Mahindra & Mahindra Ltd (M&M) Q2 FY22 Earnings Concall Transcript

Mahindra & Mahindra Limited (NSE:M&M) Q2 FY22 Earnings call dated  Nov. 09, 2021

Corporate Participants:

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Anish Shah — Managing Director and Chief Executive Officer

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Manoj Bhat — Group Chief Financial Officer

Rajeev Goyal — Chief Financial Officer [Automotive Sector]

Analysts:

Pramod Kumar — UBS — Analyst

Kapil Singh — Nomura Securities — Analyst

Pramod Amthe — InCred Capital — Analyst

Jinesh Gandhi — Motilal Oswal — Analyst

Sonal Gupta — L&T Mutual Fund — Analyst

Amyn Pirani — JP Morgan — Analyst

Yogesh Agarwal — HSBC — Analyst

Mihir Jhaveri — Avendus Capital — Analyst

Binay Singh — Morgan Stanley — Analyst

Nitin Arora — Axis — Analyst

Presentation:

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Good afternoon, everyone. Good afternoon, good evening or good morning from wherever you are joining in. Welcome to M&M Quarter — Q2 FY’22 Earnings Call. We are indeed glad to have you all on this call today.

Just before beginning, a Safe Harbor statement. Certain statements on this conference call with regard to our future growth prospects are forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements.

Now I would like to welcome our senior management. We have with us today Dr. Anish Shah, Managing Director and CEO; Mr. Rajesh Jejurikar, Executive Director, Auto and Farm Sector; Mr. Manoj Bhat, Group CFO; and also other senior management from both auto and farm team and also the Investor Relationships team.

With this, now I hand over the conference to Dr. Anish Shah for his opening remarks and then followed by presentations by Rajesh and Manoj.

Over to you, Dr. Shah.

Anish Shah — Managing Director and Chief Executive Officer

Thank you. And greetings, everyone. It’s a pleasure to be back with you today. We’re going to talk about some very strong results despite some challenges that we will outline. I’m going to outline or start with a framework that you’ve seen before. But we are starting to really look at our businesses as core, growth gems and digital platforms. And we will talk about the progress on each of those.

So the key messages for today are that our core businesses have really seen a resilient operating and financial performance despite some fairly significant headwinds for both commodities and supply chain. Our new product launches have been very well received by the market, and we’ll talk about that, the XUV 700 in particular, but it’s not just that. It’s a set of products that has been there leading up to that as well. And we’ve seen a very strong recovery from our group companies, Mahindra Finance in particular but also some of our other group entities, and we’ve got all our group companies really starting to position themselves very well and deliver results.

On growth gems, we are seeing a higher level of profitability from both our listed and unlisted entities, and we are seeing tangible examples of value creation at our digital platforms that we’ll talk about as well. So for today, I’m going to give an overview after which Rajesh and Manoj will take you through the details.

Let’s start with the numbers first. On a standalone basis, PAT before EI is up 29% at INR1,687 crores. PAT after EI is up almost 9x at INR1,432 crores. If you were to look at consolidated, here we see PAT before EI at INR1,975 crores, up 43% after we restate Ssangyyong as a discontinued operation. When what we announced last year when we gave our results was INR906 crores, which included Ssangyyong at that point in time. So if you look at it versus 906 [Phonetic], it’s effectively a 2x return. And similarly on PAT after EI, it’s going up from INR615 crores to INR1,929 crores with Ssangyyong as discontinued. But based on what we reported last year, it’s really going from INR136 crores to INR1,929 crores, and that also shows the result of the hard calls we’ve taken with regard to capital allocation.

I referred to the headwinds. They’re essentially in three categories. Significant increases in commodity prices, which I’m sure you’re seeing across the board; the semiconductor shortage issue; and freight costs. We have taken significant actions around that, increasing selling price, aggressive cost re-engineering, looking at rejigging up production, commonolizing some components within auto, though that does take some time, looking at route optimization for freight and so on. So those have helped us but this has had an impact. And as we look at the next page, what we see is, on the farm business, revenue is up 4% but PBIT is down 14% despite almost a 2 percentage point gain in market share, and that’s really driven by the commodity price inflation. What I’m also very happy to say is, our international subsidiaries where we’ve seen significant concerns in the past have turned around. The actions we took on category A, B and C have really worked out well. So the category A and B companies that we continued with have demonstrated a PBIT of INR105 crores for this quarter, a second consecutive quarter greater than INR100 crores and the fifth consecutive quarter of being positive. So we started to see a real turnaround on that front, and that really leaves us with the conclusion of a focused and robust operating performance in the face of some pretty significant headwinds.

Auto, again a similar story. Much stronger growth in revenue here at 23%, and PBIT is impacted, not only by commodity inflation, but in this case, by shortages on semiconductors as well that resulted in a volume loss of 32,000 units that obviously impacted operating leverage and thereby PBIT is lower. But what we are really excited about here is my earlier comment on XUV 700. The bookings are reflective of the quality of the product and the four consecutive blockbuster launches from the XUV 300, Bolero Neo, Thar and 700. We’ve seen some very strong response from the market. The best was in the 700 obviously. And what we are looking forward to now is the launch of the new Scorpio, and we hope to make it the fifth consecutive blockbuster launch, which positions us really well to regain leadership in the core SUV space.

Let me talk about Mahindra Finance, because this is one that did concern us last quarter. And what we had at that point indicated was, based on history, it was a temporary phenomenon that would get reversed in the following three quarters. And what we are seeing here is that reversal is well on track. PAT is up from negative INR1,500 crores to positive INR1,000 crores. in this case, we are not looking at year-over-year. We are looking at the previous quarter, because we do want to show a story from the previous quarter as to what happened. So you effectively have a INR2,500 crores swing on the profit side. That is driven by GNPA, down 2.8 points, though we do expect it to go down further as we go along in the next two quarters, and that has resulted in a fairly significant swing with regard to provisions. And we had taken a provision net of INR2,500 crores last quarter. INR7,650 [Phonetic] crores of that has come back. And based on what the Mahindra Finance team has outlined for its analysts. The next will come back or [Indecipherable] will come back in the next two quarters.

So little more of a deep dive on GNPA, just to give a little more flavor of the numbers behind Mahindra Finance. Stage 3 contracts have come down from 294,000 at the start of the quarter to 216,000 at the end of the quarter. As a reference, in March, there were 194,000. So we are getting fairly close to the March numbers, which is what we wanted to get back towards. A lot of Stage III rose into Stage II first and therefore Stage II hasn’t seen much movement or has seen no movement in fact. It’s gone from 402 to 404, and that is also almost the same number that we had in March 2021. So what we need to do is work on Stage II next and start moving that down to Stage I or current and those are the efforts that the team is focused on over the next couple of quarters.

TechM has great momentum. Profits are up 26% driven by large deals by 5G by TCV being double the historic run rate, free cash flow and 15,000 associates by the last quarter. So very strong momentum for TechM and that’s something that we are seeing based on the tailwind in the industry as well as the performance by the Company.

Let’s look at the listed growth gems. Logistics has seen some strong progress this quarter even as you see the profit number down 37% that’s driven by some one-time items. But revenue is up 22%. Multiple business wins. And it’s positioned very well in an industry that has a lot of tailwinds.

Hospitality, we are seeing a significant growth in profits. Occupancy getting back to pre-COVID levels. Resorts in Finland are operational. And a fairly bold approach to driving growth in hospitality. Similarly, in real estate and we are seeing that bold approach starting to pay results. Profits again showing a significant uptick, focused execution and proud to report that we are the only real estate sector company to publish a sustainability report. So that is one that’s a huge plus amongst our various actions on the ESG front. So overall, our listed growth gems have seen some very strong traction in profitability. We are not going to go through the unlisted ones today, but we’ll do that in future conversations as we start highlighting some of them.

