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, that's roughly about 26,000 crores in the case of JLR. And as we had indicated, this will be fundamentally around products, technologies, a bit of capacity enhancement as well. And the whole idea is to ensure that we make this business future ready because we are in the midst of a transformation from an IC engine automobile industry to moving towards the Net Zero commitments of the various OEMs. So 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 as well. So that's where the money is going.

Yeah, great question. So if you look at JLR, let's take it piece by piece. If you look at JLR, the 2.6 billion pounds that they are looking at is broadly in line with the guidance of 2 and a half billion that we've been indicating. Therefore, they will get to a net debt zero fundamentally out of their internal approvals, and therefore this 2.6 billion — we will be generating free cash flows in excess of a billion after spending this 2.6 billion of capex. That's number one. When it comes to Tata Motors, I think as far as the commercial vehicle business is concerned, it will be cash accretive, and on the passenger vehicle business as well, we now become cash neutral, and these spends that 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 we are on the journey towards net debt free continues, and these capex are well funded within that particular journey.

See, yes, 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, and because of our inability to service the demand that is there in the market both in JLR and in Tata Motors as well, therefore that results in loss of contribution profits and loss of operating leverage. So the semiconductor cost 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 rather than forego revenues at this point in time. But we believe this should normalize once 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 on this. So let's break it up into individual trunks. As far as China COVID lockdowns are concerned, they have impacted the April numbers for all OEMs. The GDP numbers that came out yesterday, a decline of almost 11% plus, is also giving you an indication of how severe the situation is. But what we hear from China is that starting this Sunday, that is 22nd of May onwards, there is a gradual relaxation plan where the more intense lockdowns will be restricted and the rest of the areas where the case counts have gone down are opening up, and productions will also begin. So that's good news. Let's wait and see how far it plays out. And starting June, they are looking for even more significant relaxations. So let's just wait for how that plays out. That has obviously caused supply chain disruptions everywhere, particularly domestically in China and also the exports that happen out of China. And you've all seen the news items: ports being locked out, factories not able to open. That apart, the second big intervention is the Russia conflict in Ukraine where directly the supply chain has not been impacted to such an extent. We have two vendors over there and that is all being rerouted, so so far that is not a big issue there. However, the resultant inflation that you see in crude, commodities, food, all of which will — and then the central banks responding with interest rate hikes — will definitely have a dampener on demand going forward. But we must note that from an overall industry perspective, but from a JLR and Tata Motors perspective, domestically in India in Tata Motors so far we have not seen this hitting demand right away. But it is fair to say that we have to watch this very closely, and maybe the next 3 to 6 months will tell us how this is being played out. But we shouldn't forget that anything done to manage inflation expectations and controlling it is good for everybody in the long run. And therefore, what we are now starting to see is a risk of inflationary expectations. Of course, inflation is high, but the bigger worry is inflationary expectations becoming high — that becomes a slippery slope, which is what the central banks are now currently trying to contain. And if that then gets contained with all the interventions that are happening, that's good for us in the long run. So currently we do not see a challenge with respect to demand, but be it commodities, crude, and hence resultant fuel price increases, all of it is something that we need to keep a close watch on, not impacting the premium segment as yet as well as demand in India. But we have to keep a close watch on it.

See, currently if you look at our margins waterfall that we have shared, we are about 200 bps of unrecovered margin because of the commodity increase that is there. If you recollect, this used to be almost 540 bps earlier, so there is something that has improved in terms of margins that we are recovering. Having said that, our current base read is that commodities will remain stable, albeit at elevated levels. So it's likely to be a bit sticky, this inflation. But even if it stabilizes at this level, we should be able to work our way back in terms of margins. However, we have taken a price hike in April as well. However, if we do see commodities continuing to rise, then we will have no choice but to take up further prices because we will need to protect our margins. In the case of electric batteries, that's another one where I think lithium prices have really run up as the 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, you need to see the running cost as much as the put-down price for the vehicle. There we believe there is a very, very attractive equation in terms of running cost of an electric vehicle vis-à-vis a diesel or a petrol, and therefore we don't see a concern on that one.