Ladies and gentlemen, good day. Welcome to the call on Tata Motors Q2 earnings conference call. As a reminder, all participant lines will be in the listen-only mode. During the course of presentation, if any participants intend to ask questions, they can use the chat box option appearing at the bottom of the screen to submit their questions to the speakers. All the questions will be taken up at the end of the session. Please note that this conference is being recorded. I now hand the conference over to Mr. Prakash Pandey. Thank you. Over to you, sir.
Thank you, Pallavi. Good evening, everyone. On behalf of Tata Motors, I welcome you to the earnings call for our Q2 FY 2021 results conference call. We have with us Mr. Guenter Butschek , MD and CEO, Tata Motors. Mr. Thierry Bolloré, CEO, Jaguar Land Rover. Mr. PB Balaji, Group CFO, Tata Motors. Mr. Adrian Mardell, CFO, Jaguar Land Rover. Mr. Girish Wagh , President, Commercial Vehicle Business, Tata Motors. Mr. Shailesh Chandra, President, Electric Mobility and Electrification Business, Tata Motors. All my other colleagues from the investment team. Like always, we will start with the business with a quick overview of Tata Motors' business performance and navigation. Over to you, Balaji.
Thanks, Prakash. Firstly, welcome all of you. Apologies for the slightly delayed start. We were just getting a few technical issues sorted out. I am sure now you are able to hear us loud and clear. This is a standard safe harbor statement. You have seen that. The only attention I will draw into is a few changes that we have done in the definitions around EBITDA and free cash flows. These are basically to ensure consistency of reporting, as well as ensuring alignment with other OEMs who are out there. The big one would be on the free cash flow definition, where, both on consolidated and on Tata Motors domestic, free cash flows will be net of interest, which is something which JLR was always there, and we are now ensuring consistency of this definition right across. The comparatives are available on the data bank.
I'm happy to clarify offline any further clarifications you may need on this particular front. Go to the next slide, Prakash. Again, an intense period of product launches during this quarter as well. You have seen all of them. The key call-out I would make in Tata Motors has been on the CV side, a pretty intensive period, with the Signa 55 launched as well as the Signa 4825.TK. For us in Passenger Vehicles, the results, of course, on the numbers you've already seen, but the milestone of the 300,000th Tata Tiago and the 1,000th Tata Nexon EV is something to celebrate about. In JLR, the Land Rover Defender 90 is now available for sale. The Jaguar F-PACE 21 model year launched. So far this year, five PHEVs and five MHEVs have also been added to our portfolio, furthering our electrification drive. Go to the next slide.
Growth-wise, despite challenging periods that we have seen, I think there's been a significant improvement in sequential performance. Even on a year-on-year basis, particularly the decline in revenues of 18% notwithstanding, PBT has been managed at reasonable levels. EBITDA decline has been reduced to just 160 basis points, EBIT breakeven having achieved in this period. In line with our deleveraging commitment that we put out there, free cash flows automotive has been INR 6,700 crore positive. In a highly trying period, I think, happy with the set of numbers that we have put through. Go to the next slide. If you were to peel this performance into what actually drove it, bulk of it coming from a drop in volume, the next, which is compensated with the rest of the factors.
Overall, on the profitability, the big one that came down was JLR, coming fundamentally on a year-on-year basis, fundamentally because of the volumes that you saw earlier that came down. TML, of course, improved it, and overall net automotive debt has now started its downward journey as it's supposed to go to. We have reduced it about INR 6,000 odd crores this quarter. Next slide. Debt profile is strong. Overall liquidity has remained strong with maturities well spread out. On a memo basis in JLR, we had an additional GBP 700 million issuance that happened in the month of October, which further added to the liquidity. Overall, the liquidity profile has been quite strong. Forward.
Let me now hand this over to Adrian, who will talk about JLR, and I will then invite Thierry to talk about how he sees the business having been 60 days on the job. Over to you, Adrian.
Right. Thank you, Balaji, and good evening, everybody. On this slide, if you remember when we talked in July, there were a few things we were signaling for this quarter. I'm really pleased most of those things have happened. In fact, some of them have happened more aggressively than we were signaling. You see here, retail sales were higher than quarter one, significantly higher than Q1, although not as strong as last year, as we said last time. Revenues similar to that. Revenues actually are down 28.5% year-over-year, but significantly stronger than the previous quarter. We were profitable in the quarter. That is something we were not signaling in July, we'll take you through the reasons for that.
EBITDA back into double-digit percentages, which of course is pleasing, and also a very strong free cash flow, which we actually were signaling two months ago. Next slide, please. These are the headlines within the quarter. Significant improvement Q-over-Q. However, year-over-year down 28.5% on revenue. China and U.K. are the two regions that have actually returned to pre-COVID levels quickest, and our retailer inventories are down to ideal levels. I'll take you through that in a moment. That was another thing we signaled as an intent in July. Five PHEVs and five MHEVs already added to our product portfolio in FY 2021, with more to come, and I'll take you through those in a few moments. We were profitable, as I said, GBP 65 million in the quarter. Some of that was exchanged, so the EBIT was 0.3%.
Charge did its thing again, GBP 300 million cost reductions year-over-year, and also GBP 300 million investment. Again, we continued with CJLR, which was again for the second quarter running at the break-even levels. That consistent improvement year-over-year continues in our joint venture in China. The GBP 463 million positive cash. As I mentioned, I'll take you through the details of that in a moment. Next slide, please. Thank you. I mentioned a minute ago, U.K. and China have returned to pre-COVID norms the quickest. Very close to last year's Q2 levels. U.S. down about 15%, although there were supply shortages to the U.S. in September. We're obviously looking carefully at the Q3 results, which we expect to be stronger in North America. The two regions we haven't yet returned to previous levels are Europe and overseas.
