Chief Executive Officer, JLR, Jaguar Land Rover (JLR) - Jaguar brand
Tata Motors Demerger: Group CFO PB Balaji On Reasoning | NDTV Profit
Group CFO PB Balaji discusses Tata Motors' decision to separate its commercial and passenger vehicle divisions into two distinct listed entities.
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About Pb Balaji
In a January 2019 interview with ET Now, Tata Motors CFO P.B. Balaji discussed the company's turnaround plan for Jaguar Land Rover (JLR). He described the plan as having three buckets: sales enhancement, cost and cash management, and capability building. Balaji stated that the company aimed to remove 2.5 billion dollars in costs over 18 months, including 1 billion from capital expenditure and 500 million from improved working capital. He said the product pipeline included new models such as the Evoque and Defender, and that JLR planned to expand from 12 to 16 nameplates over the next three to four years, with all nameplates available on some electric option by 2020. Balaji also addressed JLR's challenges in China, stating that the company was shifting from a push strategy focused on volume to a pull strategy emphasizing branding, dealer profitability, and exclusivity. He expressed confidence that the strategy was working, noting a reorientation toward Land Rover over Jaguar. Balaji said that with the cost reductions, JLR's threshold EBITDA margins would move from about 10% to about 14%, and that the business would become cash accretive with capital expenditure committed at 11-12% going forward.
Transcript (14 segments)
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Interviewer0:00
Hello and welcome to NTV Profit. With me is PB Balaji, who's the Group CFO at Tata Motors. Mr. Balaji, thank you very much for joining us on NTV Profit. This is the first interaction after the demerger announcement. Give us a sense of what went through that announcement, because you're trying to demerge your CV business separately and your PV and electric vehicles separately.
P
Pb Balaji0:21
You need to see it as a logical culmination of the interventions we've been making over the last few years. First, each business has to be self-sustaining, with its own strategies. We simplified capital structures, cleaned out ADRs, and solved the DVR shareholder issue. Then we made the business debt-free. Now the businesses are large: CV is a $10 billion business, PV is smaller but growing. We already split the teams. There are limited synergies between CV and PV going forward because technology roadmaps are diverging. CV will be more software-intensive. We will be the only manufacturer with a Tiago EV at one end and a Range Rover electric at the other. Synergies are becoming bigger in the EV space. Regarding cyclicality, CV has eight verticals. We will reduce volatility by managing within CV through international business, vehicle park solutions, smart mobility, and spares. Our intention is to dramatically reduce volatility. We are not looking at CV cyclicality compensated by PV; we are saying CV's own internal compensation will work. The purpose is to discover better value out of CV. CV's RoSI is 36%, we have a strong brand and market share. The only thing to crack is volatility, and we have a roadmap for that. Let the market discover value for itself.
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Interviewer6:11
What you're saying is that post demerger, the CV will generate more cash than the PV because PV will be in a growth phase. Is that clear? Simple mathematics?
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Pb Balaji6:19
Absolutely correct. CV today has a RoSI of 36% last year, a very strong brand, and robust market share. The only thing to crack is volatility in results due to HCV cyclicality, which we have a roadmap for. We believe this business will have to be looked at differently. Let the market discover value for itself.
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Interviewer6:43
How do you manage the cash flows for the PV business? So far, the cash flows of CV were funding the R&D capex for the PV business. Now PV would be on its own. EV will take time to mature and be profitable. The 16 to 18,000 crores of capex lined up for the EV business alone, and ICE will have its own capex. How will you manage that?
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Pb Balaji7:04
Two things. First, the PV business today is cash flow positive. It generates about 10% EBITDA, spends about 6% capex, so about 4% free cash flow. It can be self-sustained. The only place we need to invest is EV, for which funding has been secured. We have PLI, and we have money stacked up. EV will generate its own funds; it's already EBITDA neutral this year and will become positive. If needed, there are multiple sources. PV itself can invest if needed, and JLR dividends are coming. JLR is becoming debt free, so there are enough sources of funds.
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Interviewer8:10
You guided for JLR being debt free in FY25. It also has a huge capex plan of 3.5 billion pounds. Will JLR generate enough cash for the capex and to give you dividends? Simple: JLR today is generating 2 billion pounds of cash after capex.
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Pb Balaji8:33
That means capex is about 3.5 billion, so it's generating 5.5 billion of operating cash flows. There is enough cash being generated in JLR. It's a pivot to premium luxury, currently at 8.5% margin, will go to 10% next year. Capex is about 3.5 billion. 10% on a 30 billion business is 3 billion, so enough cash. We will lift EBITDA margin to 15% as we move towards premium luxury, all while delivering RoSI of 20% plus. It is seriously capital prudent, premium, cash accretive, and has a dividend policy of 25-40% of PAT. We see no stress as long as the strategy is executed flawlessly.
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Interviewer9:28
What we have seen is that global auto companies are valued at much more discount to Indian auto companies right now. We have a coding giant coming in with IP of $25 billion while the parent may be at a discounted value. The Indian company would be trading between 18 to 20 times earnings. Do you see these restructuring exercises that you have done at your end from the CV point of view, from the PV electric vehicle and JLR, changing the kind of valuation for Tata's PV business as a whole going forward because of the IPO listing? Not just IPO, but also the restructuring and the work you're doing. It's also a learning phase for the market.
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Pb Balaji10:11
I think the market will find its level. Investors are smarter than us. Our job is to communicate the strategy and execute it. Let the market find its own level. From a shareholder point of view, we have done nothing that is shareholder unfriendly. Every step gives transparency, clarity of strategy, and we are executing against that strategy. Market value will discover itself through various triggers. Our job is to keep simplifying, clarifying, and executing. If we get these three right, we are on the right journey. We have a task to make JLR a luxury player and get people to understand it that way. Job two: ensure CV becomes less volatile, strongly cash accretive, and continues profitable growth on a strong brand. Job three: PV continue to build share and drive profitability. EV drive proactively to reach 30% plus penetration. This is what we will execute. The market is wiser than all of us.
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Interviewer11:32
By when do you see the entire demerger process to be over?
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Pb Balaji11:34
July next year is what we are internally targeting to get there. Obviously, the NCLT process is not under our control, but we believe that's a realistic date to work with.
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Interviewer11:42
Thank you very much for joining us today.
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Pb Balaji11:43
Thank you, thank you.