Tata Motors' Biggest Problem Is Not Chip Shortage: BQ Exclusive

“It (raw material cost) is becoming very, very painful,” PB Balaji, chief financial officer at Tata Motors Group, told BloombergQuint in an interview. “Prices right now are moving so fast that we are not able to process it,” he said.

According to Balaji, in the last one year vehicle cost across categories has gone up by 14% due to engine upgradation to meet lower emission standards (BS-VI). Another 6-7% rise in price is owing to higher steel costs.

So far, the company has hiked prices three times but is yet to recover the full increase in cost. “We have taken 6% price increase already. I think we are still losing at least 350-400 basis points of the margins because we are not able to pass-on hike in price of steel,” said Balaji. The automaker, according to him, is required to further hike prices by 5% to make up for the increased steel price.

The company is uncertain if the fragile recovery in demand can bear the burden of higher fuel and auto costs. Already, the chip shortage has hurt production in India and for the Jaguar Land Rover business. Balaji said in the July-September quarter, 50% of JLR volumes, that’s about 65,000 units, would be lost to the chip shortage. In India production will be lower by 3,000-6,000 units compared with the average quarterly production of 45,000-50,000 units.

Somehow the company has stocked dealers to meet demand in the festival season that starts soon.

“Specific inventories [supply chain] in specific areas have been jacked up so that we have the right things with us and we are picking up whatever orders we are given,” Balaji said. “It is a meticulous planning process between us, tier 1 [suppliers] and the semiconductor industry.”

Tata Motors, he said, was even buying such inventories during the lockdown imposed to curb the second Covid-19 wave. That, according to Balaji, is giving respite to the automaker now.

Balaji is hopeful of a strong recovery in the second half of the fiscal and may push further product price hikes till then. “At this point I’m starting to worry, and we need to be careful that we don’t overdo the pricing,” he said, adding that he hopes raw material prices stabilise soon.

Meanwhile, cost management is also in focus, especially to reduce steel content in cars.

“Various works are happening to take the steel out in its entirety and then of course product mix is a very important lever. Per vehicle I may not be able to make money, but if it’s a better mix of products I can make money out of that,” he said adding that automaker is working at every aspect to get operating leverage and find ways to make money.

Despite the headwinds, Tata Motors is on track to achieve a near-zero net debt target by fiscal 2023-24. It depends on free cash flow generation that will account for bulk of recovery, monetisation of non-core assets, and residual equity top-up.

Balaji said the company was looking at monetising some or all of its shareholding in Tata Technologies Ltd., Tata Hitachi Construction Machinery Co., and Tata Finance Ltd. It also intends to turn to financial investors to fund its electric vehicle portfolio.

Tata Motors is currently in the process of demerging the passenger vehicle business into a wholly owned subsidiary. The domestic EV business will be housed under that subsidiary.

Other highlights:

• Continue to have conversation with partners for the passenger vehicles business.

• EVs to account for 25% of the volumes by 2025.

• Current EV order book: 4-5 months.

• JLR and Tata Motors to be the key customers for Tata Chemicals Ltd. for cell supply.

• To set up 15,000 charging networks in the next three-four years.