But let me talk about digital platforms. We’ve mentioned this before. And we mentioned the fact that FirstCry was at a $1.7 billion valuation and it was a result of merger with Mom & Me and FirstCry and is along this exponential growth that we’ve shown. But beyond FirstCry, we’ve got First Choice Wheels which is being rechristened as [Indecipherable] really coming up strong. The fundraise is underway right now. And we do expect to see some good numbers there in terms of market valuation. What I really want to talk about today is Porter. Porter is a business in intracity logistics. The latest round values the company at INR3,750 crores. This company was set up with the merger with SmartShift. SmartShift was a start-up that was set up in M&M with an investment of all of INR23 crores. And SmartShift became the second largest in the industry. Merged with Porter. At that point, we put in an additional INR70 crores into the company. Overall, we’ve put in so far about INR100 crores to INR120 crores or so, somewhere in that range, and the valuation today at INR3,750 crores where our share would be somewhere in the 25% to 30% range. So significant value creation. You start seeing the impact of the exponential curve catching up here. Valuation is up 4x in the last 24 months. M&M still is the largest shareholder, but this company is positioned very well in intracity logistics with 35 cities [Indecipherable].

Beyond this, we are going to look at — just moving back to the previous slide for a minute. We are looking at digital finco that we have put in place now. A good team is already driving action in that space. We are looking at [Indecipherable] two more digital platforms, and there will be a couple of other ideas we have put on the table, but we’re starting to see real value creation for our shareholders without having to invest significant money into it because we are looking at external investors coming in to many of these companies where over time we will take a minority stake.

So with that, let me hand it over to Rajesh to go through details on auto and farm. Rajesh, over to you.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Hi, everybody. Good to be with you this evening for us, and like Shriram said, morning or evening for you all.

I’m going to break my presentation into two parts: talk briefly about the quarter that’s gone by and then focus more on the path forward, which is the growth and return journey. So on the quarter that’s gone by, as you can see here, the standalone revenue grew by 15% and the consolidated revenue by 13%. And for the first half, just 46% and 41% respectively. This clearly is an indication of the fact that H1 was slow because of the COVID lockdown, and we saw some of that effect this year in the way quarter two got depressed as quarter two last year had got a carryover of the quarter one of F’21 into the numbers.

Next slide, Amin? When we look at our PBIT, you will see that standalone EBIT has come down by 29%. But again, I’m just reinforcing that quarter two last year was an exceptionally high base. So this year, the quarter two [Indecipherable], even though you see this de-growth here, it’s actually our second highest ever quarter to PBIT. And it is our second highest ever quarter two domestic volume and second highest ever domestic volume. So it has by itself been a very strong quarter. You just have to keep in mind that what we are comparing is on an exceptionally high base, on volumes and on margins.

Next slide. When you look at the first half, you can see that the standalone PBIT has gone up 37 [Phonetic] and the consolidated PBIT has gone up by 73%.

Next slide. Anish spoke about the turnaround in the international subs of FES. That’s been a major task in front of us. It was slowing down our ability to grow as we were focusing on turning around these and consolidating our performance. As you can see, from here, it’s five consecutive quarters now of profit and two consecutive quarters of profit more than INR100 crores are clearly setting us up or an ability to drive growth as these companies get stronger on their path to turnaround.

Next slide. A quick summary of the highlights of farm in quarter two. Our market share went up by 1.9 percentage points. Very strong launch of Yuvo Tech on the farm side. Feature-packed product, well priced. Exports, I spoke about. And what we believe is a strong margin performance in the context of the of environment. 18.7% is a very healthy margin. [Technical Issues] has been used to margins in the region of 18, 19% last year was an aberration, as I said, with exceptionally high margins driven by volume that built up into quarter two and of course the operating leverage kicked in and commodities inflation had not yet kicked off. Strong price increases have been taken, 88% overall, and material cost is not yet fully passed on. However, we have managed margins by keeping fixed costs under control.

On the auto side, a very, very strong launch of 700 with 70,000 bookings, and as you all would have read, 50,000 of them happened in three hours, 25,000 in the first hour on day one, 25,000 in the second two hours on day two. And that takes the total cumulative open bookings across all our products, including 700, to 160,000. Strong export performance. And we have been talking about the fact that three-wheeler electric is at an inflection point and you can see that play out now. A very strong growth of 318%, but more interestingly, a 68% share of market, establishing the first mover advantage that we had and now beginning to leverage that. As we said, that business up for a strong growth [Indecipherable]. The auto margins have been under pressure. Clearly, commodity price inflation has hurt us. We’ve lost about 32,000 vehicles, UVs [Indecipherable] in the quarter. And we have taken aggressive price increases, not enough to cover the material cost increase, but a 7% increase over the last year.

I’m now moving onto the second phase of my presentation, which is how do we drive growth as we think about the future. We’ve built a strong base. It’s time for us to now focus on growth, but growth with financial results. By the year 2025, we would look at a CAGR of 15% to 20%. Tractor market share would grow to 40% plus levels. I’m going to spend some time talking about farmers [Indecipherable] because we have been talking about that as a growth engine, and we are talking about hence a 10x growth and we’ll talk about why we think [Indecipherable]. We would like to be number one in the core SUV sector. I’m going to take a minute to talk about what we mean by core SUVs. As we’ve been talking about the fact that UVs is a very broad category in the ways [Indecipherable] defining it and that has its relevance. We have defined core SUVs in a way that it doesn’t make it too restrictive and too niche. So the definition that we’re using include 70% of the UV industry. Our definition is based on bringing alive the SUV category, so a high ground clearance and high seat position reflect an SUV character. And we’ve defined that by distance of seat point to the ground, and if that’s greater than 650 mm, we believe that is something we can call a core SUV.

The other is a capability to capability to go anywhere. Capability to go anywhere is defined by the tire outer diameter, which, if it’s greater than 650 mm, we will consider it as a core SUV and an engine capacity equal to or greater than 1.5 liters or the engine is turbocharged. So basically a combination of the perceived look and the capability. What we’ve tried to keep the perceived low parameters — the parameters here are completely measurable. There are several SUV characters as part of design language but we’re intentionally not putting that out there because that’s driven by subjective judgments. All of these are very measurable parameters and hence clearly allows us to segment the market in a way which we think is the universe we would want to compete in and that’s 70% of the UV industry. We are number one in DLC with less than 3.5 ton segment and we would like to stay that way.

Next slide. So I’m taking some illustrations of business segments, where we’ll talk about how we’re thinking about the future growth strategy: farm, SUVs, LCVs, last mile mobility and just a slide on capturing the auto electric way for us.

Next slide. This is the way we define the purpose of the farm equipment business. It’s about transforming farming and enriching lives. Our people are here to enrich the lives of farmers by providing easy access to affordable and innovative technology solutions enabling [Indecipherable]. I’m going to talk about exciting new tractor platforms which are in the pipeline. We’re going to talk more about the 10x by 2027 and 15 new products that we see coming along the way to enable that. This is the product portfolio that we are building on the tractor side: brand Mahindra and brand Swaraj. A lot of these are underway and we would start seeing them from next year till ’25, ’26. A significant part of it is the K2 platforms, which we spoken about. That’s four new platforms, 37 new products. But that’s not the only thing we’re doing. There are multiple new products on the Swaraj side, all in work, and we expect Mahindra to have a very strong solid portfolio of tractors [Technical Issues] and to keep increasing our market share.

Next slide. Here is the logic behind the farmers [Indecipherable]. The domestic industry today is INR5,000 crores. 18% to 20% CAGR will take it to INR12,000 crores by 2027. Our market share today is less than 10%. Our tractor market share is more than 40%. We do believe that with everything that we are going to be doing, in the next five years, our farming market share should be 30% plus, which is basically INR4,000 crores to INR12,000 crore for tractor industry and INR1,000 crores of exports from India of farm machines. It will take us to a 10x growth. This doesn’t include farm machinery revenue through our global subsidiaries.

