to get the — we need to serve the demand, that is where we’re.

So we wouldn’t want to hazard our guess or where we would land on a full year basis. But do keep in mind that the deterioration of this quarter, most of it is working capital and we will obviously see a significant amount of the working capital, minute volumes starts picking up. Adrian, anything you want to add to this?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Nothing to add to that, Balaji. No, thank you.

P. B. Balaji — Group Chief Financial Officer

Okay. Question from Vinay Singh on a very similar line, saying that if revenues in the second half of this year is going to be very similar to the revenues that we had last year same time, why would EBIT margins be lower on a year-on-year basis? There we haven’t specifically called out EBIT margin for the second half of the year. Therefore, I must admit that I didn’t understand your question too much, Adrian, unless if you can figure out what he is trying to say.

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

If I May, Balaji, I think the question is misunderstood, the outlook slide because the 6% — I think, this is where I did drop off. So I did explain it, but it sounded like I was talking to myself, the 6% is actually the underlying for last year and the headline is 7.1%. So, the two numbers both relate to last year, we have not provided any guidance for H2 FY ’22 for the reasons set.

P. B. Balaji — Group Chief Financial Officer

Yeah, now I got it. Got it. No answer. Then I hope that’s clear for you. Then you have any hopes from Sun Life Asset Management [Phonetic.]. CJLR questions, if I may. Do you think you can get to Q1 levels of absolute wholesale for better as early as Q3? Should we continue to expect emission charges in H2? Should we expect volumes at CJLR to follow a similar patent to the rest of JLR? Can anything be done to reduce CJLR overhead cost or should we be prepared for more losses going forward? Adrian?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Thank you, Balaji. Do I think, we can get to Q — in Q3, Q1 levels, yes we can. But I haven’t got the supply guarantees as yet to demonstrate we will or we certainly can. And it’s certainly possible and it’s not guidance, that’s just what’s — it’s in the range of reasonable outcomes, let me put it like that. Should we continue to expect emission charges in H2, well if I take you to the first piece of your question, if we have a profiling Q3 similar to Q1 I think it’s reasonable to assume it won’t be a compliance profile. That’s reasonable to assume. So we would need to increase volumes above that quarter one level in my view for us to actually see the full power for that compliant portfolio. That would be my expectation here.

So we would need to get closer to a normal level of supply, if not to the supply we could certainly — the demand we have for us to be compliant in any given quarter. I do not expect us to be compliant in Q2 when that 65,000 unit volume number we’ve indicated. And CJLR, I think it’s reasonable to assume the pattern is the same i.e. they will be impacted by semiconductor shortages similar to ourselves for the foreseeable future. And I did mention on one of the previous questions, we are absolutely working on reducing our breakeven point at CJLR. And of course that will be twofold health of sale, quality of sale, reduction to incentives given by VME, but also structural cost reductions as well. They obviously have a much lower cost base in here. And therefore, the absolute numbers will be nowhere near as big as the reductions we’ve made in the core business, but I do expect breakeven to reduce below 70,000 units for those two reasons. Yes.

P. B. Balaji — Group Chief Financial Officer

Thank you. Thanks, Adrian. Question for Girish from Satyam Thakur, Credit Suisse. What has been the quarter-on-quarter trends and discounts in M&HCV? How do you see that?

Girish Wagh — Executive Director

Okay. Thanks, Balaji. So, as I mentioned, we have taken the price increase on beginning of January and then again in April. So, generally when we take these price increases, these price increases get accepted as we go ahead in the quarter. So by middle of the quarter or second month, I think generally these price increases get accepted. So, I would say, in terms of realizations towards the end of the quarter, we are back to the levels that we were in the previous quarter.

P. B. Balaji — Group Chief Financial Officer

Okay. Thanks. Thanks, Girish. Maybe stay on the line for a minute. People inventory for retrofit, are you doing anything in CV; and similarly Shailesh, for you in PV; and Adrian, for you in JLR?

Girish Wagh — Executive Director

Yes. So, Balaji, on CV, we don’t want to keep — there is no need to keep inventory of finished vehicles. As I mentioned in my presentation, we are keeping strategic inventory of either semiconductor or semiconductor parts at part level in very few cases at aggregate level, but not at the vehicle level that’s not required, because we are aligning our production to retail. Balaji, back to you.

