EV As Business Will Be Cash Positive By 2025 | P B Balaji, Tata Motors

Sure, it's been a comeback. It's been a real strong comeback for Tata Motors passenger car business. For a brand which was struggling, now it is enjoying double-digit market share. Is this as good as it gets? Not really, because I believe there's a lot going in our favor and there's lots more to be done from our end. And if I look at the work that you have done so far, what's really worked for us so far is the product portfolio, as well as the entry into electric vehicles. And there's still work to be done on the front end distribution, the whole digitalization journey that we are on to. And also we believe that the consumer himself or herself is premiumizing, and therefore our call on safety as well as design and connectivity is something that's going to really continue to give us momentum going forward as well. And the work on electric is just about big. We hit about 7.5% penetration and we see that increasing to at least about 25% plus by 2025. And we have 10 more cars coming in, 10 electric vehicle models coming in by that time. So there's enough to play for in this. And let's say for now, assume that the best is behind us.

See, I think the new forever range of vehicles that launched from 2020 onwards as part of the BS6 portfolio is something that has really attracted the consumers and also ensured that it is living up to the expectation of the new age consumer who's out there. At the same time, the doubling down on SUVs has also helped, and the bold call that we took on electric vehicles is now starting to pay off as well. And you shouldn't forget that across time we've been clear that safety is one aspect that Indian cars need to get into, and therefore our early bet on getting to 5-star GNCAP is now slowly starting to spread across the auto industry, and that is also now vibing well with the consumers. So that's an additional point here. And in 2020, the entire focus was how do you reimagine the front end, and that's an area where work is still underway, and we believe that will give us further benefits as we go forward. Additionally, the work around digitalization of the entire front-end experience is also going to pay us dividends going forward as well. So there is enough and more growth drivers that we have with us, and we need to ensure that we stay the course and execute flawlessly as we've been doing over the last two years. And in the recent past, I think what's really worked in our favor is also the way we have managed the semiconductor situation here in India, and that has helped in terms of ensuring we are agile and we're also able to redesign our chip intensity in our vehicles in order to be able to deliver better growth. And currently the focus is also on debottlenecking capacities and ensuring that we're able to support the growth paradigm that is out there. And that's been our focus so far.

Yeah, right. I think currently our portfolio has about 7.5% electric, and we're also seeing CNG coming in a big way within our portfolio. And we expect to see that cross double digit pretty soon. And at the same time, EVs will continue to rise further and reach the 25% mark that I talked about. So it's fair to say that pretty soon by 2025, you should expect to see a reasonable mix which is pretty common between EV, CNG, petrol and diesel, more in favor of petrol being the lead, followed by EVs, CNGs and diesel being the last. So how exactly it will play out, the consumer will decide. But we are ready to play in all the segments to ensure that we give full choice to the consumers. And we've been quite clear that this is a decision of the consumer and not the OEM, and our job is to provide the options there. With respect to your point on capacity debottlenecking, as I said earlier itself, that we are ready to manufacture close to 50-55,000 vehicles per month in our own existing plants, and that debottlenecking is fully underway. And currently the Ford Sanand plant only an MoU has been signed, we have not yet concluded the deal, and I'll be able to talk about it after the deal is concluded. But there is definitely one more close to about 300 to 400,000 vehicles that can get made there per annum, that's roughly about 35-40,000 vehicles. That's on top of the existing 50-55,000 that we currently working on. So believe we have the right mix of powertrains, nameplates and capacities in order to be continuing to deliver this growth journey.