Although 21 model year PHEV offerings are very important to Europe, we're expecting better things in Q3, stroke second half. The Defenders are now being added to the overseas lineup. Again, we will expect better sales in the second half of the year in overseas regions. You see there, we're already returning to pre-levels. Next slide, please, if you would. Thank you. Just on this one by nameplate, again, Range Rover and Jaguar F-PACE showing the pattern, significant over Q1, but short of last time. They're the two callouts on this page. You can see the Defender 90, top right, bigger in quarter two than any other quarter. We expect that profile, of course, to continue in the second half of the year. We will add the Defender 90 right at the back end of this calendar year into quarter four.
Those sales will continue to increase in half two. Very confident on the Defender product. You see the powertrain mix there. We're adding those MHEVs, appealing well to customers. Proportionately, a large take-up of our ICE engines are now MHEV offerings, we'll get into some more details of that later in the presentation. Next slide, please. We called out dealer inventory in quarter one because, as the dealers closed in March, those inventory levels increased. We were specific with our intent to bring that back into control in quarter two. We said at the time, we had 90 days worth of inventory, sub 55 days is the place we wanted to be. Really pleased we're at 54 days at the end of September. Again, we're getting in the habit of doing what we say, which is really good.
At the absolute levels, top line is the dealer inventory, 60,000 units. The bottom line is inventory on the way to dealers, 33,700 units, which grew a little in quarter two only. Next slide, please. Where were we in the quarter on profitability versus last year? Balaji mentioned it was down year-over-year. These are the reasons why. Dramatic reduction in volumes. As you saw earlier, almost GBP 500 million, although our JV position has improved substantially also. The big news here actually is the improvement in the marketplace. A rapid improvement, particularly in quarter two, particularly in markets like North America. Our headline VME was down to sub 4%. It's important to note that the underlying was mid 6%, so a little better than we'd achieved in previous quarters.
The release here of U.S. residual value reserves, which we put in place as we saw the market deteriorating rapidly in March, April, and May. Most of those reserves have now actually been released, which is a great sign of the secondhand marketplace and the health of the market, of course. Warranty, we did have a campaign this quarter on the Jaguar I-PACE, and also in this time last year, there was a reversal of a spend on a PHEV campaign in China, which makes up the warranty. We are actually working with the suppliers. The supply network are trying to get themselves back into 100% operating effectiveness, and that is delaying our ability to take costs down in the first half of the year. That will improve in the second half of the year. Also, Charge has done its stuff on cost control and structural cost reductions.
Significant improvements again this quarter, obviously measured over year-over-year. The reason why we were profitable there, our currency exchanges, the sterling appreciated in the quarter, finishing just short of 130, and that gave a revaluation of the balance sheet, which of course we weren't aware of at the point we communicated in July. Next slide, please. Okay, very pleased with this slide. We did say we would be significantly cash positive. We did say overwhelmingly that was working capital, which it was. If you go into that middle section, we were underlying cash negative of about GBP 65 million. On 73,500 deliveries to the marketplace, that is a strong underlying performance. That's annualized deliveries sub 300,000 units. Again, mostly because of the health of the sale has been strong, which we're not pushing volume, don't forget.
We're pushing health of sale, quality of sale, value from sale, but also our structural cost reductions. I remind you, two years ago, our breakeven position was 575,000 units. This is signaling our breakeven position is a shade over 400,000 units. Dramatic improvements on the downside risk assessments that you can make on this entity. Next slide, please. Investment GBP 531 million. Again, I did say in July investment will be close to quarter one levels. It was a shade lower. You see where those investments were. We have brought more of our engineers back to work at the back end of this quarter. I do expect investment levels actually to increase in the second half of the year modestly. However, our full year guidance still stays at up to GBP 2.5 billion.
I think with GBP 1.1 billion spent in the first half of the year, you'll see that we're actually in control of our investment spends. Next slide, please. Okay, shifting gears a little bit to environmental update. None of this will surprise you. I think the only surprise here is the speed that these things are coming at us, and potentially they will come at us together now. COVID, of course, in the winter period could get worse, may actually again mean some instability in people's lives and for us in production. Brexit, of course, the completion of the process on the 1st of January. There may be some friction at the border over that period of time. We'll get into that later. We'll know next week who's won the U.S. presidency. That one will come at us very quickly.
You would expect the disruption we've seen in the marketplace off the back of all of these things. Markets are moving quickly based off single information sets at the moment, and that's just the environment we will continue to operate within. I'll touch on emissions on later slides. Next slide, please. We use external intelligence and information, particularly on volume from IHS. You can see their mainstream case is actually a modest improvement over time in the marketplaces. Obviously, it wouldn't index in overwhelmingly any of the events I've just mentioned. Standing down those binary impacts, we do expect a modest growth in our sectors across all of our regions going forward over the next 12 months. IHS tells us we should. Next slide, please. Defender, the marvelous Defender.
We did say vehicle deliveries from the factory will increase and sales will increase also. September does have our second largest month in the U.K. in there. The retail level of 3,000- 4,500 units in September was a bit higher in the U.K. Although now deliveries are actually coming at us more consistently. With the Defender 90 being added, I do expect sales of 4,000- 5,000 units per month going forward. Wholesale deliveries to the market were increased as we start to fill and get our vehicles to the point of customer. The actual order bank still remains very strong. We're still at the position of sales being sold out for the rest of this year. Order banks not reducing. They're actually increasing, including the additive of the Defender 90, which goes on sale at the end of this year. Next slide, please.
We are overwhelmed and pleased with Defender performance. Next slide. Great adds to our lineup with new PHEVs. These actually are off our D7a architectures. This one is the Jaguar F-PACE and the Range Rover Velar. Big interior upgrades also. We think these vehicles will be very appealing, particularly in our U.K. and European regions. We are expecting these to underpin sales growth in the second half of the year. Also compliance. The emissions compliance also will be enhanced off the back of it as well. Next slide, please. Where are we overall on our lineup from a PHEV and an MHEV perspective? Each time we talk to you about this, more of the covers come off. There's only one cover on one vehicle left from the PHEVs. We will announce tomorrow. We actually are adding the PHEV to the Jaguar E-PACE as well.