How are we going to make this happen? A very strong product pipeline, which some of which I’ve alluded to, [Technical Issues] out of our global centers of excellence, exploring partnership alliances, acquisitions, through setting up manufacturing facility in-house that we can [Indecipherable] be ready next financial year, expanding our network by 3 times for the next four years, and most importantly, increasing access. Growth of farm machinery is going to come out of access. Use of finance or financial packages, leasing models and rental models. So while this may seem a stretch when we talk about 10x, we think it’s doable. It’s doable because we are a very, very strong rural and farm equipment-driven company, and with the right product portfolios and the right go-to-market strategy, there is no reason why we can’t leverage the opportunity. It is what it is around the world. And as we’ve often said in the past, India is tractorized, not mechanized, and there is a big opportunity ahead for us as leaders to drive that pace of mechanization.

Next slide. This is what the 15 products look like. This is an illustration, products which are tractor-mounted or tractor trailed and products which are self-propelled. These will come out between now and 2025.

Next slide. Moving onto SUVs. And really what we are trying to do in the SUV portfolio is to build a strong and authentic SUV brand. What does that mean? It means creating sophisticated, authentic SUVs with an unmissable presence, products which are advanced by way of adventure ready. We don’t say that authentic means SUV, you have to be a 4×4 to be an authentic SUV or that you have [Indecipherable]. What we really mean is how do we create product which are adventure ready, and our whole portfolio is going to be about that and which is why we would like to measure ourselves with a relevant size of business, and that’s what we’re calling the core SUV business. We’re planning 13 new launches by 2027.

Next slide. A very important part is our whole brand transformation exercise, and you’ve seen us do that over the last year and a half, first with the launch of the Thar, now with the launch of the XUV 700. We moved to a new visual identity, the twin peak logo for the SUV business. We are revamping our dealership signages to bring alive this new imagery. And these are our four key focus brands that we’ll build on. We may look at creating a new electric brand as well. So here’s the strategy about focus, differentiation, transformation, and we believe, based on all the research that we’ve done, that there are large number of consumers who are very excited with the proposition of what our brand offers, the proposition of buying an authentic core SUV.

Next slide. This is what a showroom could look like by 2027. 13 new products. A large number of them, eight, are going to be electric. A lot of work is happening on electric. I’m sure you will have questions and I’ll talk a little more about it, but more over the next year. The XUV 400 here may make you wonder what that is. We may name that XUV 400 the electric version of [Technical Issues]. We believe it has an opportunity to be named differently. It is still a code name, but just to differentiate it from the 300, you see an XUV 400 there.

Next slide. So proposition here is around exploring the impossible. That’s the brand idea. Four key brands doesn’t mean we discontinue the others. One new electric brand, 13 new launches, out of which eight will be electric. And we believe we should be prepared for at least 20% of the UV volume being electric by 2027.

So let me move on to LCVs. In the LCV space we already are leaders. We’re planning to strengthen our position with 17 new launches by 2026. Eight of them will be electric. There will be 12 CNG options available.

Next. A lot of these products are underway already. A new pickup range starting from early next year. And some new platforms that we’re working on and a very exciting product portfolio in the last mile mobility side.

Move on to the last mile mobility vertical. We are number one in the month of — in quarter two actually — we had a 68% market share. We believe the penetration in this is going to happen very rapidly and we would expect a 30% plus penetration by 2025 in the electric three wheeler space. We would like to stay ahead by launching five innovative products. And [Technical Issues] partnership has been built [Indecipherable] efforts.

Moving onto one slide around the electric, auto electric targets as we may call it. We have been in this segment for 10 years. We have accumulated 340 million kilometers on road. Lots of learnings out of that. These learnings are going to be [Indecipherable] to creating a portfolio [Indecipherable]. So eight new SUVs, eight new LCVs and number one in the electric three-wheeler space. We will talk more about the details of our strategy. I’m sure you have questions on [Indecipherable] who are going to be our partners, where are we going to get batteries, but that’s not [Indecipherable]. We will talk about that during the course of the next calendar and share with you as openly as we have been for the last two quarters, what our thinking around this is.

With growth has to come strong returns and ROCE of 18 plus what we target. We are working and we have been very strong in the managing our working capital. Capex, which is focused around segments in which we want to play and win and complexity reduction to platform synergy and platform [Indecipherable]. As a part to driving returns management of our OPM is going to be critical. We’ve taken up on ourselves target to reduce cost as a percentage of revenue by 3% year-on-year. This will happen by way of driving material costs down. A lot of work happening around it, parts commonality platform configurability. On the fixed cost side, we look at new age marketing. We’re already seeing that. We’ve launched both Thar and XUV 700 with a fraction of the marketing budgets that we have in the past. That’s what new age marketing is about and we believe that because our products are so differentiated and unique, it allows us to do that more than [Indecipherable] drive manufacturing conversion cost-out, logistics cost-out, and leverage [Indecipherable].

So, broadly as we think about the future, we believe that there is — they’re uniquely placed. Very, very strong pillars to build on, to drive growth and deliver very strong [Indecipherable].

With that, Manoj, over to you.

Manoj Bhat — Group Chief Financial Officer

Thank you, Rajesh. Thank you.

I think most of you would have seen the numbers, so I’m going to run through this pretty quickly. I think if we look at the standalone revenue growth of 15%, within that, Auto segment showed a growth but farm showed a slight decline because last year, farm was a very strong year for farm. And so there are two mix trends in here. Coming to the EBITDA, at an absolute level, there was a 19% decline because of some of the reasons which were discussed by Rajesh and Anish in terms of the commodity cost increase. And so the margins have gone down as a percentage and also in absolute terms.

Go to the next slide. However, at the PAT level, I think our returns from our group companies are increasing. So dividends are increasing and most — many of our group companies have given dividends this quarter, most notably TechM. That was a large component of this. That’s why overall PAT before EI grew about 29%. I think PAT after EI was a 9x growth. I think the main reason for this difference between before and after EI was some of our capital allocation decisions last year, which had resulted in certain write-downs which are not there. During the current quarter, we have an EI of about INR225 crores, which is embedded into this number. So that’s the gap between INR1,687 crores and INR1,432 crores in the current quarter.

Can you go to the next slide, please? I think this just illustrates what I was talking about. I think both farm and auto, I think because of the commodity cost pressures, I think we have seen an absolute decline. However, group companies largely led by dividend increase have contributed to a growth in profits, leading to an overall growth in the PAT before EI at a standalone level. At a consolidated level, auto led the growth, I think 23% growth year-on-year. Farm, at a consolidated level, including domestic and international, was a minus 4% growth while group companies, and this is across multiple sectors, grew by 11%. So I think good all-round growth which we are seeing across multiple companies in terms of revenue growth. If you look at PAT before EI, I think there is a 43% growth at a nominal level, and SYMC effect which Anish was mentioning, I think that — if you had taken that into account, it’s a growth from INR906 crores to INR1,975 crores. Similarly, I think there is a 9x growth coming at a consol level because from INR136 crores to INR1,929 crores, I think — can you move to the next slide?

Just splitting that up into the pattern around domestic auto and farm, I think we’re seeing the same pattern that [Indecipherable] in the standalone, there is an absolute decline. However, international subs where there’s been a lot of effort in terms metric improvement that supports the contribution of about INR200 crores, and finally group companies. Within this INR776 crores number of group companies, the positive impact of [Indecipherable] is about INR411 crores, and the remaining is coming from other group companies. So overall, I think the bridge here is that while the domestic auto and farm business is under pressure because of some of the reasons, but we are seeing good growth in terms of profitability gains in international subs as well as the group company performance.

I think that’s all I have in terms of the slides. And back to you, Anish.

Questions and Answers:

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Yeah. Thank you, Anish, Rajesh and Manoj. We now open the floor for question and answers. [Operator Instructions] First question we have today from Pramod Kumar of UBS. Pramod, would you like to go ahead?

