Capex, funding, semiconductor crisis & more! | PB Balaji, Tata Motors

First, thanks for having me on the show. We have looked at a total investment of about 6,000 crores in Tata Motors and about 2.6 billion pounds (roughly 26,000 crores) in the case of JLR. As we had indicated, this will be fundamentally around products, technologies, and a bit of capacity enhancement as well. The whole idea is to ensure that we make this business future-ready because we are in the midst of a transformation from an ICE automobile industry to one going toward Net Zero commitments of various OEMs. We are very much on that journey as well, so we will be using these for investing in the traditional businesses as well as investing for transforming the journey towards electrification. That's where the money is going.

Yeah, great question. So if you look at JLR, let's take it piece by piece. The 2.6 billion pounds that they are looking at is broadly in line with the guidance of two and a half billion that we've been indicating, therefore they will get to net debt zero fundamentally out of their internal approvals. After spending this 2.6 billion capex, we will be generating free cash flows in excess of a billion. That's number one. When it comes to Tata Motors, as far as the commercial vehicle business is concerned, it will be cash accretive; on the passenger vehicle business, we have now become cash neutral. The spend we are doing will take care of that. The only area where we are investing ahead of the curve is in electrification, and that's the reason we did the TPG deal to fund those investments well on time. So the journey towards net debt free continues, and these capex are well funded within that journey.

Yes, the prices of semiconductors have indeed gone up, but in the broader scheme of things, those are not materially moving the margins. The ones that are moving the margins is our inability to price for commodity inflation. The semiconductor intensity is actually hitting the revenue line because of our inability to service the demand that is there in the market, both in JLR and in Tata Motors. That then results in loss of contribution profits and loss of operating leverage. So the cost of semiconductor per se is not such a big deal—yes, it has inflated humongously—but the overall semiconductor intensity is not such a big one for us to be worried about. We would rather have the semiconductors first than forego revenues at this point in time. But we believe this should normalize as the overall situation keeps improving, which we are calling out as well.

Yeah, it's a tough question to answer because there are many moving parts. Let's break it into individual trunks. As far as China COVID lockdowns are concerned, they have impacted the April numbers for all OEMs. The GDP number that came out yesterday, a decline of almost 11% plus, is also giving an indication of how severe the situation is. But what we hear from China is that starting this Sunday, 22nd of May onwards, there is a gradual relaxation plan where more intense lockdowns will be restricted and other areas where case counts have gone down are opening up, and production will also begin. That's good news. Let's wait and see how far it plays out. Starting June, they are looking for even more significant relaxations. That has caused supply chain disruptions everywhere, particularly domestically in China and also the exports that happen out of China—ports being locked out, factories not able to open. Apart from that, the second big intervention is the Russia conflict in Ukraine. Directly, the supply chain has not been impacted to such an extent; we have two vendors out there, and that is being rerouted, so far that is not a big issue. However, the resultant inflation you see in crude, commodities, food—all of which will lead to central banks responding with interest rate hikes—will definitely have a dampener on demand going forward. But from an overall industry perspective, from a JLR and Tata Motors perspective, domestically in Tata Motors, we have not seen this hitting demand right away. But it is fair to say we have to watch this very closely; the next three to six months will tell us how this is being played out. We shouldn't forget that anything done to manage inflation expectations and controlling it is good for everybody in the long run. What we are now starting to see is a risk of inflationary expectations becoming high, which is a slippery slope that central banks are trying to contain. If that gets contained with all the interventions, that's good for us in the long run. Currently, we do not see a challenge with respect to demand, but commodities, crude, and resultant fuel price increases are something we need to keep a close watch on. It's not impacting the premium segment as yet, nor demand in India, but we have to keep a close watch.

Currently, if you look at our margin waterfall that we have shared, we are about 200 basis points of unrecovered margin because of the commodity increase. If you recollect, this used to be almost 540 basis points earlier, so there has been improvement in terms of margins we are recovering. That said, our current base read is that commodities will remain stable, albeit at elevated levels, so inflation is likely to be a bit sticky. But even if it stabilizes at this level, we should be able to work our way back in terms of margins. We have taken a price hike in April. However, if we see commodities continuing to rise, we will have no choice but to take further price hikes because we need to protect our margins. In the case of electric batteries, lithium prices have really run up as demand for electric vehicles increases. There we have taken price increases, and those are well absorbed by the market. Because the overall TCO of managing an electric vehicle considers both running cost and put-down price, we believe the equation is very attractive in terms of running cost of an EV vis-à-vis a diesel or petrol vehicle, so we don't see a concern on that one.