That's the cover that will come off. Later in the year, we'll announce a second additive in the MHEV range. I'm sure as you go through all the vehicles, it's becoming more obvious which that one is, but I'm not in a position to actually say that second MHEV today. Most of our range now is in place, and our second half of the year, particularly quarter three, will be determined by the pace of bringing these vehicles to the marketplace, particularly the U.K. and the European region on time. To quality. We will not compromise quality for speed. We will get these vehicles right before we deliver them to the marketplace. Next slide, please. Okay. Where are we overall with our compliance targets by region? Lots of green on the page, so I won't focus on those.
I'm actually going to focus on U.K. and Europe for this calendar year as a part of a delivery of those PHEVs, particularly to the marketplace, which, as I mentioned in July, are and have been impacted by the COVID delays. They will actually be delivered to the marketplace later than we were originally anticipating, as a result of which we have added within our quarterly results, first of all, in our end of quarter four results last year, reserves for potential fines we will need to pay in U.K. and Europe. We built those reserves up to GBP 90 million. Now, we will be compliant in Q4, this Q4 calendar year, because of course, these are assessed on a calendar year, not a fiscal year basis. Obviously the compliance will be dependent on the number of registrations for the new PHEVs, but also the Jaguar I-PACEs.
For the moment, the reserve level is adequate, and we're hopeful in the balance of this quarter we're now in, those reserves will start to fall. We have a compliant lineup in calendar year 2021. These are calendar year dates, not fiscal year dates. It's just simply a case of quality delivery of those vehicles to customers' hands, which will progressively happen through this quarter. Next slide, please. Off the back of that, I wanted to remind you the journey we've been on. Our target was a 45% reduction from 2007 levels. We will be at that point when we get into next calendar year. We're progressing to that point quickly in this quarter. Overwhelmingly, we have a compliant fleet in our U.K. and European markets, post the introduction of these final PHEVs.
A great job by the team, 45% reduction in CO2 over that period of time. Next slide, please. We're getting to Brexit, I'm sure in Q&A. Just simply to say our base case is still that there will be a deal between the U.K. and the European Commission, i.e., we won't trigger a WTO tariffs. That still becomes our base case, and if that becomes true, then a deal is very similar to the Canadian position we expect. If there's no deal, we're expecting something like the arrangement Australia has with the European Union, and I'll get into the details of what that means again, as we talk about it most quarters within a Q&A, should anyone want to ask. Next slide, please. Charge has done what it does best. Tight controls over cost and expenditure.
It's done so well, people are starting to ask, are we under-investing? We don't believe so. We think we are appropriately investing. We will appropriately grow the speed of that investment as resources come to us over the balance of this year. This quarter, almost GBP 600 million additional savings. Don't forget, last quarter we did GBP 1.2 billion. In total, in the first half of the year, that's GBP 1.8 billion worth of variable profit cost, investment and inventory reductions we have made. All measured on a year-over-year basis, by the way. This isn't notional internal stuff against internal targets. This is measured versus what we did in the prior year. Looking forward, we confidently, again, would say that the GBP 2.5 billion target for this year is absolutely within reach. People like to ask where it's going to come from.
You've seen in the quarter two, it's about 50/50 investment in cost and profits, and that's broadly the splits we expect going forward also. We're mostly done on investment. We are at that GBP 3 billion level at the end of quarter two. Next slide, please. Just a quick summary overall. I don't think there's any new points here for anyone. The Investor Day, I draw your attention to for Jaguar Land Rover, we're looking at the Investor day on the 2nd of December, Wednesday the 2nd December, and we're really looking forward to it. To set that up, just a quick discussion, I'd like to ask Thierry to say a few words. Our new CEO, Thierry, if you wouldn't mind just saying a few words to the investors.
Sure. Thank you very much, Adrian. Hello everyone. My name is Thierry Bolloré. It's my pleasure to introduce myself to you as the new CEO of Jaguar Land Rover today. It goes without saying that these are unprecedented times with the health and economic impacts of COVID-19 compounding many other challenges presently facing the industry. There are rapid technological change and political and trade uncertainties such as Brexit, to name a few. Jaguar Land Rover is an iconic company with strong brands and talented employees to manage through these times. That Jaguar Land Rover generated a profit and positive cash flow this quarter is a testament to this. I'm confident the business will achieve a future of long-term sustainable profitability.
I know many of you would like to ask about what I think about the company or what changes I might like to make. I just joined the company in September, and I'm still in the process of reviewing the business with the management team. Before the end of the year, I expect to be able to say more to you then about my vision for the future of this iconic business. I look forward to speaking to you again then. Thank you very much.
Thank you. Thanks, Thierry. We lost you a little bit towards the end. Basically, his main point is, he would be very keen to engage with all of the investors on the Investor Day that is now scheduled for the 2nd of December. Look forward to seeing you there. That is his basic takeout. Okay. Moving on to Tata Motors.
Absolutely. Thank you.
Thanks, Thierry. Moving on to Tata Motors' domestic business, a strong sequential improvement in performance. Year-on-year growth of 3.4%, almost entirely led from the passenger vehicle piece. Revenue down 3% and PBT broadly in line with what was there last year. EBITDA, of course, what I really would love to call your attention to is the EBITDA improvement by 480 basis points, despite this holding the revenue line. This tells you the amount of work that's happening on the cost line and EBIT improving by about 300 basis points. Again, reassuringly, free cash flow after interest, after the new definition, still positive at INR 2,300 crore. Next slide, please. Performance highlights, if I had to summarize, quarter-on-quarter improvement is something which is definitely there. CV, gradual improvements in demand and with improving market share as the supply chain stabilizes. The call-out is demand still remains weak.
