Tata Motors Ltd. ADR Earnings Call Nuggets: Dip in Market Share and Extent of Discounts

Tata Motors, Ltd. ADR (NYSE:TTM) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Dip in Market Share

Kapil Singh – Nomura: Sir, good evening. I have a couple of questions. First on, while MHCV volumes, we’ve seen a dip in market share this year compared to last year and in some of the months like Jan it has been even below 50%, so is it related to inventory correction or is it related to growth or decline in volumes in markets where Tata Motors is stronger, how would you explain that and what is plan to gain back the share?

C. Ramakrishnan – CFO: I think you have touched on the two factors which are both important I think there is a play of both. Inventory correction is not so much at our end, our inventories have been under control for – in the Commercial Vehicle business, but there has been inventory correction in some of our competition and there is a regional play as well. We expect that the market share will maintain and come to our market share in the coming quarters.

Kapil Singh – Nomura: Sir, in retail you would have around 60% kind of a share?

C. Ramakrishnan – CFO: Yes, I don’t have the number right now readily here, but yes, in retail, yes.

Kapil Singh – Nomura: Secondly, as far as profitability is concerned for MHCVs or even for that matter for LCVs, is there a increase in competitive intensity and when the market recovers, do you think we will be able to get back to historical level of margins that we used to see two or three years back, or do you think that because of higher competition the margins maybe a tad lower than what we were seeing earlier?

C. Ramakrishnan – CFO: It’s difficult to predict on the margins given where we are today. In general, I would say, there is a bit of a pressure on the margins for everybody, and definitely in our case, due to the competitive intensity we face not only in the commercial vehicle, but also the passenger cars in particular, it will tend to increase the marketing cost, particularly the variable marketing expenses. I think it will be a tactical play from quarter-to-quarter. But in terms of an underlying long-term trend, I think margins will be somewhat under control.

Kapil Singh – Nomura: Sir, finally, has there been any price increases or reduction in discounts that has happened in January or February?

C. Ramakrishnan – CFO: During the quarter, October to December, on an average in commercial vehicles we’d have taken a price increase of about 1%, but this is October to December quarter, so did we in January as well. So, we have been taking general small doses of price increase from time-to-time as we have done in the past in the Commercial Vehicle business. Discounts, I’m not seeing any particular reduction in January, February compared to a quarter ago. It remained intense.

Extent of Discounts

Hitesh Goel – Kotak Equities: First, I had a question on the JLR front, why have the realizations dropped like 6% on Q-on-Q basis? Was it driven mostly by discounts? We know that there is a higher mix of (indiscernible). But what were the extent of discounts and if you can detail out that? Secondly, there is – margins have come up quite well at around 14% despite realizations dropping so much, so if you can give some color on that as well.

C. Ramakrishnan – CFO: The realization has been mix of many things, including regional mix and model mix and variants mix as well as the exchange. I will focus more on the margins, which as you’ve said, have remained reasonably strong compared to the (initial) quarters. It’s difficult to comment on net realization mix. It’s a function of many things, but not necessarily reflective of any significant increase in this current quarter, variable marketing expenses. They have been on the increase, in general, I would say over the last year, but nothing exceptional or strong in this quarter.

Hitesh Goel – Kotak Equities: Sir, would we say that this is largely driven by higher Evoque and Freelander volumes?

C. Ramakrishnan – CFO: That’s right.

Hitesh Goel – Kotak Equities: Because the geographical mix for China and all remains the same. So I can only think about product mix.

C. Ramakrishnan – CFO: Yes, it a more a model mix and within the model maybe the variant mix.

Hitesh Goel – Kotak Equities: Sir, but then margin should also have got some impact, but there is no impact on margins front? Also, if you can give some outlook for next quarter per se that would the marketing cost and stuff will be much lower next quarter as compared to third quarter levels and how do you see currency shaping up for fourth quarter?

C. Ramakrishnan – CFO: On currency shaping up for fourth quarter, I would – maybe I should take an average of predictions from all the analysts in this meeting.

Hitesh Goel – Kotak Equities: Sir, because the currency has started to move in your favor in January, February. That’s why I’m asking that question.

C. Ramakrishnan – CFO: That is true. There will be some play of that in the coming quarter, but generally I would say margins will remain strong at the current level.

Hitesh Goel – Kotak Equities: But the marketing expenses, will it go down? Or do you see more marketing expense?

C. Ramakrishnan – CFO: I don’t see a significant change either way.

Hitesh Goel – Kotak Equities: Finally, Sir if you can throw some light on the tax rate and the depreciation expenses that have gone up in JLR and tax rate in the consolidated has been – is around 39%, so if you can give some color on that?

C. Ramakrishnan – CFO: JLR, if you’ll call, last year in March we brought in the deferred tax accounting and took credit for the future deferred taxes. Therefore in JLR, we will be fully accounting – between deferred taxes and current taxes we will be fully accounting for the tax as an expense item in P&L. So there is a difference in tax treatment in JLR, which I think we explained in the last two, three quarters. In addition to this, I recall, during this quarter JLR also had a tax incidence on the dividend it started getting from various overseas operations, including…

Hitesh Goel – Kotak Equities: Sir, JLR tax rate is at 27% and we’re talking about the consolidated tax rate which is at 39% despite a tax credit in the standalone operation. So we are not able to understand that. So if you can …

C. Ramakrishnan – CFO: That’s primarily driven by the JLR tax. JLR has tax both in U.K. even though the cash payment of tax in U.K. is low and overseas operations. I think we had explained in one of the earlier calls, JLR in all its NSE operations will have to pay the local income tax on its local assessment including in China.

Hitesh Goel – Kotak Equities: So that has already been factored in JLR operations, right, but if we look at the consol tax rate it is like 39% versus JLR tax rate of 27%. There is some INR240 crores difference even if I translate on our …

C. Ramakrishnan – CFO: Maybe we can send the details to you offline after the call.

Hitesh Goel – Kotak Equities: Okay Sir. The presentation expenses in the JLR front, how should we look at that now if you can explain that?

C. Ramakrishnan – CFO: Depreciation expenses in JLR, depreciation, amortization in general in JLR will keep growing up as a line item. As you know, when we acquired and whatever product development and existing expenses have been capitalized in JLR, as the new models get launched and we do have aggressive model and product introduction plan going forward. So you should see this expenditure going up in the coming quarters.

Hitesh Goel – Kotak Equities: Sir, how should we look at GBP90 million to GBP100 million increase every year? It’s difficult to give an estimate, but how should we (monetize) capitalized R&D expense? Should we do it over a 10-year period? How are you looking at it?

C. Ramakrishnan – CFO: In general, I would say over a five to seven-year period.