Management Discussion and Analysis



The Indian economy in Fiscal 2017, on a macro-economic level stayed fairly robust and stable. India was one of the faster growing large economies in the world, with a currency that performed better than most other emerging markets. There was a significant upturn in commodity prices after a year of deflation. Consumer spending remained subdued during the early part of the year impacted by two years of drought. This year was marked by the way for the long awaited and transformational Goods and Services Tax (GST).

Fiscal 2017 was an eventful year for automobile sector due to: i) Ban on diesel cars, ii) Demonetization, iii) Ban on sale and registration of BSIII vehicles. The demonetization affected the Indian economy, which resulted in decline in sale of passenger and commercial vehicles by 2.3% in December 2016. Further, ban on sale and registration of BSIII vehicles has resulted in higher discounts by the automobile companies at the end of Fiscal 2017 and inventories to be either converted into BSIV vehicles or scrapped, affecting the profits.

As per the advance estimates, in Fiscal 2017, India's GDP increased by 7.1%, as compared to an increase of 7.9% in Fiscal 2016 (based on second advanced estimate data from the Ministry of Statistics and Programme Implementation). Agriculture sector registered a 4.4% growth in Fiscal 2017 as compared to 0.8% in Fiscal 2016. According to the new base year (2011-12), the Index of Industrial Production (IIP) recorded 5.0% growth in Fiscal 2017, as compared to 3.4% in Fiscal 2016. Significant factors influencing IIP growth in Fiscal 2017 included a 4.9% increase in the manufacturing sector, compared to 3.0% in Fiscal 2016, which was due to a better performance of sectors like motor vehicles, other transport equipment and pharmaceuticals. The IIP of the mining & quarrying sector increased by 5.3%, compared to 4.3% in Fiscal 2016, and electricity services recorded moderate increase of 5.8% in Fiscal 2017, as compared to 5.7% in Fiscal 2016. The consumer durables sector grew by 6.1% in Fiscal 2017, as compared to 4.3% in Fiscal 2016. (Source: Ministry of Statistics and Program Implementation).

However, real GDP growth was lower than Fiscal 2016. Nominal GDP growth recovered to respectable levels, reversing the sharp and worrisome dip that had occurred. The Consumer Price Index (CPI)-New Series inflation, displayed a downward trend since July 2016. The rising international oil prices resulted in reversal of WPI. Core inflation, however, was more stable. The current account deficit declined in the first half of Fiscal 2017. The trade deficit declined for majority of period. During the first half of the fiscal, there was a contraction in imports, which was far steeper than the fall in exports but during later half both exports and imports started a long-awaited recovery.


The below par performance of global economy was reflected in a continued slowdown in growth in most of the emerging and developing markets. Activity rebounded strongly in the United States in second half of 2016 after a weak first half. However, output remained below potential in a number of other advanced economies, notable in the euro area. The picture for emerging market and developing economies remained much more diverse. The growth rate in China was a bit stronger than expected, supported by continued policy stimulus. However, activity was weaker than expected in some Latin American countries such as Brazil. Activity in Russia was slightly better than expected, in part reflecting firmer oil prices.

During 2016, prices of base metals have also strengthened, with strong infrastructure and real estate investment in China as well as expectations of fiscal easing in the US. Oil prices increased later half of 2016, reflecting an agreement among major producers to trim supply.

The UK secured its seventh consecutive year of growth since the recession, and have been the fastest growing of the group of seven leading industrial economies in 2016. Sterling suffered two sharp devaluations this year — immediately after the EU referendum in June and in October as statements made at the Conservative party conference stoked fears of a "hard Brexit". The Eurozone had marginal GDP growth in 2016; however, rising inflation poses a risk on growth and may reduce consumer spending. France and Spain had better prospects with GDP growing at decent rates, while Germany and Italy showed no change with GDP growth rates same as last year.

The GDP for China showed a steady performance. The real estate sector has seen an increased investment by government. The Consumer Price Index increased in 2016. Russia's GDP grew as it continues to recover form crisis brought by low oil prices and western sanctions that closed access to international market. Its inflation is on track to reach projected target of CBR (Central Bank of Russia).

Japan's economic growth is on back of weaker Yen and government steps to stimulate sluggish completion, the GDP grew in 2016 and unemployment rate declined. South Africa had GDP increase, mainly due to marginally higher global growth, Stabilized commodity prize, Business and Consumer confidence and Improved Labor Relations.