Obviously improving within the month of October compared to where it was earlier, but still a long way to go in terms of the heydays of CV. Passenger vehicles, of course, has been on absolute boil. Very strong sales momentum coming through with our new portfolio, with increasing market share. EBITDA was positive for Tata Motors despite this weak mix, which is really noteworthy given what is happening on the cost side. CV has improved sequentially, but the revenue call-out, so many of you were asking me earlier in terms of PV EBITDA breakeven. Glad to report it has been achieved. We have probably had our highest-ever EBITDA for quite a while, 1.6%. Strong free cash flow, of course, we have called out earlier. Next slide, please. This you have already seen, so I won't spend too much time on this. Nothing further other than what's on the slide.
Keep moving, please. Free cash flow, again, we have talked about, no further comments on that. You can definitely move into the commercial vehicle, please. Investment spending, you can skip this slide. Cash savings on this point, this slide, a minute here. We had called out an INR 6,000 crore cash savings, against that, we have delivered INR 2,475. As we look forward into the future, we are confident of delivering the INR 6,000 crores. I expect a bit of movement in the numbers between investment and working capital because we are seeing a very resurgent demand, particularly coming through in PV. We just need to ensure that the CapEx is managed prudently while catering to that resurgent demand. We will deliver the INR 6,000 crores that we are confident of. Move forward.
Of course, costs and profits are very strong, (INR 20 crores) delivered, which is reflecting in the EBITDA improvement as well. Keep going. On the commercial vehicle side, market share is at 36.7%. It is starting to improve month-on-month. Every month, we are seeing an improvement in market share, fundamentally coming out of supply chain issues as we stabilize post-COVID. M&HCV has continued to do well at 50% share. The call-out is on small commercial vehicles, where we need to improve our shares. The recent win that we've had of 6,400 vehicles for the Andhra Pradesh Civil Supplies is something which will help us there. More than that, you will see is a lot of work happening in the second half of the year as the supply chain stabilizes there.
The real call-out is CV passenger, which I'm sure Girish will talk later, where we don't see much happening in this particular segment because of issues like working from home as well as schools not being there and state transport undertakings not having the monies to buy. Move forward. On the financials, the overall, despite it being a very weak mix, because M&HCV within Commercial Vehicles has actually been declined even further. Despite that, we have improved our overall position in terms of revenues and retails. You'll find retails being higher than Sorry, wholesales being higher than retails as we build inventory post- BS6. Overall, EBITDA at 3.2% just reflects the situation on the mix line. Move forward. On the CV market update, I think, I'm sure Girish is going to talk about it in the Q&A, a quick run-up there.
Girish, would you want to take a minute on this?
Yes, Balaji, thanks.
You're probably unmuted there.
I think as Balaji put out rightly, we have seen a decline happening across the segments, which we see in Q2, the passenger segment has declined by 73%, M&HCV by 39%, ILCV by 30%, and SCV, 1%. I think the good thing in this is that these declines are far lower than the Q1 decline. Also, if you see within Q2, July, August, September, this decline has been reducing. If you take M&HCV for that matter, while for the quarter it is a 39% decline, for the month of September, it was a very low single-digit decline. I think gradually, the volumes are picking up in all the segments. SCV and pickup, in fact, was higher in September 2020 as compared to September 2019.
As a result of this, the small commercial vehicle and pickup salience has actually gone up by almost 20%, so it's now at 72% in this quarter. Some of the good things that we are seeing at micro level, e-way bills, petrol consumption, and GST collections are going up. Fleet utilization is gradually improving, and the sentiments that we track for customers in all the segments have also been going up. Essentially within that, they are quite optimistic about the future, although not so satisfied with the current status. Rural demand, as all of us know, is growing and is very strong. We also see good movement happening in mining as well as infrastructure projects, especially driven by highways. I think our BS6 range has been received really very well.
Across the range, we have seen fuel efficiency and TCO benefits, which is leading to a very good positive recall in the minds of the customers. Some of the challenges as we go ahead, I think commodity prices have started going up again. Not only the precious metals, but also flat steel, long steel, both have gone up from the month of October, so something challenging. I think on passenger, Balaji already spoke that generally, the demand for passenger is very low because of schools not working and a lot of employees working from home. Prakash, can we go to the next slide? Thank you. I think what is it that we've been doing? Again, same buckets that we spoke about in the last analyst call.
In terms of demand generation, I think as the COVID intensity is reducing, there's a lot of focus on ground activation, so a lot of back-to-back trials of the BS6 products to prove the superiority. We are pushing a lot of value-added services, whether it is Platinum AMC or it is uptime guarantee, turnaround time guarantee, extended warranty. I think a lot of these are being appreciated by the customers, especially in BS6 era. In financing, a lot of work is being done by closely coordinating with the financials across, and a lot of good schemes have been brought up, which ensure that the EMIs are equivalent to the BS4 era. In terms of demand fulfillment, a very clear focus we have on de-bottlenecking the supply chain, and we are working on ramping up the supplies.
I think month-over-month, there is a good improvement which is happening in the output. We are also driving a lot of flexibility in manufacturing. For example, in Q2, two of our plant locations had a high impact of COVID. I think we were in a position to then shift some of the production of some variants at that location to other locations, and therefore negate this impact. Similarly, we are also working with our vendors to see to it that the COVID impact is minimized. We are also having almost now daily sales and operation planning process to ensure that there is a good bridge between demand forecast and what we are able to supply. I think cost reduction, cash conservation, right on track, as Balaji mentioned. I don't want to spend more time, but all our cost reduction initiatives are on track.
In fact, now we are focusing on sustaining the gains in fixed expenses, although the scale of operation is increasing and coming back to pre-COVID levels. On CapEx, I think we continue with a choiceful deployment. Some of the areas due to increase in volumes, we are spending CapEx, but otherwise it's controlled in other areas. We are working with a very tight working capital cycle, which has led to good cash flows. Balaji, back to you.