Pramod Kumar — UBS — Analyst

Hello, Sriram, can you hear me?

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Yes. Please go ahead.

Pramod Kumar — UBS — Analyst

Yeah, sorry. Thanks for the detailed presentation. Before I start off with my questions, just a clarification on Slide 42, where you mentioned 3% cost reduction as a percentage of revenue. Just wanted to clarify is it auto plus farm and also the timeline for the same.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

It is auto plus. That’s Pramod, right?

Pramod Kumar — UBS — Analyst

Yes, sir. Yes, Rajesh.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Yes, Pramod. So that is auto plus farm. That was a common slide. All the financial slides are common for auto and farm.

Pramod Kumar — UBS — Analyst

And timeline, Rajesh?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Yeah. So the timeline for the ROCE is 2025. That’s where we’re putting the revenue and that doesn’t mean it won’t happen before. But clearly, when we say year-on-year, it starts now, year-on-year.

Pramod Kumar — UBS — Analyst

Okay. And my first question, Rajesh…

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

And I want to clarify, Pramod, but — Pramod, I want to clarify, it is as a percentage of revenue.

Pramod Kumar — UBS — Analyst

Yes, yes. So that makes it quite impactful actually. That’s I want to clarify that upfront.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Yeah. We need not always be absolute. We just want to clarify just percentage of the — yeah?

Pramod Kumar — UBS — Analyst

Yeah. Thanks, Rajesh. And the first question is actually on the EV strategy. You’ve seen of late a lot of transactions on EVs, lot of appetite in fact to participate in the India EV story. And given that the wide EV mobility platform what you have, and reasonably good capabilities already in terms of non-electric platforms, just wondering are we still open to partnerships. Because we had this thought a couple of years back. Then we moved to the EV subsidiary into the main business. So what is the thinking going forward? Because you seem to be having a very busy launch pipeline across both auto, farm, non-farm and — I missed all this is — is there something that you can benefit from by partnering with someone? So just wanted to understand your thoughts on that.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Yeah. Pramod, I hope you mean busy in a positive sense.

Pramod Kumar — UBS — Analyst

Yeah, of course.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Anish, you want to take that first?

Anish Shah — Managing Director and Chief Executive Officer

I’ll take that first, Rajesh. So, Pramod, we are looking at leadership in the EV space. As you rightly said, there are lots of capabilities we have today. And to directly answer your question first, yes, we are open to partnerships, we are open to investors coming in as well. We had Mahindra Electric set up as a unit which was doing some very specialized things on the EV front, but we need to go broader than that, and that’s the reason we merged it back with the company right now. We will look at all potential options of the partner coming in. But where we stand today is dealership in three-wheelers, as Rajesh, has talked about, 68% share in a market which is moving to EV very quickly. I have said earlier that there are three drivers of EV: cost of ownership, range anxiety and infrastructure. All three have been met for the three-wheeler space. We’re not quite there for the four-wheeler space as an industry and therefore volumes today are very low. But as volumes pick up, we will be a big part of that, and we’ve got a range of products coming up for that as well. So EV is going to be a big part of our story going forward, and we are open to all options in terms of partnerships and investments.

Pramod Kumar — UBS — Analyst

Thanks, Anish. Second question is more towards Rajesh. Rajesh, between XUV, Thar and some other products, you have like over 150,000 bookings, and I am pretty sure with Thar you did get a lot of new customers. So between Thar and XUV, where you have like 70,000 bookings, if you can help us understand how has the customer profile has changed from Mahindra compared to the previous products. Because what I’m trying to get it is, we had a very strong positioning in certain pockets of the country, certain product categories, and I’m just trying to understand are we seeing a change in customer profile which should benefit more and more as we launch Scorpio, for example, which is historically a semi-urban rural kind of a product, not seen so much by office-going public in Mumbai, for example. I may be wrong, but that’s my general understanding. So I’m just trying to understand, are we managing to attract more new customers who are not the typical Mahindra customers historically.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

I’ll give you a data point which will make it very illustrative of the fact that we are getting a very different target audience. Thar is 50% auto-transmission, just a very clear indication that it’s a very different profile from what we have had before. Even XUV 500, which was a metro-driven product, had less than I think 10% or 15% auto-transmission. So when we launched Thar, Thar has gone in with 50% auto-transmission and 25% [Indecipherable]. As we’ve gotten into XUV 700, of course it’s a number of 50% plus, but AX7 and AX7L are in the range of 65%, 70%, right at the top. And 95% of the portfolio is AX and just 5% is the MX portfolio by way of bookings. So you can clearly see that this is a very, very different segment and hence sets us up, and that exactly was our intention. The whole brand transformation exercise is about attracting new or different user segments. And just going back in time, 20 odd years, when Scorpio was launched, it was a very metro product, and you did see it a lot in cities. It’s just that with time, as newer products have come in, Scorpio became more a semi-urban-rural product and was lost traction in the city. I’m sure as we launch the Z101, we are going to come back very strongly in cities. Now, that is not going to say that XUV 700 or Thar are not selling [Indecipherable]. What we are doing is a completely different base on top of what we have. We’re not doing anything by which we’re isolating or losing our base. And actually anecdotally, this holds true even for Neo. Neo is starting to sell in Delhi NCR, which Bolero never did, and starting to sell in South. So we are clearly opening up new markets, new segments with our new launches.

Pramod Kumar — UBS — Analyst

And, Rajesh, before I go, XUV 400, I see the timeline on the slide as ’24, ’26. Is that understanding right?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

No. I mean, see, the timelines here on a slide like this have to be a little loose by way of band. It will be much earlier.

Pramod Kumar — UBS — Analyst

Thanks a lot and wish you all the best. Thanks a lot.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Thank you.

Anish Shah — Managing Director and Chief Executive Officer

Thanks, Pramod.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Thanks, Pramod. The next question is from Kapil of Nomura Securities. Kapil?

Kapil Singh — Nomura Securities — Analyst

First of all, appreciate that the management has laid out an impressive vision for both EVs and farm machinery. Thanks very much for that. That was a key ask from us. My first question is on EVs. Again, we’ve executed very well in case of SUVs, though we are yet to see the fruits of that. When you envision this number one position in e-SUVs as well and also e-three-wheelers, what are the capabilities required for the same in your view and where is M&M on that, what are you doing to get there? Also, if you could talk about external funding requirement and whether you are exploring that or not.

Anish Shah — Managing Director and Chief Executive Officer

Rajesh, go ahead.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

I think, Anish, you answered the first question — second question Kapil asked which is around funding requirement. Yes, we are open to any form of funding that may come in to enable us to achieve the objectives that we want. So we’re not at all close to that. The first point around what capabilities we need is what I would like to take a few months before we can come and share with you. We will want to do a very specific [Indecipherable] indication around how we are preparing and building our competencies ourselves. So we are at that stage of defining what we’re going to do ourselves, what we want to get into partnerships on and who that partnership and what that partnership ecosystem will look like. But we wouldn’t want to share that in an ad hoc manner like this. It’s not a 30 second answer. So we will come back sometime in the next calendar year with a comprehensive plan. Anish, do you want to add on to that, please?

Anish Shah — Managing Director and Chief Executive Officer

I just want to touch upon the three-wheeler EV that you mentioned, Kapil. I just want to touch upon the three-wheeler EV that you mentioned Kapil. On that front, we do have clear market leadership today with a 68% share. We have all the capabilities required for that. It’s been driven essentially by our experience in electric vehicles over the last 10 years because it’s the same battery that’s really being used for this.

We’ve had vehicles driven over 340 million kilometers and a lot of expertise in battery packaging and other areas that are required for it. So on the three-wheeler front, we are well positioned today. We need to demonstrate more on the four-wheeler front, which is what we’re focused on.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Kapil, do you have any follow-up questions? Okay, thanks, Kapil. The next question is from Pramod Amthe, InCred Capital. Pramod, you can unmute and go ahead with your question.