It is. And from an overall profitability perspective, for starters, we are already a bit positive as far as the EV business is concerned. And that's the reason why we have very carefully calibrated how we are investing in EVs. We are existing the existing products are also there. There are three stages of this whole platform that we are building. First is a conversion platform, we call it Gen 1. The current Nexon, Nexon EV Max go into that. Second, we are looking at the multi-fuel architectures where it is designed for EV but can also carry an IC engine if needed. And that is a curve that we showcased about a month and a half back. And third is a born electric platform, pure electric, that is where the Avinya concept is coming in. So that is ensuring us that we are able to defray expenses over larger volume and not investing too ahead of where the consumer is. At the same time, we need to be ahead of the curve with respect to ensuring that we are bringing the consumer up, but we can't go too far away. That's number one. Number two, the overall volumes are adding. I'm not cannibalizing any of the IC engine portfolio at this time. We are getting growth in both these. And we believe the more the choice is available to consumers, the better are the chances of success for any. And therefore we do not see this cannibalizing at this point in time. Number two, so these additional volumes give us operating leverage. Three, don't forget that the cost of IC engine manufacturing in the country will keep going up as the emission standards keep increasing. You're already seeing challenges at the lower and lower displacement diesel engines. Already EVs are actually cheaper when it comes to that. And this economics of EV costs coming down as battery prices come off, and IC engine cost going up as more and more investments are needed to get into that envelope of emissions, is another parameter that needs to be kept in mind. And lastly, and perhaps most importantly, the EVs will always carry a premium over IC engine because this is a better consumer experience. There is lower maintenance, lower TCO. The torque is outstanding, so you get a rip when you actually press on the pedal there. And it's noiseless, which means you feel the music better. The thrill of the ride is much, much better in EV compared to ICE. So there will always be a premium for that. Add those three mixed together, we are quite confident that EV as a business will be cash positive by 2025, and ICE will continue to do well as well.

See, I think India will always be an intensely competitive country. It'll be foolish on our part to assume that competition will just roll over and give away market shares. It doesn't happen that way. But we believe with the product portfolio that we have, the propositions that we have, as well as the first-mover advantage that we have on EVs, will stand us in good stead. Just a statistic here: on EVs alone, by the time the first round of serious products come into the marketplace, we would have clocked almost 800 million kilometers of Indian drive conditions. And that's a sizable first-mover advantage we have, because that will go towards how do you design our vehicles, how do you ensure that the BMS, the battery management systems, are tuned to Indian conditions. And that we believe will give us a significant start with respect to how we can work on our products, which should help beat competition. But the game in EV is first and foremost penetration. Market share is incidental to that entire game plan. And as long as we are growing ahead of the marketplace and continuing to lead this disruption in the marketplace, we are happy.

Okay, there are a lot of questions in that one question, so let me unpack that first, one thing at a time. Let's start with debt first. As far as JLR is concerned, we have guided for a 5% EBIT and a 1 billion of cash flows this year. And as far as their debt levels themselves are concerned, in the next two years we are quite confident it will come down to zero. Why do I say that? Two reasons. If you look at the one and a half billion of cash outflow that happened last year, almost entirely it is working capital led. And that is because volume growths were lower than the previous year. There is a volume decline, in a negative working capital situation automatically cash flows out. And as we get back to growth, this will rewind back and therefore we should get back that cash in the next two years. Don't see a challenge there. Second, if you look at their intrinsic breakeven levels, which used to be almost 600,000-550,000 vehicles earlier, is now down to about 320,000 vehicles. So therefore, if you're able to start growing ahead of that, which you're quite confident of once the semiconductor issue eases, we believe this business will generate significant cash and significant profits and significant dividends. So combination of these three, we are quite confident that JLR will go to net debt zero by FY24. So that's we're comfortable there. To your point on demand, at this point in time we do not see any stress in demand. The premium luxury segment that we are in continues to be robust. We have an order book of 168,000 vehicles when we ended last quarter, and that is only strengthened further hereon as the Range Rover Sport orders are also starting to be picked up. And in the meanwhile, the semiconductor situation is gradually easing, and we expect to see that continuing to improve as the quarters roll by. And what did cause grief for us in the current quarter, running quarter, was the Chinese lockdowns, and that had implications on supply chain as well as China sales. And that we had called out last quarter as a temporary aberration. And once that starts coming back under control again, we expect to see JLR having a pretty strong second half as it goes forward. So that's how we see the JLR situation at this point in time.

See, currently the factories are all opened up. And I spoke to the Chinese team as earlier this week, and the factories are opened up and production has started everywhere. So gradually things are picking up as far as the production is concerned. Even if you look at the retail sales, it is down 6% compared to the down 11% that was there the previous month. And gradual opening is what we see. And at the same time, the main one that is impacting JLR at this point in time is availability of supplies. The order book is pretty strong, and that does not include China. So therefore, we are quite comfortable that as things gradually improve in China, we should have momentum picking up in the rest of the world as supply situation improves.