Yeah, thank you. That gives you a sense of where commercial vehicles is. Moving on to passenger vehicles. Next move. Call out is the 7.9% market share after a long period of time. This is now starting to move, as we had said, watch this space. All the four main players that are out there, Tata Tiago, Tata Tigor, Tata Altroz, Tata Nexon, and of course, Tata Harrier, starting to now really do well. Shailesh, I'm sure, is going to talk about it in the Q&A as well. Between Tata Harrier and Tata Altroz, we are really seeing momentum pick up in this particular segment. These are very choice vehicles that we put out there in the ALFA and OMEGA architectures. Therefore, on an industry growth of -34%, happy to see a first half growth of +10%. This is quite noteworthy because this includes the lockdown period.
Despite lockdowns, complete shutdown for two and a half months, this business has delivered a 10% growth. Nexon EV is now almost 61% of industry volume. There's a very strong market share there. The clear focus on re-imagining PV is now starting to yield results, and it's also showing in the P&L. Move to the next slide, please. This was a wholesale of 107% growth, retail of 73%, and our absolute numbers almost there's nothing to talk home about. There's no inventory being built anywhere. We don't have inventory at this point in time. Revenue of INR 4,000 crores for this quarter is a high over many quarters that is out there. EBITDA at 1.6% is extremely reassuring that this business is back into what it was before. It is not a flash in the pan.
Overall, next target is now to get the EBITDA to break even and then the cash to break even, which is what we are on to. Move forward. Let me hand this over to Shailesh for understanding of what's happening and what's driving the step-up in performance. Shailesh, over to you.
Thank you, Balaji. Some of the key actions that we took to drive the kind of improvement in sales that we have seen in the last six months. First and foremost was the focus on retail and seamless demand supply synchronization. This was very essential to ensure fast cash operation for the dealers, especially in the COVID times. Otherwise, it would have been trouble, especially in the initial months. This is what led us to absolutely align the production to what was needed in the market. This ensured that we were able to therefore do double of what was the working capital capacity of the dealers. The second most important action that we took was to increase our share of voice. We realized while we were interviewing the customers in the lockdown period, April and May, that the awareness of our new Forever product was very low.
That's why we took a call that we'll go high on share of voice right from July itself. That has helped us to not only increase the awareness, but also consideration of all our cars. As Balaji mentioned, that it is not a story about one car or so, each and every car, five cars that we have in our portfolio, some of them who are not doing well also in the earlier years, all five are doing really well as far as their pull is concerned in the market. The third action that we took was a significant revamp of the dealer policies and incentive structure, which enabled a significant jump in the profitability. There were significant section of dealers who were not profitable.
I'm very happy to share that now majority of our dealers are profitable with the kind of growth we have seen and with the action on the dealer policy change that we have done, which meant enhancing the margins and also revamping the incentive structure, which was aligned to the growth that we wanted to drive, specifically in areas like some of the products which I said in the portfolio, which were not doing well. At the same time, specifically on the diesel portfolio also. This has really helped us drive traction and also as far as our booking generation is concerned. The fourth action was on the digital. As you know, in the times of pandemic, the customers were not ready to venture out of their houses and go to the showrooms.
Digital was the important source of inquiries. We took several actions, and especially the Click-to-Drive initiative where a customer could view the video brochures, could get an immersive experience. On the back of that, it really drove a lot of online bookings for us. Beyond that, we are also working on a very holistic initiative, which will drive a seamless digital experience for our customers in their entire journey. The last one is focused work to enhance rural penetration in key micro markets, which is 20 urban micro markets that we have identified. There are several set of initiatives that we have taken, which includes hyperlocal marketing, then focused marketing activities, network strengthening, et cetera, and also nuanced marketing for rural markets and the EMO expansion, what is emerging market outlet expansion.
These are the set of initiatives which we have taken in the last five, six months, which has led to this kind of performance for us. Back to you, Balaji.
Yep, thank you. Go to the next slide, please. Moving on to Tata Motors Finance, this is one area where we did express saying we would want to watch September, the critical month when the moratorium lifts. Here again, happy to see that things have actually been better than what we had anticipated. The business had a CV market share improving to 37%. We have consciously removed CV market share here because public sector banks are absolutely picking up humongous market shares on PV, and we will never be competitive there. CV market share is something we are choicefully deploying our monies in. With a PBT of a positive PBT despite significant overlays coming through and overall GNPA at 4.8%, below what it was last year despite moratorium, is something that is very reassuring. Therefore, this focus on cost-to-income ratio, focus on efficiency has really helped.
We are now at 44%, down from the highs of 70%s, then the 50%s, now at 49%, now below at 44%. Of course, liquidity has been extremely strong in this business. No concern on that front. Overall ROE at 6.1%, it will move to a double-digit ROE as we tighten this business in terms of its efficiencies and its disbursals. Move forward. Looking ahead, you've seen the slide. The key call-out I would have is second half is expected to be much better than first half as demand improves and our focus on cost and the cash continues to drive harder. Therefore, we are absolutely committed to de-leveraging this business over the next three years and become sustainably cash positive. The focus areas are there for all to see.
No new news there other than brilliant execution of our exciting portfolio and continuing to manage the cost tightly. Last slide. There will obviously be a more deeper dive on the business strategy post-COVID, both in TML and in JLR on the first and second of December. Look forward to seeing you there. With this, let me hand it back to you for any question and answer that you may have. Okay. I think we already started seeing questions coming through on the moderator view, it says media stream live. Anyway, this is the Chorus Call. First one is from Pramod Kumar, Goldman Sachs. Congrats on a great performance. What is driving the record ASP and gross margin? Are these sustainable at current levels? Number one.