Pramod Amthe — InCred Capital — Analyst

There seems to be mixed signals on the rural demand environment. Would you give some your thought process in terms of how overall shaping for your products or overall scheme of things for the next six to nine months?

Manoj Bhat — Group Chief Financial Officer

Yeah, Pramod, Anish —

Anish Shah — Managing Director and Chief Executive Officer

Go ahead, Rajesh.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Yeah, so Pramod, two things to consider. One is for most products, rural is on a very high base because as we all know, last year when urban was very slow, rural had really taken off of course for tractors, but we had also seen it in all our auto products and I think it was visible across categories. Rural was extremely buoyant. As we’ve come into this year, so we have to keep in mind that all categories are on a very high base in rural.

The other thing to keep in mind is rains have got delayed this year. Sowing happened late to begin with and then rains have flown into or carried over into the so to say festival season and it’s been particularly bad in the East, that is UP, Bihar, West Bengal kind of belts. Southern markets Telangana, Andhra have been slow as well for the same reasons.

So my kind of take would be at this point of time, and these are things which will evolve and get a deeper understanding with time, but my current take is fundamentals of rural economy are very strong. Crop outputs are very good and overall we’ll see buoyancy going into rural over the next six to nine months, but there is going to be a base effect and anytime we look at rural, we have to keep in mind that we are comparing on a very high base. Does it answer your question, Pramod. Kind of answers your question. I’m sure it doesn’t fully answer your question.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Pramod, can you talk. There seems to be something —

Anish Shah — Managing Director and Chief Executive Officer

I think he’s on mute or he’s gone on to mute, Sriram.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Yeah, I think there seems to be some technical issue with the new WebEx. This mute, unmute seems to be a little bit of an issue. Can you — Pramod —

Anish Shah — Managing Director and Chief Executive Officer

Maybe we need to unmute from our side and let’s do that for Kapil as well, I don’t know whether he was muted.

Pramod Amthe — InCred Capital — Analyst

Yeah, thanks. I’m back. Thanks for unmuting. Yeah, Rajesh, that helps to answer the question to a bit. Second one is with regard to the new model launches. Good to see that you guys are back on successful new launch successes and garnering a good amount of bookings. Two questions related to the same. One, looking at the aggressive pricing stance which you are taking, it looks like that till the time your cost structure comes into place we have to assume these lower margins for automotive division to continue for some more time to come. That’s one.

Second is looking at your execution capabilities challenges in some of the responses like Thar, how do you plan to successfully address it in the future models like we have never seen you guys hitting 50,000 plus type of bookings and how are you planning to ramp up your supply chain so that you can deliver these customer expectations. Thanks.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Just want to be sure it’s Pramod, right?

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Yeah, Pramod.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Yeah, okay. Pramod bhai, so the first question is I guess around pricing of new products and the overall margin story and they are connected and they are not connected. So firstly when you look at our auto business right now, the margin is a blend of multiple categories. It’s a blend of SUVs, it’s a blend of LCV less than 3.5 tonnes, it’s a blend of trucks and buses.

So what you’re seeing is a blended margin and each of these have different factors at play. What we have seen right now is an unprecedented commodity price inflation and when you look at our margins today, they are still best-in-class, way above all our peers who may have higher volumes than us as well. So we have been aggressive in taking our prices up and while of course margins have dropped, they are still way better than others. So I wouldn’t right now at this moment read new product pricing into margins that we’re seeing in Q2 not to say that it won’t make efforts.

Just to give you an example, we did not take Thar prices up for many months because we wanted to protect customers who had booked Thar in the early months. We could have easily taken it up, but we felt it would be very non customer-centric for somebody who has booked a product in 15 days or 20 days to get a product at a significantly higher price even though we’ve always capture that in the booking form.

So we have taken some of these calls to protect interest of the customers. We learnt [Phonetic] out of that in XUV700, we did two rounds of pricing. So we did 25,000 bookings, we stopped and we changed the price. We knew upfront that if we don’t do that we’ll get locked into the same situation as Thar. So these are some things we learn out of these things and as you see the XUV700 [Technical Issues] bookings as I just mentioned is highly topic [Phonetic]. So I won’t necessarily read too much right now into new product pricing, not to say that new products are not going to be aggressively priced.

They will be aggressively priced. We know that’s the way to win when you have a good product and we know that in the past whenever we’ve succeeded, the ability to take prices up is seamless. So we believe that there will be some play that we will put in, in the short-term to get the right prices out for all our launches and we will be able to take them up with success. We’ve done that in Thar.

We’ve taken a very aggressive price increase, which has come into play now in November and that hasn’t affected the booking momentum at all. So that’s I think the question on margins. It’s a mix of commodities which is very aggressive. We think commodity will see a down cycle in the next two to three year period, it has to. All past evidence is whenever you see an increase of this kind, it does correct and you can’t say when it will correct, but it will definitely correct in the three years.

Your point on execution I am guessing is to do with what kind of capacity we are setting up for and we had set up Thar for 2,000, 2,500 kind of capacity. We are now at 4,000. Thar capacity is ready for 4,000 however, the constraint continues to be the availability of the ECUs and sometimes the infotainment. So the constraint is not our capacity planning at the moment at the semiconductor and we’ve already triggered investments to take that 4,000 up quite substantially. Likewise 700, we are ready with a very, very good capacity.

We were prepared with the strategy of MX and AX variant, that we would see a very strong demand, but again, we are constrained by multiple semiconductors that impact us. The AX7 variant I think has over 170 semiconductors. I mean that’s the extent of technology that’s there in that product. So these are things that we are going to have to navigate with, some of them are environmental, some of them we are learning out of and with every new launch, we learn something new and we factor that into the new launch. Pramod, does that answer your question?

Pramod Amthe — InCred Capital — Analyst

Yeah, thanks, Rajesh. All the best.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Thanks, Pramod. We’re bringing back Kapil. I think we lost Kapil earlier. Kapil, you are back on line.

Kapil Singh — Nomura Securities — Analyst

Thank you. Thanks for bringing back. Firstly, just one clarification on the product launches on EV side, how many are you launching by FY ’23-end and in terms of chronology is the e700 coming earlier or is e400 [Phonetic] coming earlier?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

E400 [Phonetic] is coming earlier and that will be the first launch and that will happen in financial year F ’23 probably towards quarter four — calendar ’23.

Kapil Singh — Nomura Securities — Analyst

Because I see eKUV there as well. First [Speech Overlap].

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

EKUV will be primarily export product with maybe a little bit of plain domestic. KUV100 is a very strong export product. North Africa countries like Tunisia, South Africa and so on also some neighboring countries like Nepal. So we might use that more as an export.

Kapil Singh — Nomura Securities — Analyst

Got it. The second question was on farm machinery. So when we are looking at this 10x growth, can you talk about what are the kind of innovations you are thinking that could disrupt or help us grow at that pace. And would the export play be much higher in the long run in these kind of products?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Okay, the first part of the question is clear. I’m not sure about the second part. When you mean export play would be higher, what do you mean? Higher than what? You mean higher than INR1,000 crores or I’m not sure what you’re comparing?

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Okay, a request to the participant is during the — when you are asking the question, please don’t unmute — mute it, then we need to unmute it again. So that’s taking a lot of time. So when you are asking the question, please on the unmute. Nithin, can you unmute Kapil again.

Kapil Singh — Nomura Securities — Analyst

Yeah, that’s what I meant that in the long run could this INR1,000 crores could also be a multi-fold opportunity with these products beyond 2025.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Okay so the first part of your question Kapil is around what innovations. I think the innovations are going to be multifold. There will be product innovation, because in this category, you have to have hyper local delivery. Products will perform differently in different soil conditions around the country. How do we create a scaled up model which allows hyper local customization? The second part of innovation is going to be around logistics. Logistics/localized production facilities. The third part of innovation will be around access finance, leasing, rental. So there are a bunch of areas we have to look at by way of innovation to enable this kind of a growth because at the end of the day, what we’re looking at is creating a category and category innovation and category growth will come out of innovation on multiple fronts, not just one.