Risk Factors

Risks associated with the Company's Business and the Automotive Industry.

Deterioration in global economic conditions could have a material adverse impact on the Company's sales and results of operations.

The Indian automotive industry could be affected materially by the general economic conditions in India and around the world. The automotive industry, in general, is cyclical, and economic slowdowns in the recent past have affected the manufacturing sector in India, including the automotive and related industries. A continuation of negative economic trends or further deterioration in key economic metrics, such as the growth rate, interest rates and inflation, as well as reduced availability of financing for vehicles at competitive rates, environment policies, tax policies, increase in freight rates and fuel prices could materially and adversely affect the Company's automotive sales in India and results of operations.

In addition, investors' reactions to economic developments or a loss of investor confidence in the financial systems of other countries may cause volatility in Indian financial markets and indirectly, in the Indian economy in general. Any worldwide financial instability, including withdrawal from trade pacts by countries in which the Company operates, could also have a negative impact on the Indian economy, including the movement of exchange rates and interest rates in India. In the event global economic recovery is slower than expected, or if there is any significant financial disruption, this could have a material adverse effect on the Company's cost of funding, portfolio of financing loans, business, prospects, results of operations, financial condition and the trading price of the Company's Shares and ADSs.

The Company's Jaguar Land Rover business has significant operations in the United Kingdom, North America, continental Europe and China as well as sales operations in other overseas markets across the globe. The automotive market in China experienced strong growth in Fiscal 2017, with positive growth also in Europe, the UK and the US. Conditions remained challenging in emerging markets such as Brazil, Russia and South Africa where automotive sales deteriorated during Fiscal 2017. Jaguar Land Rovers' growth plans may not quite materialize as expected which could have a significant adverse impact on company's financial performance. If automotive demand softens because of lower or negative economic growth in key markets (notably China) or due to other factors, Jaguar Land Rover's operations and financial condition could be materially and adversely affected as a result.

The Brexit vote, the June 8, 2017 U.K.-election results and the ongoing negotiations between the United Kingdom and the European Union to finalize terms of the United Kingdom's exit from the European Union has created significant uncertainty with respect to the United Kingdom's future relationship with the European Union, the economic and political future of the United Kingdom and the legal structure applicable to companies doing business in the United Kingdom. This uncertainty, along with any real or perceived impact of Brexit, could have a material adverse effect on the Company's Jaguar Land Rover business, results of operations and financial condition. Deterioration in key economic factors, such as GDP growth rates, interest rates and inflation, as well as the reduced availability of financing for vehicles at competitive rates in countries where Jaguar Land Rover has sales operations may result in a decrease in demand for automobiles. A decrease in demand would, in turn, cause automobile prices and manufacturing capacity utilization rates to fall. Such circumstances have in the past materially affected, and could in the future, materially affect, the Company's business, results of operations and financial condition.

Intensifying competition could materially and adversely affect the Company's sales, financial conditions and results of operations.

The global automotive industry is highly competitive and competition is likely to further intensify in light of continuing globalization and consolidation. Competition is especially likely to increase in the premium automotive categories as each market participant intensifies its efforts to retain its position in established markets while also expanding in emerging markets, such as China, India, Russia, Brazil and parts of Asia. Factors affecting competition include product quality and features, innovation and the development time for introduction of new products, cost control, pricing, reliability, safety, fuel economy, environmental impact and perception thereof, customer service and financing terms. In light of the impending Brexit, some of the Company's EU-based competitors may gain a competitive advantage that would enable them to benefit from their access to the European Union single market post-Brexit. There can be no assurance that the Company will be able to compete successfully in the global automotive industry in the future.

The Company also faces strong competition in the Indian market from domestic, as well as foreign automobile manufacturers. Improving infrastructure and growth prospects, compared to those of other mature markets, has attracted a number of international companies to India either through joint arrangements with local partners or through independently owned operations in India. International competitors bring with them decades of international experience, global scale, advanced technology and significant financial resources. Consequently, domestic competition is likely to further intensify in the future. There can be no assurance that the Company will be able to implement the Company's future strategies in a way that will mitigate the effects of increased competition on the Indian automotive industry.