Number two, can you please provide an update on Defender customer order book and explain the gap between wholesales and retails of 8,000 since launch. Three, what are you going to do to arrest market share decline across the CV segment, save medium and heavy commercial vehicles? Adrian, can you take item one and two, and Girish, I'll probably divert you to item three.
Okay, Balaji. Thank you for the questions. Margins, I think I'm on record saying, look, we're looking to grow the health of our margin rather than the quantity of sales. We've taken a number of actions, including making sure with the overstocking we had in the marketplace from April, May, and June, including making sure that we're only building cars that we needed to build. We brought our plants back up to speed based off a demand-led recovery, starting off with Nitra, which builds the Defender, of course, and the Discovery. At the same time, on the 18th of May, we brought back our Solihull plants, where the Range Rovers are built. The quickest region to come back has been China, and that's why the year-over-year performance in China actually in the quarter has been good.
I think you know we sell more of our SUV5 units in China, and therefore, the margins are healthier on those units from China. The regional profile of change and growth back has driven a strong margin performance for us in the quarter also. I refer back to some of the VME residual value reserve releases, GBP 64 million. Although we've had negative headwinds as well, which do offset those reserve releases, including booking an extra GBP 30 million just in case we don't get those PHEVs to the marketplace within our compliance cost reserves, and also a difficult performance on cost down for suppliers. Overwhelmingly, the underlying left there is health of sale, particularly because of the speed of return to sales from our China region.
Defenders, of course, Defender is an all-new vehicle, therefore, there is a lag between production, then into wholesales, then into retails. The order banks would tell us we do not yet have enough cars actually in the customer's hands or to the face of the customer. Therefore, I do expect as that gets built up, that our wholesales will be higher than our retails, because of course, the car has to go through our own hands into dealers, and then into customers' hands. That will continue a little bit into the second half of the year, but a lot of that is in place now on the Land Rover Defender 110. We will bring the Land Rover Defender 90 on stream later in the year, and you will see the same profile.
Production in the early days will outweigh wholesales, and they will be higher than retails because, of course, we have to get the vehicles down the line into customers' hands again. That will level out, I expect, in quarter four. The big message here is, there's more demand than supply at the minute, and those order banks will stay strong throughout the balance of this fiscal year, and there's good, healthy sales as well. The mix of sales that the customers are ordering are stronger than the mix profiles we anticipated when we estimated the initial six months' worth of sales. There's nothing extraordinary happening apart from attempting to get those vehicles into customers' hands as soon as we possibly can.
Thanks, Adrian. Girish, would you want to take the question on what are you going to do to arrest the market share declines across CV segments, save Medium and Heavy Commercial?
Yes. See this market share decline which has been there is essentially due to the supply side constraints. I think our pipelines, in terms of demand generations, have been quite good. If you see the month-over-month market shares, I think we have consistently grown, starting from mid-June onwards, as the availability of the vehicles have increased with debottlenecking of the supply chain. In fact, if you look at September alone market share, I think we are almost close to what we had in September 2019. We will continue on this journey. As we know, I think the market in H2, the total industry volume in H2 is going to be more than double of what it was in H1, and therefore, it is going to give us a very good opportunity to recover this as the supply side constraints are addressed.
I think some of the key factors that Balaji also mentioned, I think the key here is going to be actually the small commercial vehicle and pickup segment, where the salience has increased to 72%. Therefore, any loss in this actually gets aggravated at the overall business level. Here, not only is the pipeline in the retail market good, but also we recently backed this order from Andhra Pradesh. Supplies is around 6,400 vehicles. All this is part of our calculation, which will help us to get the market share back across all the segments, either in Q3 or towards beginning of Q4. Balaji?
Thanks, Girish. Thank you. Second question comes from Prateek Poddar, Nippon India Mutual Fund. First question addressed to Thierry. Is there a need really for the JLR nameplate and sharpen the brand positioning of Jaguar in your view? Would you look at pruning the product portfolio such that the models don't cannibalize each other? Let me respond to that. I think as Thierry has said that he's keen to speak to us on the 2nd of December. I would rather we wait for that conversation as he makes up his mind on this, would be my response to you, Prateek. Second question, Girish, is to you to say that can you talk about the outlook for M&HCV and how is the confidence among CV operators. Internally, Tata Motors has leading indicators of predicting M&HCV demand. What are they indicating?
Would you want to take that, Girish? Next question is, I'll pick it up after that.
Some of the lead indicators of M&HCV that we look at, first of all, of course, what is the kind of spend which is happening on mining and infrastructure, as also e-commerce, what is the kind of agri produce, what is the kind of output from steel and cement industry. I think these are some of the lead indicators that we are looking at, the good thing is most of these indicators seem to be doing well. Number one. Number two, I think, gradually over Q2, the utilization of the fleet and the freight rates are kind of firming up, which is also good. I mean, this is something that we can see from the e-way bills. This is another good indicator.
One indicator that we track internally is the sentiment index, the consumer sentiment index, so to say, which is a multiplication of what is their satisfaction with the current status as well as future expectations. We see that while the current status is slightly improved over Q1, the future expectations have significantly improved, which means that they are looking forward to the business to grow. As I said, in the first quarter, the M&HCV segment had de-grown by almost 90%. Q2, it de-grew by 39%-40%. If you look at just the month of September, I think it de-grew by only 3%-4%. Gradually, medium and heavy commercial vehicle volumes are growing and are catching up with what we were last year.
Of course, last year itself was a good amount of decline over the year previous to that which was high. I think overall, some of the lead indicators are falling in place, and we do see that the medium and heavy commercial vehicle demand, therefore, should go up gradually as we go ahead. Balaji?
