BQ Conversations With Tata Motors' PB Balaji

Thanks for having me.

I think it's been fascinating fun because in some matters they are similar, some matters are very different, and it's quite an interesting experience to figure out which parts are similar, which parts are different, and accordingly tweak your approach. So it's been an absolutely fascinating six months. I wanted excitement and a challenge, and both are there.

I think the starting point of funding any investment plan is the operating cash flows of the business, and we are very clear that that is the number one priority. You need to generate growth; that's always the best source of money. Then it starts playing out differently by businesses. For JLR, they need to get their act even better on the operating leverage side. For the CV business, keep growing, gaining share, and driving cost reduction. For the PV business, get your capex right, contribution margins right, and ensure a strong product pipeline. We have differentiated approaches for each business because the challenges are different. For JLR, the MOOC is a challenge, so we are preparing with the electrification roadmap.

There is absolutely no equity needed at this point. We have a very strong balance sheet. Net debt numbers are comfortable. We look at net debt after free cash flows; we expect only marginal negative in the near term, easily managed by stepping up debt. JLR has 2.9 billion of revolvers available and will issue bonds. Their liquidity is adequate and spread out over ten years. Debt levels will go up, but we are also divesting non-core assets to bring net debt down. That's one reason we called out the six cylinders. Will it fully meet my expectations? Let's wait and see.

Great question. Multiple factors. When we gave that eight to ten percent originally, we were just for PV costs at the same 79 percent. We have not done anything on that side, so from a cash perspective nothing changes. We have created a stepping stone: between FY19 and FY21, we want a four to seven percent range. First focus is growth. A 25 billion pound business with strong contribution margins will deliver operating leverage if you keep cost structures tight. The reason they got into a jam is planning for significant growth ahead of where you are. It's a trip, not a fall. Once they correct cost structures, money pours out. We changed the capitalization policy, impaired projects not affordable, introduced an affordability gateway. You may have great business cases, but total money is fixed, so prioritize. That's the basis for impairments in both JLR and Tata Motors.

The policy was always uniform. They were earlier in US GAAP, then IFRS. The policy at that point was Tata Motors policy and JLR were together. We are not saying the affordability matrix is being introduced simultaneously. The demand environment has changed, and value creation drivers can change. That doesn't mean drop all value creation; it means be prudent in capital, demand, and cost. Once you do that, money pours out. You've seen that in Tata Motors: we delivered 700 basis point operating leverage by keeping cost line steady. JLR already has healthy contribution margins; hold operating costs and margins come up. In the last year we had three to four new launches for JLR. Between now and 2020, many launches with electrification. The innovation pipeline doesn't stop because of cost challenges. We are going for MLE architecture to optimize costs across platforms. The word is discipline. The I-Pace is a world beater, first premium SUV BEV. We outsourced cell technology but package batteries ourselves. We found our own motors for better performance. We partnered with Waymo for autonomous, learning without busting the bank, and sold 20,000 vehicles to Waymo, amortizing costs and generating 1 billion turnover in two years. That's how we want to play this game. JLR has done a fabulous job navigating this. You just need to get cost structure right.

Let's start with UK. Brexit is a key conversation. By 2020 everything has one electric option, which neutralizes the diesel risk. Consumers respond well to electric and plug-in hybrids. Brexit contours are unknown, so we work with government and industry bodies. Europe is coming back gradually; the Slovakia plant starts by end of year with 150,000 capacity. China: the custom duty reduction is beneficial in the long term. We welcome that. The Chinese business will be thought through.

Another thing is the PV business, the third cylinder. We ended Q4 with 6.5% market share, full year 5.7%. We have taken hard calls. Will it help us cross 10%? We have a target of top three in domestic market. 85% of our products are bought by individuals, not fleets. The brand is landing with young, edgy consumers. Our design philosophy makes people turn around. JD Power customer service index: we are number two. Contribution margins are sequentially increasing. We have the outlines of a healthy business. Our target segment is 25-35 year olds. We want profitable breakeven ASAP. That's turnaround 2.0. It's about brand and value for money, not entry level cars.

And about the future charges you took in the quarter, including for Nano. This shows we are making bold moves. Winning sustainability is the brief for PV. If it doesn't fit the bill, we park it. Nano is ring-fenced and can be monetized. The technological capability exists; if we can juice it, great. If not, we'll find a way.

Will that mean you will also look at new innovative models ahead of 2020 BS6? BS6 doesn't matter to the consumer. We are not slowing down launches. We need to be clever and mingle the two together. My idea is getting launched in 2019. We are not stopping for BS6. The consumer wants breakfast, lunch, dinner full time, so we need to be prepared.

Let me set the record straight. My variable market expenses this year are significantly lower than last year. The discounting question is over. The environment has changed from overloading to rated payload, giving opportunities to cost engineer. We will continue cost engineering. For the customer, it has to be solutions, not just pricing. That's why we introduced a six-year warranty. As for market share, this is the first year after seven years that we have seen share increase. My volume doesn't supply full demand because supply chain is not ready. We went from 16,000 vehicles in April to 49,000 in March, but still not sufficient. We are working with reliable vendors and introducing new vendor base. I expect supply chain issues to be ironed out in three to six months.

I think both are very strategic assets built with a lot of passion and care. We are clear they have to go to a person who can build them further. Tata Technologies is very core to Tata Motors and JLR because they are integral to our designing and building cars. They have enormous capabilities in electric, like the work with NIO. We would want to go to a player who can build it and add value back to us. But we don't have to control that entire business; we are happy to give 100% out because it's a core vendor. As for Hitachi construction, it has been doing exceedingly well. They have had a dream run. We have said that business requires capital and it's the right time to say it's not our focus. We already stepped down to 40% ownership. It would be better for Hitachi to take it and run with it completely because they need faster decision making and capital. Value-wise, we should be fair for both parties. There are many subsidiaries within Tata Motors with huge asset bases, low cash flows, and low profit. We are reviewing every one of them. Everything else is on strategic review barring Tata Motors Finance and JLR.