Designing, manufacturing and selling vehicles is capital intensive and requires substantial investments in manufacturing, machinery, research and development, product design, engineering, technology and marketing in order to meet both consumer preferences and regulatory requirements. If competitors consolidate or enter into other strategic agreements such as alliances, they may be able to take better advantage of economies of scale. The Company believes that competitors may be able to benefit from the cost savings offered by consolidation or alliances, which could adversely affect the Company's competitiveness with respect to those competitors. Competitors could use consolidation or alliances as a means of enhancing their competitiveness (including through the acquisition of technology), which could also materially adversely affect Company's business. Further the Company's growth strategy relies on the expansion of the Company's operations in less mature markets abroad, where the Company may face significant competition and higher than expected costs to enter and establish themselves.

If the Company is unable to effectively implement or manage the Company's strategy, it's operating results and financial condition could be materially and adversely affected.

As part of its strategy, the Company may open new manufacturing, research or engineering facilities, expand existing facilities, add additional product lines or expand its businesses into new geographical markets. There is a range of risks inherent in such a strategy that could adversely affect its ability to achieve these objectives, including, but not limited to, the potential disruption of the Company's business; the uncertainty that new product lines will generate anticipated sales; the uncertainty that a new business will achieve anticipated operating results; the diversion of resources and management's time; the cost reduction efforts, which may not be successful; the difficulty of managing the operations of a larger Company; and the difficulty of competing for growth opportunities with companies having greater financial resources than the Company has.

More specifically, the international businesses of the Company face a range of risks and challenges, including, but not limited to, the following: language barriers, cultural differences, difficulties in staffing and managing overseas operations, inherent difficulties and delays in contract enforcement and the collection of receivables under the legal systems of foreign countries, the risk of non-tariff barriers, regulatory and legal requirements affecting the Company's ability to enter new markets through joint ventures with local entities, difficulties in obtaining regulatory approvals, environmental permits and other similar types of governmental consents, difficulties in negotiating effective contracts, obtaining the necessary facility sites or marketing outlets or securing essential local financing, liquidity, trade financing or cash management facilities, export and import restrictions, multiple tax regimes (including regulations relating to transfer pricing and withholding and other taxes on remittances and other payments from subsidiaries), foreign investment restrictions, foreign exchange controls and restrictions on repatriation of funds, other restrictions on foreign trade or investment sanctions, and the burdens of complying with a wide variety of foreign laws and regulations. Furthermore, as part of global activities, the Company may engage with third-party dealers and distributors, which the Company do not control but which, nevertheless, take actions that could have a material adverse impact on the Company's reputation and business; the Company cannot assure you that it will not be held responsible for any activities undertaken by such dealers and distributors. If the Company is unable to manage risks related to its expansion and growth in other parts of the world and therefore fail to establish a strong presence in those higher growth markets, its business, results of operations and financial condition could be adversely affected or its investments could be lost.

Furthermore, the Company is subject to risks associated with growing its business through mergers and acquisitions. The Company believes that its acquisitions provide it opportunities to grow significantly in the global automobile markets by offering premium brands and products. The Company's acquisitions have provided it with access to technology and additional capabilities while also offering potential synergies. However, the scale, scope and nature of the integration required in connection with its acquisitions present significant challenges, and the Company may be unable to integrate the relevant subsidiaries, divisions and facilities effectively within its expected schedule. An acquisition may not meet its expectations and the realization of the anticipated benefits may be blocked, delayed or reduced as a result of numerous factors, some of which are outside the Company's control.

For example, the Company acquired the Jaguar Land Rover business from Ford in June 2008, and since then Jaguar Land Rover has become a significant part of its business, accounting for approximately 79% of its total revenues in Fiscal 2017. As a result of the acquisition, the Company is responsible for, among other things, the obligations and liabilities associated with the legacy business of Jaguar Land Rover. There can be no assurances that any legacy issues at Jaguar Land Rover or any other acquisition the Company has undertaken in the past or will undertake in the future would not have a material adverse effect on its business, financial condition and results of operations, as well as its reputation and prospects.

The Company will continue to evaluate growth opportunities through suitable mergers and acquisitions in the future. Growth through mergers and acquisitions involves business risks, including unforeseen contingent risks or latent business liabilities that may only become apparent after the merger or acquisition is completed. The key success factors are seamless integration, effective management of the merged and/or acquired entity, retention of key personnel, cash flow generation from synergies in engineering and sourcing, joint sales and marketing efforts, and management of a larger business. If any of these factors fails to materialize or if the Company is unable to manage any of the associated risks successfully, the business, financial condition and results of operations could be materially and adversely affected.