The second part of your question I think is very interesting and we strongly believe that India can be a global center of manufacturing performance machines. We have everything to enable that to happen and yes, potentially as things pick up we could look at a greater than INR1,000 crores revenue. Also many of our subsidiaries have a very large farm machinery presence. So in Magna, almost 30% or 35% of the revenues come out of farm machines and some of them, we may make in India, which are currently being made in U.S. or other parts of the world. So there could be an upside on exports, but too early to talk about.

Kapil Singh — Nomura Securities — Analyst

Thank you very much and wish you all the best.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Thank you, Kapil. Since there are many more questions, I would request each participant to restrict to only one question per participant. The next question is from Gunjan Bothra from Bank of America. Gunjan, can you unmute. Please go ahead. Okay, if Gunjan is not online, then we can go to Jinesh. Nithin, can you unmute Jinesh.

Jinesh Gandhi — Motilal Oswal — Analyst

Hi, am I audible now?

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Yeah, Jinesh.

Jinesh Gandhi — Motilal Oswal — Analyst

Yeah hi, first question is on clarification on the XUV700 capacity, what was the number you shared Rajesh?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

There is good [Indecipherable] number.

Jinesh Gandhi — Motilal Oswal — Analyst

Any number which you can put to that. I mean been the capacity, which you are starting up.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Yeah, I don’t want to put that right now, Jinesh, not for any other reason, but it’s going to lead to speculation of what’s going to be the waiting time and that’s going to create a lot of discomfort among customers who are already speculating. So the way we are dealing with this right now is addressing each one in phases. So we right now have given out a delivery schedule for the first 15,000 people. We would do that very shortly for the next group. So when complete the first day 25,000 booking and put out a schedule for them and then we are going to put out a schedule for the balance 25 [Phonetic] and so on. The reason we are not putting out a number on our capacity because is right now the constraining capacity is going to be the ECUs and not necessarily our own capacity and putting out a number of what our capacity is not relevant because if you don’t have the ECUs, you are not going to be able to leverage your capacity and everybody is going to get into projecting what their waiting period is going to be. That waiting period is also going to be very dependent on which version they bought at because there are multiple semiconductors that are at play like I mentioned earlier. So there is — just for a simple example is wireless charger needs a semiconductor. That’s in shortage. Now we have to probably create an alternate variant to give customer a choice if they want the XUV700 without a wireless charger. So there are multiple such things that we are working on Jinesh. So just bear with us a little bit. We don’t want to jump the gun and put out something right now which creates discomfort amongst people who have booked. I hope you understand. That’s the reason we are not clear.

Jinesh Gandhi — Motilal Oswal — Analyst

And on the semiconductor part, what’s the visibility you have now given that there is some improvement on the supply side. And secondly, can you update on the tractor Diwali sales for the industry. How were they? Whether they were down or flat on a YoY basis?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

So the semiconductor question. I mean, to be honest, it continues to be dynamic. We would know now — about now in a few days what December availability is going to be. So it’s really a month to month thing and like I said, it’s not just ECUs, it’s multiple things. So at the end of the day, it’s very dynamic production planning of the kind I don’t think any supply chain people have ever experienced. So many moving parts all the time continuously for over a year. Really the word planning has very little relevance in the current context, but as we’ve said earlier, the last year has been hit by multiple extraneous factors. There was a semiconductor factory in Japan which had caught fire and they were down for almost a month. Malaysia was hit for almost a month. There were some storms in U.S. a few months back and some capacity that got out of commission there. So there have been multiple extraneous factors. Hopefully, we won’t see more of those and then it’s going to be a normal demand-supply gap and that’s not going to be as bad as what the last few months have been. So that’s on the semiconductor question.

Your question was on — the next question was on the tractor Diwali sales. I won’t want to put out a number yet because right now our view is that Diwali sales are going to spillover into parts of November because of delayed sowing, delayed rains and buying is extending beyond the festival time. So we’re just going to wait and watch how November goes rather than conclude that Diwali was the end of November [Phonetic]. We are seeing postponement in the market, not buying. So it’s just better to wait out.

Anish Shah — Managing Director and Chief Executive Officer

Just to add a little to Rajesh’s point on semiconductors. The two factors driving it were COVID and the supply-demand gap. COVID really caused a much bigger disruption and that’s what we have seen. Hopefully, that’s behind us unless COVID rears its ugly head again somewhere around the world in a much bigger way. So if that’s behind us, then things should be much easier to manage going forward. Yes, there will be a supply-demand gap, but it will be much easier than what the COVID issues were.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Thanks, Jinesh. The next question is from Sonal Gupta, L&T Mutual Fund.

Sonal Gupta — L&T Mutual Fund — Analyst

Hello.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Yeah, Sonal, we can hear you.

Sonal Gupta — L&T Mutual Fund — Analyst

Yeah, thanks. So just a few financial related questions. So could you sort of tell us what is other operating income in this quarter and what is the corresponding number in Q1?

Anish Shah — Managing Director and Chief Executive Officer

Manoj, go ahead.

Manoj Bhat — Group Chief Financial Officer

Other operating income is what we showed, it was about INR852 crores and just give me a second. What was the other question, I’ll come back to this. I’ll give you the exact number.

Sonal Gupta — L&T Mutual Fund — Analyst

And I was asking the corresponding in the first quarter as well. And my other question was the lower employee cost in this quarter, if you see sequentially, is there a one-off here or how do you see the…

Manoj Bhat — Group Chief Financial Officer

So there are some swaps in terms of our performance pay etc. So I think that’s an impact of about INR30 crore, which should be normalized. So it’s lower by about INR30 odd crore. I’ll come back on the other operating income.

Sonal Gupta — L&T Mutual Fund — Analyst

Sure and would you be able to share the absolute EV number — EV three-wheeler number for this quarter.

Manoj Bhat — Group Chief Financial Officer

You mean EV three-wheeler volume? Rajesh?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Rajeev Goyal, do you have that readily available, but I do remember the last couple of months have been in the 1,000 plus range. We did 2,000 in October.

Sonal Gupta — L&T Mutual Fund — Analyst

2,000 in October and that includes the e-rickshaws as well, right?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

E-Alfa and Treo.

Sonal Gupta — L&T Mutual Fund — Analyst

Okay, sir.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Rajeev, do you want to add anything? Rajeev Goyal if you are on.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

I think Rajeev is…

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Not to worry, maybe you can share it — maybe Sriram you can share the details.

Rajeev Goyal — Chief Financial Officer [Automotive Sector]

Rajesh, actually we did 1,600 in September and over 2,000 in October and that has around 1,200 numbers of Treos and 800 number odd of EL [Phonetic].

Manoj Bhat — Group Chief Financial Officer

I have that answer on the other operating income INR58 crores in Q1 and INR852 crores in Q2.

Sonal Gupta — L&T Mutual Fund — Analyst

No, sir. I mean, the other operating income, which is the incentives, etc. from the government, etc., which would be coming above the EBITDA line.

Manoj Bhat — Group Chief Financial Officer

Okay. So let me come back to you on that.

Sonal Gupta — L&T Mutual Fund — Analyst

Sure. Thank you.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

I think, Manoj, last year in auto we had —

Manoj Bhat — Group Chief Financial Officer

One-time extra.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

One-time of IPS which is the promotional incentive and this year we didn’t.

Manoj Bhat — Group Chief Financial Officer

Yes, Rajesh, INR63 crores for one-time last year, which was IPS which were pertaining to the previous year, which is [Technical Issues] before. This time, there is no one-time.

Sonal Gupta — L&T Mutual Fund — Analyst

What would be the number overall other operating.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

I think we are just talking about auto. So Manoj can give you a more comprehensive answer.