Thanks, Girish. Third question is from (Prateek of BMO), which says that how should we think about investments in CapEx over the medium term, given that investments in BS6 are over and major platform investments in PV are also done with. I presume you are referring to Tata Motors domestic. Here, it is said that the investments will continue to remain tight. At the same time, we don't want to lose demand because of capacity constraints or anything. We will be very choiceful about that, but I don't expect something coming through here. We should be in and around the ballpark range that you stated, INR 1,500 crore to INR 2,000 crore kind of range. Because we also have a very clear imperative of deleveraging the business.
As I keep saying earlier, also I think that we will start to talk about free cash flow generation to pay down the debt. This is one more reason why we changed the definition of free cash flows to net off interest cost. We know that that money is available to pay down the debt, and therefore CapEx will be a derived number from that perspective, at the same time, not compromising on growth. Let's move to the next question. That's from Sonal Gupta, UBS. For JLR, can you indicate what the share of BEV and PHEV is U.K. plus EU volume for Q2 FY 2021? You are provisioning for some fines for JLR in terms of meeting EU CO2 targets. Can you indicate what was approved quarter? Also, to meet the 2021 target, what should be the PHEV/BEV share that you need to achieve? Thanks.
Adrian, you want to pick this up?
Yeah. Thank you, Balaji, and thank you for the question also. The data we show you actually in the presentation, of course, is global 3% and 3%. Normally speaking, if you divide the world into five and crudely say each one's a fifth, there's 40% of our sales ultimately will be U.K. and Europe. 3% PHEV, times it by 2.5, you get to, say, 7% or 8% of the marketplace. That will increase as we go through into next quarter, as we release these PHEVs into the market, of course. We've broadly given guidance three or four years out. We've given guidance that we expect these to be up to 24%, 25% of our sales. The level of increase, of course, is important and partially that will be driven by the speed of those vehicles to market.
I would anticipate double-digit percentages for both PHEV and BEV in the Q3 period of time. 11%, 12%, 13%, 14% levels of those sales will be PHEV/BEV units is our expectation in Q3. Going forward beyond that, yes, reserves grew to GBP 90 million at the end of September. They were just about GBP 60 million at the end of June, so we increased those reserves by about GBP 32 million actually in the quarter, GBP 58 million- GBP 90 million. We do expect that to come down in Q3 fiscal, i.e., the balance of this calendar year, but it really depends on the release of those vehicles, as I mentioned earlier.
Thank you. Thanks, Adrian. Next question is from Yogesh Aggarwal, HSBC. Again for JLR, Adrian coming to you. Do you plan to move Jaguar XE and Jaguar E-PACE on the MLA platform over the coming years? Second, market-
I will not comment.
Okay. Not surprised. Market share continues to fall in China. Reasons behind that? I think you already answered the question on provisions. To clarify, Yogesh, it is part of the P&L of this particular quarter, so nothing outside the P&L. Can you take this question on market share in China, Adrian?
Yeah. China is particularly, we talk about health of sale rather than quantity of sale. That lands greatest in China. I think we'd shown you in previous quarters, we've really been working on the health of sale, and there's a number of metrics that we use to show that within our China organization, including where we sell the vehicles, localized sales rather than absolute number of sales. We're up to 90% on that metric, including the level of inventory that we actually have in place at our dealers, which we're at 1.3 and 1.5 months on that metric, and including where we actually sell the vehicles in the responsible area, we're at 93% on that metric. We also have return on sales metrics for our dealers, which we want to be, of course, positive.
Dealers like to sell your cars when they make money. We return to positive territory at the dealers in quarter three. As a result of that health of sale drive, we actually reduced the variable marketing support we put behind the units in China import business to around 5% underlying in the quarter. We're about health of sales. You know the SUV5s are our highest selling units within that import business, and we feel the size and the scale of the business with those two vehicles, in the seventh and eighth year of their life, is incredibly rich at this point in time, and margins are incredibly strong from China. We're very, very pleased where we are in China. We think we can do better going forward by driving those metrics. We set dealers a target. We expect them to hit that target.
We expect them to sell that car locally rather than outside of their region. We expect them to be profitable, and we expect them to have lower stock levels. We have delivered all of those things again in the quarter. Delivering those things, we are less sensitive about absolute share of market, although we think we can improve that going forward also.
Thank you. There's a question on strategy. Does the CEO want more models in the portfolio or lesser? Yogesh, as I said, let's keep this question for December 2nd. Next question comes from Mr Rakesh Jhunjhunwala of Rare Enterprises. How important is the scrappage policy? Girish, can I ask you to take that question?
Yes, Balaji. I think for commercial vehicles, the scrappage policy is indeed going to be very important, because we've seen that over the last two years since the downturn started, we see almost way back in, say, September of 2018 when the increased axle load regulation was notified. Since then, the amount of replacement demand has been very low, and therefore we have to create a window for having that kind of demand coming up with the scrappage policy. I think it also depends on how the scrappage policy is going to be defined. As it appears now, it is going to be based on not only number of years of usage of the vehicle, but also on the health assessment of the vehicle and health assessment basis emissions and safety.
If the vehicle is found to be not meeting some of the norms, I think it will be subjected to some disincentivization and being forced to scrap. I think this is what it appears the scrapping policy will be. In addition to this, it also needs to be supported by health assessment centers across the country, as well as scrappage centers in an organized manner across the country. We are indeed looking forward to the scrappage policy because it will ignite some amount of replacement demand which has not been there for the last two years because the fleet utilization was low. Balaji?
Yeah. Thanks, Girish. Next question is coming from Chirag Shah, Edelweiss. First on Brexit. What models you make today in EU, excluding U.K., and what models can be made there if forced to? What kind of investment will be needed for that? Adrian, we'll take it one question after the other. There's a lot of questions out there. Chirag, you had a party with you. Okay, goodbye.
