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

Collect in February we had the JLR investor day where we had specifically spent good two hours explaining on the reimagine strategy of JLR. In that, what we called out is a few things. One, we said JLR's basic DNA will be Modern Luxury by Design. Number one, as part of that, we said Jaguar will become fully electric as a vehicle from 2025 onwards, premium luxury BEV electric vehicle, and Land Rover will have six BEV vehicles coming in from 2025, and by 2030 we'll have every one of our vehicles will have a BEV option, and by 2036 we'll become 100% zero tailpipe emissions free. Those are very big decisions communicated, and decisions also which are getting implemented as we speak. Due to that particular set of decisions that we have taken, we said we will also have those investments that we don't intend to pursue going forward; we'll be forced to write them down, and we'll also restructure our employee base, we'll restructure our vendor commitments that we made; we have to now write them off. So we called out in February last year that we'll have a one and a half billion, that's roughly about 15,000 crores kind of a hit that we will have in our P&L. It's a one-off hit. Of that, close to 9,000 crores will be 950 million pounds will be non-cash, and the rest will be cash payout that will happen in FY22. This is what we called out in February, and that's what you're seeing as numbers. There's no change in those numbers from thereafter. That's the debit side of the equation.

The credit side of the equation is probably where the surprise is, because passenger vehicle business, if you recollect last year same time, we had taken an impairment of the business close to about 1,400-500 crores, 1,500 crores. We take an impairment, and we also had a bought contract provision which we took because our volumes are much low and COVID was there in front of us, and therefore we had to — accounting will force you to take that call. Yeah, now with the performance of the PV business that has come through very, very strongly and continuing to do well both on an absolute basis as well as on a relative basis, the underlying performance is lifting multifold, and therefore we now are reversing that provision and actually releasing the impairment provision that we have taken, which is 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, and the other one is a confirmation of the fact that the PV business is firing all cylinders. So both these are actually pieces of good news that the market should be understanding it as. But yes, some people have understood, most people have understood it, a few people haven't understood it as yet.

Let me take India for instance. Yeah, that may be where the numbers are close by. We'll also understand it better. In India, take Tata Motors portfolio. In 2019, 2020, 2021, three years which I take, we were 2% of our business was EV in 2019. Today it is 2% of my business is EV. This is an exponential disruption. So 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 be taken completely by surprise, the speed of the force there. So what to watch out for is the penetration rates, how fast it is moving. And if I see that sequence, 212, that is an extremely fast adoption that is now happening from underneath, and we won't realize it till it comes and hits us. And 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. So therefore this can be a very large disruption coming at us, and 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. And 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. So the clientele that is coming in is different, the demand for the vehicle is strong, and the performance of the vehicle is excellent. And therefore I'm seeing this as India will leapfrog this disruption. It won't go through the PV route; it won't go because the cost of two powertrains is more than the cost of one powertrain. It's as simple mathematics in that one. And therefore we do see this as a significant intervention that we will make as Tata Motors.

See, I think what's happening globally, which is great news and also gives us a lot of comfort even for India for that matter, as vaccination started maximizing and you start vaccinating significant chunks of your population, economic growth is back and back with a bang. And today China is firing all cylinders for us, the 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, hope remains that way, that there is not a demand issue in JLR today. The challenge for all OEMs is more supply. And therefore what we are seeing is a complete clear-out of inventory, be it at retail level, be it at wholesale level, be it at supply floats. We are doing everything possible to maximize the available level of semiconductors out there. So 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, and therefore 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 there onwards.

Q1, we all, all of 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 the adverse impact we called it out. But thereafter we do expect things to start normalizing and improve from there onwards. Obviously, the thing to notice is that automobile demand for semiconductors is a drop in the ocean of semiconductors. So a little bit of allocations, if it starts switching away into or switching towards automotive, suddenly there's no problem. So it's a small number. That's the reason we don't want to create sensational news giving impact on production, etc., because we will want to fight till the last day and see how much ever we can eke it out, and then we will deliver against it.

See, today we see steel, aluminium, precious metals, all of them inflating and significantly inflating. And therefore this is something which has been a challenge. Last quarter we started seeing the impact of that even in my P&L, you would have seen it. And we do expect this situation to continue in the first half of this year. Obviously India has also got another reverse impact of the lockdowns, and therefore today I think it's a choice between demand versus inflation; how do you play that stuff there? So currently contracts are not being negotiated as we speak; everybody is just frozen right now at this point in time. But second half, will things start quietening down? That's our hope. As such, at least what we speak to the various people, we do understand that things have run away a bit too much, and therefore 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. I think we will take judicious price increases, which we have already done. We are trying our level best to protect the end customer, so that whoever has ordered the cars, we are not impacting them with the price increase till May 7th; whatever was a May 7th booking, you will not get impacted. May 8 onwards, yes, the new price will come into effect. At the same time, huge focus on cost reduction, huge focus on which we have done a very good job over the last three to 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, because I think there's no point looking at the near term alone and start looking despondent about it. But if you look at what happened in the last year, when the lockdowns lift, it's a humongous recovery that comes through thereafter. And 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, where their urge to break free all that comes through there.

And for commercial vehicles, I think we have seen a pretty horrendous period over the last two years in terms of demand. Last year's demand, FY21, is actually lower than what it was in FY10. So we are now 10 years back in terms of volumes. And you know it 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 therefore neither do I accept the fact that this demand is indeed that. And 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 vehicle is not good enough, because we have taken almost 15-20%, 10-15% price increases because of BS6. So the revenue is actually starting to now lift much higher; last quarter, for instance, the revenue is higher than what it was in FY19. And then the mix, which has always been against M&HCV for the last three years, that needs to come back as well. I think there's a lot of things going for commercial vehicles subsequently, but we just have to see through the immediate pain. So that's the reason when we are looking at our strategy, this year is very different from last year. Last year was a business continuity plan because we didn't know what's going to happen; do we need to? So the focus was survive, revive, and grow; that's how we looked at last year. This year is saying no, it's none of these three; it's actually being agile because interview.