Manoj Bhat — Group Chief Financial Officer

Yeah, why don’t we come back to you after the call. I’ll give you a number on that piece.

Sonal Gupta — L&T Mutual Fund — Analyst

Sure. Thank you so much.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Okay, thanks, Manoj. The next question is from Amyn Pirani of JP Morgan.

Amyn Pirani — JP Morgan — Analyst

Hello.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Yeah, Amyn we can hear you.

Amyn Pirani — JP Morgan — Analyst

Thank you. My question was with respect to the specific guidance that you’ve given on LCV market share and SUV market share. Now on the LCV side for a very long time, we’ve seen that the number one position between you and Tata is determined by whether the zero to two tonne is doing better or the 2.0 tonne to 3.5 tonne is doing better. So when you’re talking about leadership, should we expect that 2 tonne to 3.5 tonne will keep getting better or are you going to do some product interventions on the lower segment zero to two tonne are relatively weaker.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

You did see that chart out there and we did talk about a new platform and that’s what we’ll take on the lower segment. So yes, it will include both.

Amyn Pirani — JP Morgan — Analyst

And just on the SUV market share. So you mentioned that you want to be number one in the core SUV, which will be like 70% of the SUV market which will effectively place you like a number one or a very close number two in overall SUVs also. So should we expect that because you have stayed away from that small crossover car like SUV. So again, are we expecting that the market will now start shifting towards the mid to large size SUVs and that’s how your dominance in that category will lead to a higher market share.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

So 70% is based on today’s market composition, not a projected market composition. So it is 70% today, the way we are defining it and we’ve been very mindful to define it in a way that you don’t come back and tell us that you have defined a category to suit your convenience. So we’re not saying the market is for Thar and Scorpio kind of products and we are going to be number one in that. We have kind of bulk of the market only excluded clear outliers which are either completely MPV or car crossovers and really as per us should not be counted as SUV and we are hence, keeping a very reasonable size. So the 70% is based on today’s vehicles in the market, not based on a projected conversion.

Amyn Pirani — JP Morgan — Analyst

And your market share there right now would be number one already or you would according to your own calculations?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

No, we are not number one and we are not measuring our market share in the context that we are supplying so badly. So we’ll just play out a few months before you see the real value of where we are.

Amyn Pirani — JP Morgan — Analyst

Great. Looking forward to that. Thank you.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Thanks, Amyn. The next question is from Yogesh Agarwal of HSBC.

Yogesh Agarwal — HSBC — Analyst

Sriram?

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Yeah Yogesh.

Yogesh Agarwal — HSBC — Analyst

Yeah, hi. So just quick clarifications, Rajesh you talked about this a growth expectations for the next three years 15% to 20%, but you also talked about this base effect in rural India and all of us are expecting a bit of moderation now in tractor cycles next two, three years is quite likely right. So bulk of that 15% 20% will be driven by non-Farm non-tractor business one could expect or are assumption for farm businesses softer?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Okay, so let me answer this question by saying two things. A lot of global players in the farm equipment space always talk about a mid-cycle and we tend not to that and we are actually thinking that maybe at some stage we need to talk about mid-cycle rather than you know a point in farm because it’s such a cyclical industry, right. So, if we say we are going to be something in 2025, that maybe a year in which the industry has crashed and then you say, okay, I mean whatever happened to everything that you said. And a lot of people correct to take an average or take a mid-cycle. So there will be ups and downs, but we’ve consistently maintained that we expect an ongoing CAGR for tractors to be in the region of 7% or 8% or 8% to 9%. We believe all the fundamentals are right for that. So you will see years when there are 20%, 27% growth as it was last year and that is going to see, you may see two such years and then it will correct or you may see one year and it may correct and it may come back, but as you look at data over last many, many years, you will see that 7% to 8% CAGR is a very, very reasonable assumption to make protracted growth and we believe that, that still holds.

Yogesh Agarwal — HSBC — Analyst

Okay, thanks, Rajesh. Just other quick one and you talked about this farm mechanization 10 times growth. Is there a change in farmer behavior economics as well around implements because they cost a lot and historically they have been sharing. So what will change the mind of a farmer to start buying it or buying it from you versus a local unorganized guy.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

That’s a great question, Yogesh and I’m kind of going back to the comment I had made earlier on innovation needed in multiple fronts. Clearly, you have to think about access. Access may come out of rental models, may come out of leasing models, financing models as one key area. Competing with local players is going to need a different supply chain structure. You can’t make one place products of this kind and supply around the country, you will probably have to have different manufacturing hubs closer to market. So there are multiple such things that we are looking at putting into play. So it will have to be innovation at multiple levels where farmers don’t — where you’re converting unorganized to organized, you have to have a cost structure which enables that switch or a finance package to compensate for it.

Anish Shah — Managing Director and Chief Executive Officer

Let me just add here that if I would look at the macro view, we shared this before. Globally the farm machinery or implement segment is two extractors. In India, it’s a fraction. So that in itself gives us a significant level of opportunity. Now all of that is not going to happen overnight, but that will require a new set of products. It will require working with farmers to have them [Technical Issues] products but the positives here is we are seeing greater affluence for farmers and that’s going to drive behavior towards getting some of these implements that make their lives easier and you will see from us a set of innovative products that come out as well that will be better than what farmers use today as implements and make their lives much easier and that will drive this demand. So that’s the market we’re going after when we talk about a 10x growth in farm machinery and that will really help offset some of the slowness that we may see across the industry for tractors in itself. Thank guys.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Thank you. The next question is from Gunjan. Gunjan, you can go ahead with your question.

Mihir Jhaveri — Avendus Capital — Analyst

Hi, this is Mihir from Avendus.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Hello — okay, Gunjan you are coming via audio. Are you connected?

Mihir Jhaveri — Avendus Capital — Analyst

This is Mihir from Avendus. Yeah, hi, thanks for the opportunity. So two questions. One is on the tractor side, you said that you will wait for a month. So just want to understand what’s the inventory situation out there given by what sir, you have said that it looks like the retail would be negative. So where are we in terms of inventory position in tractors and what is the short cycle guidance for this year in terms of do you have any guidance for this year in terms of the tractor growth which you see. That’s my first question.

And my second question is with related to partnerships. So we have seen competitors doing this in a manner where they have got their products and the market share gain in the ICE space and also launching the EV products and then scouting for investments and partnership. We had a mixed view in terms of having partnerships be it with Ford or be it with Renault. So are we looking at it differently where we will launch few products given that till 2027 you have a targeted EV launches, which will be there. So you will be launching few products and then looking at investments or how are you looking at. So these are my two questions if you can answer. Thank you.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

I’ll take the first one Anish and maybe you want to take the second one. So Mihir, on the tractor stock, we always realize that when industry is going through volatility, we have to watch for stock. In the month of October, we already initiated down-stocking. We are amongst the people who had started the process of down-stocking in October and we will be correcting our stock in November as well. So whenever we talk projections [Technical Issues], we realize that it is about up-stocking and down-stocking in the tractor industry.

So when we say industry grew 27%, almost half of that is or let’s say X percent of that is inventory pipeline build. When you start seeing a down cycle and you say there is a minus growth of 20%, X percent of that is because you’re correcting stocks because at the end of day [Technical Issues] billing number. So the billing number always adjusts for what’s happening to retail and we start correcting our stocks. Our anticipation is that by December/January, we would be back to our normal stocks. So as things stand, we would — we are factoring that into our projections.

To your specific question on how we see industry growth for this year — for the full year, we would stay within the flat to low-single digits and that’s what we’ve been saying from the beginning of the year and many of you have been saying how can that happen if quarter one grew so much and we have been saying consistently we are on a very high base the balance part of the year and we were not going to get growth on that base. So we stay with the flat to small single-digit for the industry and from our standpoint, that includes stock correction and yeah — so nothing more to add to that Mihir, unless you have a follow-up. Anish you want to take the second?

