Will Indian markets bounce back despite COVID shutdown? | PB Balaji to ET Now

In February we had the JLR investor day where we spent a good two hours explaining the reimagine strategy of JLR. We called out a few things. One, we said JLR's basic DNA will be Modern Luxury by Design. As part of that, we said Jaguar will become fully electric from 2025 onwards, a premium luxury BEV. Land Rover will have six BEV vehicles coming in from 2025, and by 2030 every one of our vehicles will have a BEV option. By 2036 we'll become 100% zero tailpipe emissions free. Those are very big decisions communicated, and decisions which are getting implemented as we speak. Due to that set of decisions, we said we will also have investments that we don't intend to pursue going forward, we'll be forced to write them down. We'll restructure our employee base, restructure vendor commitments we made, we have to write them off. So we called out in February this year that we'll have a one and a half billion, roughly 15,000 crores, kind of a hit in our P&L. It's a one-off hit. Close to 9,000 crores, £950 million, will be non-cash, and the rest will be cash payout that will happen in FY22. That's what we called out in February, and that's what you're seeing as numbers. There's no change in those numbers. That's the debit side of the equation. The credit side of the equation is probably where the surprise is. The passenger vehicle business, if you recollect last year, we had taken an impairment of the business close to about 1,400-1,500 crores. We took an impairment, and we also had a bonus contract provision because our volumes were much lower and COVID was in front of us, so accounting forced us to take that call. Now with the performance of the PV business that has come through very strongly and continuing to do well, both on an absolute basis and on a relative basis, the underlying performance is lifting multifold. Therefore, we are now reversing that provision and releasing the impairment provision we had taken. That's more good news on what the business is. So one is an extremely strategic call being made on pivoting the business towards electric, which is what everybody wanted us to do and that's what we are very clear we will do. The other is a confirmation that the PV business is firing on all cylinders. Both of these are pieces of good news that the market should understand. Some people have understood, most people have understood, a few people haven't understood it as yet.

Let me take India, for instance, where the numbers are close by and we'll understand it better. In the Tata Motors portfolio, in 2019, 2020, 2021, three years, we were 2% of our business was EV. Today it is 2% of my business is EV. This is an exponential disruption. We will invariably overestimate near term and underestimate long term. So it'll keep giving disappointments in terms of numbers, it's not that big as we saw, but one fine day it'll flip and then suddenly it will take us completely by surprise, the speed of the force. So what to watch out for is the penetration rates, how fast is it moving. If I see that sequence, 2-1-2, that is an extremely fast adoption happening from underneath, and we won't realize it till it hits us. We are very clear this number will go to as high as 10-12% by 2025-2026, and it can even cross the 15-20% zone by the time you hit 2030. Therefore, this can be a very large disruption coming at us. As Tata Motors, we are very clear we'll drive this disruption. We are not just going to watch it happen, we will actually make it happen. For that, we will look at the entire ecosystem, solve the problems at every level. Take the month of April, midst of lockdowns, Nexon EV sold 581 vehicles. The clientele coming in is different, the demand for the vehicle is strong, and the performance of the vehicle is excellent. Therefore, I'm seeing India will leapfrog this disruption. It won't go through the PV route because the cost of two powertrains is more than the cost of one powertrain. It's simple math. We do see this as a significant intervention we will make as Tata Motors.

I think what's happening globally, which is great news and also gives us a lot of comfort even for India, as vaccination started maximizing and you start vaccinating significant chunks of your population, economic growth is back and back with a bang. Today China is firing all cylinders for us, US is firing all cylinders for us, and UK you can start seeing the lift happening. Compared to what was till Q3, the decline was just 7% last quarter. So I am expecting UK to come back to growth, Europe to come back to growth. Today it is fair to say, and touch wood it remains that way, there is not a demand issue in JLR today. The challenge for all OEMs is more supply. Therefore, what we are seeing is a complete clear out of inventory, be it at retail level, wholesale level, or supply floats. We are doing everything possible to maximize the available level of semiconductors. Mix is improving, VME is reducing, inventory levels are going down, dealers are getting profitable. That's how the current thing is playing out. But it is fair to say that we are not able to meet customer demand to the extent that we would love to. That's going to take at least two quarters before it really becomes all right. So we are saying Q1 will be significantly impacted, which we have already called out in our press release. Q2 onwards things should gradually start improving, and H2 I'm hoping, and that's what all of us believe, things should start normalizing from there onwards.

In Q4, I think as JLR and Tata Motors we scraped through, we didn't get significantly impacted by the semiconductor shortage. But as I look at Q1, we do see challenges, and that's a reason we have called it out. It is not normal and it is likely to be significant, so we called out the adverse impact. Thereafter, we do expect things to start normalizing and improve from there onwards. The thing to notice is that automobile demand for semiconductors is a drop in the ocean of semiconductors. A little bit of allocation, if it starts switching towards automotive, suddenly there's no problem. It's a small number. That's the reason we don't want to create sensational news giving impact on production, because we will fight till the last day and see how much we can eke it out, and then we will deliver against it.

Today we see steel, aluminum, precious metals, all of them inflating significantly. This has been a challenge. Last quarter we started seeing the impact of that even in my P&L, you would have seen it. We do expect this situation to continue in the first half of this year. India has also got another reverse impact of the lockdowns. Today it's a choice between demand versus inflation, how do you play that. Currently, contracts are not being negotiated as we speak, everybody is just frozen at this point in time. But second half, things will start quietening down, that's our hope. From what we speak to various people, we do understand that things have run away a bit too much, so there's likely to be a cooling off in the second half, at least getting back to normalcy. But that's all speculation, we have to wait and see how exactly it plays out. What is more important is what are we going to do about it. We will take judicious price increases, which we've already done. We are trying our level best to protect the end customer, so whoever has ordered the cars, we are not impacting them with the price increase till May 7th. May 8th onwards, the new price will come into effect. At the same time, huge focus on cost reduction, which we have done a very good job of over the last three or four years, so we'll continue to keep a good focus on that. But I do believe the right metric that will come and go against the inflation will be operating leverage once the lockdowns lift. There's no point looking at the near term alone and starting to look despondent about it. If you look at what happened in the last year, when the lockdowns lift, it's a humongous recovery that comes through thereafter. I do expect passenger vehicles to really take off after that, because people are going to be even more keen to have their personal mobility, their urge to break free. For commercial vehicles, we have seen a pretty horrendous period over the last two years in terms of demand. FY21 demand is actually lower than what it was in FY10. So we are now 10 years back in terms of volumes. You know better than I do that commercial vehicles are more a reflection of what the GDP in the country is. Our GDP hasn't gone back 10 years, so neither do I accept that this demand is indeed that. If you're able to start making money at those kind of volumes, imagine what happens when things start correcting. Second, looking at volume alone in commercial vehicles is not good enough because we have taken almost 10-15% price increases because of BS6, so the revenue is actually starting to lift much higher. Last quarter, for instance, the revenue is higher than what it was in FY19. The mix, which has always been against M&HCV for the last three years, needs to come back as well. There's a lot of things going for commercial vehicles subsequently, but we just have to see through the immediate pain. That's the reason when we are looking at our strategy this year, it is very different from last year. Last year was a business continuity plan because we didn't know what's going to happen. The focus was survive, revive, and grow. This year is saying none of these three, it's actually being agile.