Tata Motors Earnings Call NUGGETS: Difference Between Profits and Tax Rates, Raw Material Costs

On Thursday, Tata Motors, Ltd. ADR (NYSE:TTM) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Difference Between Profits and Tax Rates

Binay Singh – Morgan Stanley: Good evening, Sir. Thanks for this opportunity. My question is, there seems to be a huge difference between your profits and tax rates as per IFRS and Indian GAAP in (indiscernible). Now, could you throw some light on what are the drivers for the difference and how should we look at your tax rate – sort of a sustainable tax rate going ahead, given China share is going up?

C. Ramakrishnan – CFO: In general, the tax rate in JLR would be driven in this quarter and also in the future quarters by the deferred tax accounting that we introduced in the last quarter that is Q4 of last year.

Binay Singh – Morgan Stanley: Right.

C. Ramakrishnan – CFO: As we recognized the deferred tax assets in the last quarter, from now on between the two lines that is provision for current tax and provision for deferred tax in JLR, if you add up the two, JLR taxation. As far as the P&L provision is concerned, it would be at the marginal rate in U.K. In addition to that, JLR taxation would also be there for their overseas entities profit, which I had explained from time to time in the past. However, the tax outflow for JLR in U.K. will not be there because of their past tax credits. Your second question was relating to…

Binay Singh – Morgan Stanley: What would be the effective tax rate then going ahead? Like for example as per IFRS we are almost seeing a 29% tax rate this quarter.

C. Ramakrishnan – CFO: If you take the deferred tax line and the current tax provision, both together, the tax rate in JLR would be in the region of 20% to 25%, which is almost a marginal rate in U.K., but that does not mean it will be the tax outflow. Cash outflow will not be there.

Binay Singh – Morgan Stanley: Second question is that even the net income reported as per IFRS and Indian GAAP on JLR has a sort of a huge difference. Could you through some light as to what was the driver for that?

C. Ramakrishnan – CFO: The main differences would be apart from the – what we had talked about in the earlier quarter, the main difference would be in the exchange fluctuation accounting.

Binay Singh – Morgan Stanley: Okay. Which is basically ForEx gain sitting in the Indian…?

C. Ramakrishnan – CFO: Yes, the (foreign) exchange accounting – if you do it, there is consolidation on the base of Indian GAAP for JLR you will have a different amortization under the new Accounting Standards introduced last year in India, which is not available under IFRS.

Binay Singh – Morgan Stanley: Right. So in a way there will be a bit of a ForEx gain in the India, be it India GAAP.

Raw Material Costs

Kapil Singh – Nomura: Moving on to Standalone results, I just wanted to check, there has been a good improvement in raw material costs to sales sequentially. If you could just throw some light on what had been the drivers for that and how do you see that going forward?

C. Ramakrishnan – CFO: I think on the cost side we expect the component and the raw material costs to remain benign or subdued in the current, at least in the near future, in the coming quarter. In addition, as you know, we do have ongoing aggressive cost reduction plans in all our products, including material costs reduction. So I would say, a general subdued trend in terms of cost increases with less pressure on the costs and plus our own internal efforts have contributed to this.

Kapil Singh – Nomura: Sir, we’ve seen around 300 bps decline in raw material cost to sale. So if you can just help us understand that as well on a sequential basis?

C. Ramakrishnan – CFO: Primarily driven by what I said, but since you’re taking overall percentages, it also can be contributed through the model mix. So it’s a function of subdued levels in terms of component prices. We also took a price increase on 1st April. So if you take a fact of the price increases but steady on the cost side, our own cost reduction efforts and model mix, this ratio change can happen.

Kapil Singh – Nomura: Sir, by model mix you mean the LCVs proportion going up as well?

C. Ramakrishnan – CFO: Partly and maybe even within passenger cars and commercial vehicles.

Kapil Singh – Nomura: Sir, also on the MHCV side the – actually on the goods MHCV you’ve seen a decline in volumes, steep decline. So what is the outlook going forward and if you could just give us an idea of the inventory levels as well, with the dealers and the company?

C. Ramakrishnan – CFO: As you know in the quarter, we’ve been correcting our production to demand on a couple of occasions including taking shut down in our factories. So, we have been maintaining a capital watch on the inventory levels. We haven’t seen any alarming trends on the inventory levels. They are reasonably under control, I would say, for the Company around 30 days and similarly four to six weeks for our dealers, which is not very different from the average we would like to see. As far as the demand outlook for the M&HCV is concerned, it has been a challenging quarter. There are several factors, including the macroeconomic outlook and subdued activity on the infrastructure side. There have been some price increases also, our own price increase and we earlier in March contributed by the excise duty increases. So I think the freight rates also have been somewhat weak. There are a variety of these factors. I think going forward, I would say, it will remain – we will see some headwinds in this segment as we have said in the last quarter also. We do see some headwinds. Possibly if the monsoon recovery happens and infrastructure spending and the initiatives are triggered, maybe we will see some revival going forward in the coming quarters, but we would remain somewhat subdued in our outlook.

Kapil Singh – Nomura: Right. Sir, lastly just a small question on JLR. We’ve seen a ForEx loss of GBP67 million, if you could just help us understand that what is the nature of this loss, where is it coming from?

C. Ramakrishnan – CFO: The GBP67 million that you are referring to is the mark-to-market valuation losses on some of the hedges we had taken.

Kapil Singh – Nomura: This is for the period beyond the current quarter or it includes the current quarter as well?

C. Ramakrishnan – CFO: After market beyond the current quarter.

Kapil Singh – Nomura: For the current quarter, we take it in the revenues itself?

C. Ramakrishnan – CFO: That’s right.