Anish Shah — Managing Director and Chief Executive Officer

Yeah, Mihir, on partnerships I’ll share a few thoughts. First is we are very open to partnerships as long as there is a clear objective that’s shared between both partners. When we look at our partnership that you referred to Renault and Ford from 20 years ago, they were very successful in terms of partners achieving their objectives, which is where we looked again at Ford in a recent partnership and there I would say that we have tremendous respect for Ford and the leadership team there.

It’s a great group of people. It was just where we found more recently that our objectives were not fully aligned and that didn’t make sense to then get into a partnership where you have different objectives. We are pretty focused on the future of auto. We are focused on EV. We are focused on growth driving that space and those are areas where we will look for partnerships where we have a full alignment of interest.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Okay, thank you. The next question is from Binay Singh of Morgan Stanley. Binay?

Binay Singh — Morgan Stanley — Analyst

Going ahead if you could talk about two things, one is that we will see product especially towards XUV700. So will that put pressure on margins. And secondly, the leverage gains. When we look at automotive run rate significantly lower than what you used to do at the peak. So if volumes were to normalize, what kind of leverage gains can we see on the automotive side in the margin? Thanks.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Yeah, I kind of answered this question earlier. So, Anish as there are lots of questions, I don’t want to be very long in responding to that, but margins are driven, like I said by multiple things. Firstly, we have multiple businesses in the auto portfolio. There is the SUVs, there is LCV less than 3.5 tonnes. There is trucks and buses. So you see a blended margin across business units.

Within the portfolio of each of course, there are multiple margins. Then, there is the evolution of new products which obviously we are going to price aggressively in the early phases and as I said earlier, when we create success, we are able to take prices up and margins improve. And we are seeing an unprecedented cost cycle back at the moment. Commodities, freight, everything is on an up cycle. So over time, we believe that commodity will correct, our ability to take prices will go up and we are going to improve our business unit and model mix portfolio. So when we talk about an 18% plus ROCE over a three-year period in auto, we are factoring in the fact that we will improve our margin much [Phonetic] for the year.

Binay Singh — Morgan Stanley — Analyst

And any comments on the operating leverage point because that also would have been a significant hit to margins today, right?

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

It is a hit to margin because volumes are nowhere near what we want them to be unfortunately. So there is clear upside that’s going to come out of operating leverage as we have significantly improved our cost structure. So while cost structure has improved so dramatically, we are going to see upsides as volumes pick up.

Anish Shah — Managing Director and Chief Executive Officer

On that context, Binay, I would also add that even when we talk about the XUV700 and you mentioned the question someone else mentioned earlier aggressive pricing, but as we look at what’s happened then, we effectively raised prices twice in two days. So we started with a certain price for the first 25,000. We had a higher price for the next 25,000 and then after that there is a higher price that will be applicable when the car is delivered. So if you look at that journey combined with the fact that the model mix in XUV700 is also geared very much towards the high-end and there is operating leverage that comes in with that. I think we will have some good numbers overall in terms of margins for new vehicles as well.

Binay Singh — Morgan Stanley — Analyst

And with that, will it also be fair to — could you comment on the ASP expansion that we saw in the automotive side. We’ve seen quite a nice jump in automotive ASPs on a sequential basis. Any sort of a one-off you would call out and how would you look at it going ahead?

Anish Shah — Managing Director and Chief Executive Officer

Manoj would you take that? You mean automotive ASPs.

Manoj Bhat — Group Chief Financial Officer

[Speech Overlap] Target sales price, Rajesh. So it’s a probably a mix thing which is impacting in terms of the pricing.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Yeah it is — I guess it is mix and the fact that we’ve taken price increases. And the price increases are probably more aggressive on the higher-end model. Manoj, I don’t know if you want to add anything?

Manoj Bhat — Group Chief Financial Officer

No, Rajesh, I don’t have anything to add.

Binay Singh — Morgan Stanley — Analyst

Great, thanks, I’ll follow up.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Thanks, Binay. The next question is from of Chirag Shah of Edelweiss. Chirag? Okay. Chirag is not ready. Then next question is from Nitin Arora of Axis. Can you take Nitin online.

Nitin Arora — Axis — Analyst

Question and I’m sorry, Rajesh if I ask you again on the auto business because my question came late but straight question you’re trying to, I’m asking this question because of very nice visibility beyond FY ’25, ’27. I understand there are changes, there are challenges right now, but in the auto business there was a tweet in the morning saying that Mahindra will supply 14,000 [Phonetic] XUVs in January itself.

So the question is more because when we look at your strong backlog today, a company which has 15,000, 20,000 units on a monthly basis standing on 1.50 [Phonetic] lakh backlog. Optically once the safer [Indecipherable] market share will look very big. So the question more is that is there any other challenges are you taking apart from the supply chain on the chip side because some of the OEMs and the Koreans and the Japanese OEMs are still improving day by day on the chip side. So what I wanted to know is the visibility for the next six to eight months’ timeframe in terms of execution, number one. And number two, street believes that you will not make money on these backlogs because these are very aggressively priced products. So I understand you’ve given us FY ’25, ’27 visibility. Is it possible to guide how the margins of an auto business will look like in the next one year because you have the booking in your hand, you know this product people have booked with you and when you do the execution, I’m sure you would have the certainty on that. So those are the two questions very straightforward. Thank you so much.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Okay, Nitin, I’m going to try and give you as straightforward an answer as I can. We are making positive margin on the XUV700. We are not price tools [Phonetic]. So now how that is comparable to the rest of the portfolio is not something I’m going to be able to get in today, but it is a positively priced — positive margin product and so are all our other brands and products. What we are — I would kind of go back to what Anish has been talking about over the last year, which is delivering ROC and ROC is a function of multiple variables.

I mean we just had a discussion around operating leverage. So at the end of the day, we are going to have to balance margins, volumes, market share gain, ROC right. So the two things we are focusing on at the moment is how do we deliver market share, which gives you confidence that we are playing a game which is successful and you know we’ve heard over the last few years consistently that we are not able to execute a successful SUV strategy and now you see that play out. There is a successful SUV strategy.

We’ve got four very, very successful launches in the last year and a half or two and we are going to have a quick one which is going to be very successful as well. The critical thing is now — okay so that’s one peg to put in. The second is to manage our cost to optimize margins and it is an exceptionally bad commodity situation. I mean you are seeing everybody’s margins whoever have published and our margins are much better than them. And then how are we going to optimize capital in a way that we are able to give the right return. It’s a function of these three things and at the end of the day, we should be clear which of these three we want to prioritize, what we are prioritizing in market share and ROC.

Anish Shah — Managing Director and Chief Executive Officer

I will just add that, we feel very comfortable around where margins will be, though there are many variables that do not allow us to give a direct answer to what that number is, but if I were to just build a little more on what Rajesh said, our 700 pricing started with positive margins in the first instance. They will further enhance when we increase pricing for the next 25,000 and they were built based on a commodity price that was extremely high because this is more recent. So this is not pricing that was done in the past. So given all of those things and you combine operating leverage with that and what the product is and what it will deliver, our sense at least right now is it is going to be a very profitable product. Now what those numbers are, we will have to wait to see what happens over time but I just had multiple questions on pricing of XUV700, so wanted to address this very directly.

Nitin Arora — Axis — Analyst

Thank you.

Sriram Ramachandran — Senior Vice President – Corporate Finance, Investor Relations & Special Projects and IR Team

Thank you. So with that, we come to the end of this conference. Thanks a lot all the participants for taking your time and being here and also thank Rajesh, Anish, Manoj and others. I mean it’s been two long days of back-to-back meetings and thank you for doing it the evening of the second day of the Board meetings. Thank you all and stay safe.

Anish Shah — Managing Director and Chief Executive Officer

Thank you, everyone.

Rajesh Jejurikar — Executive Director (Auto & Farm Sectors)

Thank you everyone.