It's fair to say that if we had preferred, then we would have loved to have the EVs in JLR portfolio a year ahead of time. I think that's a fair statement. But having said that, the current products that we have are some of the best that we have ever had. There's a new Range Rover, there's a new Range Sport, there's a new Defender 130, and the Defender launch itself has gone off exceedingly well. So we have enough ammunition to work this. And in the meantime, by the time this actually starts stabilizing, we expect the EV portfolio of six Land Rover BEVs and the Jaguar going fully electric coming in by '24 and '25. So we are well covered for this. But your point is right, if we would have preferred, would have preferred it earlier, and we are doing our level best to see how fast we can get that.

Not yet, they still work in progress. And over the next two years, we should expect to see more from us on this. That's one of the variables we said from our debt leverage, deleverage perspective. We will work on.

I think, to be fair to the team there, I think the externalities that they are dealing with is substantial. And what we are able to do internally is pretty stable in terms of our breakeven levels and our ability to actually get a set of numbers on the cost and cash and capex. That's pretty steady now. Where we do struggle with, and your fair assessment to say that, growth rates and externalities on supplies is something that we are not in a position to predict. But we do live in a volatile world, and therefore we are doing our level best to ensure ourselves from that. But we got some further work to do on that particular front to ensure that we are completely above that. But I think the situation is such that there's not much that we could do on some of the variables we're dealing with.

There are a lot of changes which have happened there, but it is still work in progress. So you've reached that threshold beyond which it will not improve now? No, I think they have done solid work on the fixed cost structures. Where I think there still work underway is the variable costs. And one of the callouts on Refocus, a program on cost savings in JLR is called Refocus, and there we are working squarely on ensuring the variable cost structures are also controlled and brought under the bandwidth that you want to work with. And that is an area where work is still underway, and that will help us a lot as we navigate the inflationary environment that we're currently dealing with in the global auto world. So they still work on the variable cost side that is underway.

Absolutely. What gives you the confidence? That's my follow-up question. Great question. I think we need to split this into individual line items. The first one is capex, which is where the investment outlay both in JLR and Tata Motors is now very clear that each of these businesses are living within their means. And we did have significant cash drains in passenger vehicles earlier, that is now behind us. And the commercial vehicle cycle is just starting to turn. And therefore we do expect combination of those two, the Indian business is well on track with respect to delivering its objectives. As far as JLR is concerned, what we are facing is a supply situation which is something we should significantly improve in the second half of the year. As overall demand starts cooling off in the rest of the parts of the economy, we do not see demand as a challenge in the premium luxury segment that we are operating in JLR. And with breakevens having been reduced significantly, we do believe the combination should give us the ability to generate cash. And look at it differently: we are dealing with close to about 48,000 crores of cash, of which 7,000 crores is just IFRS related stuff, and that is just going to be there whatever you do, that number will be there. But about 10,000 crores out of this 46-48,000 crores is just working capital related, so that'll go away on its own when the growth comes back again. And that leaves us to deal with about 32,000 crores. And 32,000 crores between JLR and TML is a comfortable two-year target to go ahead and deliver. And we don't see that as a concern, thanks to the points that I just mentioned earlier.

CV as a segment, I think, has had a fair amount of challenges over the last four years. And what we are now seeing is probably a secular increase in demand as we go forward. It's happening in all the segments: MCVs, ILCVs, small commercial vehicles, and passenger buses. There's also a huge electrification roadmap underway, particularly on the buses segment, that we would want to take the lead on, similar to what we did in passenger vehicles. And at the same time, with the infrastructure investments coming in, availability of credit, and the overall aging of the vehicles because it's been now the vehicle life is actually now almost nine and a half years, it typically works at about eight odd years, that also means a fleet is getting renewed at an aggressive pace. So combination of these would also mean that CV is probably going to see a significant growth going forward. What has caused the problem in CVs in the near past has been the runaway inflation, particularly on steel prices and precious metals, and that we are expecting to cool off, which should give stability in pricing going forward. And that will also help people to take decisions. And the key metric to look for in CVs is what are the viability of the fleet operator or the transporter. And with freight rates increasing to the extent that it has, as GDP is picking up, they are able to make ends meet even though there is a rise in interest rates or the rise in fuel costs or the rise in the vehicle cost that is there. So if the big one that's likely to stabilize is going to be the rise in vehicle cost as steel prices come off, and therefore we are able to see collections also starting to improve. And therefore this cycle is now starting to come to the right place. And therefore I do expect a significant improvement in CV demand as we go forward. But obviously, the situation again, there are a lot of moving parts here, so we need to be very cautious and not get carried away. I'm very comfortable with the gradual improvement in growth. It just gives everybody the right kind of growth that one would look for.

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