P. B. Balaji — Group Chief Financial Officer

Shailesh, sorry — before I had it over to Shailesh, this question came from Chirag Shah, Edelweiss. Shailesh, on the PV side, any pre-builds you’re running? Adrian?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Yeah. So, Balaji, given that we are already — always operating at the peak capacity of certain items in the low industry volume once we are taking — keeping some finished with inventory also because of the uncertainties that we see on the supply side, even different kind of disruptions that we have been facing. But this is limited to just 10% or so of our monthly volume is what I would say. Rest is absolutely similar to CV we are keeping strategic inventory of common parts. You know as I said that this is more preparation for new launches. Back to you Balaji.

P. B. Balaji — Group Chief Financial Officer

Adrian, on the JLR side, any kind of inventory that we believe?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Yeah. So we did build inventory for retrofit at the end of June. We actually had just over 7,000 cars what we would call work-in-progress or in your words retrofit. Normally at this time of year we would expect less than 3,000 units. So we almost tripled the inventory at the end of June, exactly to do what you’re suggesting here. And their expectation is, a lot of that retrofit will happen in quarter two. Well, I don’t know is where we will end the quarter because obviously we’ll make our decisions around September what we retrofit build versus what we don’t build as we go through the next three to four weeks post our shutdown period.

Would you allow me to continue with the question two, Balaji?

P. B. Balaji — Group Chief Financial Officer

Yeah. But you already had covered that JLR plan for H2. So that company we already covered it. So we’ve got another three minutes, so I’ll take the next question. Thank you.

The next question is from Nitij Mangal from Jefferies. Two questions, particularly we haven’t [Phonetic] covered so I’ll take that first. Could you explain the vac situation at JLR? Why our last stock expense despite negative PBT? And how will this look in the second quarter and second half? We’ve always maintained to look at ETR on a full year basis and very — it is wise way if you look at within the quarter. We can get contributed to the deferred tax asset that’s not being recognized. One, given the continuing losses. The loss for the quarter could not be recognized. Within that, the UK system in particular had a higher tax loss within the consolidated [Technical Issues]. Therefore, there again we couldn’t recognize that loss there in P&L.

Thirdly, both on pension assets as well as our hedging results, which go through OCI as well as OCI happening restated because the tax rates have gone up from 19% to 25%. We should rightly be recognizing a DTA for that, which given the current tax loss position we embark and we obviously knew that as and when the business becomes profitable, you are getting back into recognizing this. So, do look at ETRs on an overall basis. There’s no structural change in ETR as per our JLR is concerned.

Adrian, anything you want to add to that?

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Just one point, I think, Balaji. Excuse me if I missed it, the line isn’t great. Look, this is IAS 12, I think, accounting. So it’s accounting regulations rather than cash payments. And at the point where we become sustainably profitable, this deferred tax asset will be created but this accounting rather than cash is the point I just wanted to make.

P. B. Balaji — Group Chief Financial Officer

Yeah, spot on. Good spot, we should have added that. Thank you. So, maybe time for one last question that is our [Technical Issues]. This is from Nikunj [Technical Issues]. This one, again, the JLR semiconductor issue, which I’ve already covered. The other one was EV launches, what is the capex plan for India CV business and the subject to the JV partnership with the strategic partner. As we have said, CV for us is a strategic call out. And obviously there is a strategic partner for that or financial partner for that, we are more than happy to take it. But obviously this imperator will be implemented as part of our plan. And as the business is starting to do well and we able to turn around, that also gives us more degrees of freedom. Having said that, we will be open to any partnership as far as this is concerned.

So, Nikunj, hope that clarifies that for you.

So, I think, with this we have come to the end of the session, 8 o’clock right now at my time. So, thanks all of you for joining in. Thanks for the teams in JLR and TML for taking the questions. Hope we’re able to answer all your questions to your satisfaction. Feel free to reach out to us in case there’s anything else that you’d like us to clarify. And look forward to engaging with you in the coming days. All the very best. Stay safe. Take care. Bye-bye.

Adrian Mardell — Chief Financial Officer, Jaguar Land Rover

Thank you, Balaji.

Operator

[Operator Closing Remarks]