Thank you. Thanks, Balaji, and thank you for the question. At our Nitra plant in Slovakia, we build the Defender and the Discovery models. At our Magna Steyr build on our behalf in Graz in Austria, the Jaguar E-PACE and the Jaguar I-PACE. Those are the models today we currently build within Europe. Of course, they're shipped globally, both to the U.K. and across the rest of the world. I don't really want to speculate about what it would cost to ship other models to other plants in Europe, or whether we have the intention to do so. All of these things are possible. Anything we would talk about strategically from a model footprint perspective or a which particular models will we emphasize more on going forward rather than less than.
These are the types of questions that we may choose to get into as a part of the Investor Day. Speculating what we could do. You can do anything, right? Just costs a lot of money to do things. It really would be an assessed return on investment, which we wouldn't do without clarity of actually what the trading circumstances are likely to be going forward. The good news, after a long time, that clarity should come at us very quickly over the course of the next 60 days.
Thanks, Adrian. Second question is on the strategy and portfolio mix. I'll skip that. Question is on the third one was, from here on, what will drive free cash flows, working capital, volumes, or profitability in terms of order of priority? Let me take that. I think the one that you see, and it also talks to your next question you have, Chirag. The working capital pullback that you saw this quarter was basically a correction of the unwind that happened in the previous quarter. We called that out explicitly, and therefore, going forward, working capital won't be the main driver. Other than the fact since we are sitting on a negative working capital, to the extent of growth, you will always see some working capital credit coming through, but nothing more than that. The main driver going forward will be combination of volumes and profitability.
Of the two, I think the profitability, the base is actually starting to get set. Some extent, some of the, particularly the material cost savings in JLR will come towards the end of the year, so there will be an improvement there. Volumes have to start coming through to start playing up on the free cash flows. Which is why if you see the comparison today, the operating cash flows, less CapEx is near zero. That needs to start turning positive for us to become sustainable. That's what you're focusing on. This adds to the question on your rising payable. It is not a rising payable. It is more a question of we have industry norms in terms of what the payable days are, and we don't intend to go beyond that.
At the same time, we need to have our rightful payable in this particular market. First question is on JLR market share. How do you look at it? In the past, market share failed to yield adequate profitability. Adrian, would you want to comment on that?
Yeah. I'll go back to the previous responses. We're very focused on health of sale. Of course, market share is an important consideration also, but health is more predominant. We have, over the course of the last two to three years, actually as a part of the Charge program, started to take out some powertrain and model offerings which were loss-making. We will continue to do that. We think most of that is now actually where it needs to be, and you will see increases in volumes going forward and also increases in shares as well.
The last question, again, that's something which I'll ask the question, but I'll push it into the December 2nd question mark. BEVs, you seem to be focusing more on PHEVs rather than HEVs as compared to your peers, who announced a series of expected launches and set aggressive targets. Adrian, would you want to take this question now or you defer it till December 2nd?
Yeah. I mean, simply put, we have different targets to a lot of our competitors, of course. We're a smaller volume seller in U.K. and Europe. There's a derogation value up to 300,000 units. Our strategy understandably is very different to our competitive strategy over the next five or six years through to the late 2020s. That means we'll just do things differently over the next phase because it works for us. They will have to do things more aggressively. That will drive competition between themselves over the next five or six years, some of which we will not need to get into. The rest we will cover at the strategy day.
Great. Thanks, Adrian. Moving on to the next question, it's from Kapil Singh, Nomura. What is JLR's best strategy? When do we plan more BEV launches, as several new competing launches are coming up in the next two weeks? I think Adrian just answered that. Second, what are the maintenance CapEx of JLR in India? What are the key reason for increasing CapEx and changing guidance for FCF in FY 2021 for the India business? I think the maintenance CapEx as we are talking about, if I understand you right, if I recollect, you're saying that what are the level of CapEx that below which we cannot go. I think post-COVID, the numbers that we have put out is probably pointing to that. Below that, it's going to be difficult for us to be a sustainable business. We may not have the models when growth does come back.
Therefore, we believe at this level, we are really scraping the barrel. As far as India is concerned, all we are signaling is that CapEx we look at dynamically, because if you're going to see 100% kind of growth rates coming through in PV with the model mix changing towards petrol, you will need to do a few corrections out there. None of this changes the fact that our main focus is to deleverage the business, and therefore CapEx will continue to be the need for CapEx will be significantly higher than the availability of CapEx. We can assure you that. Where do we account for reversal of residual values in the U.S. market? Adrian, would you want to pick that up?
Yes. It's a part of our VME, of course, releases, and it's on the balance sheet. It's in other provisions.
Got it. Thanks. Moving to the next question, which is from Jinesh Gandhi on Motilal Oswal. For JLR, any further furlough benefits expected in the third quarter? Are you looking to reduce further inventory at the dealer levels? What scope is there to reduce VME from the underlying VME of 6% in the second quarter?
Yeah, overwhelmingly, the furlough scheme is coming to an end. As you would know, in the U.K., we had 2,500 people, I think it was, in October on the scheme. They will progressively come back into the business during quarter three. VME levels in quarter three, well, of course, we're extending the 20-model-year period pending the arrival of those 21 model years. I do expect where we've extended it, particularly U.K. and Europe, those VME levels will be slightly higher than 6% in Q3, and Q4 will be a better measure for us. As we get those new programs out there, those new products out there, it's a good selling season for us, quarter four. It's that point in time when I'd expect those levels to be at the lower end of 6% rather than the high end or maybe even into 7% for this quarter.
I've said to you for four or five quarters, 7% below is a good place for us, 7% above is not such a good place. We're looking to get back into that happy place of sub 7% in the second half of the year.
Thank you. The next question is on potential EU fines. I think we have covered these questions, and therefore I'll skip that. The next question is from Arvind Sharma, Citi. Could you please shed some light on the provision for EU CO2 fines? I think the key point is, will it be offset later on? Also, how do we stand vis-à-vis competition?
The fines are actually assessed over a calendar year basis, this is why this is a really big quarter for us, because it's the last quarter in the calendar year. We do believe this will be a compliant quarter, and we're also hopeful it will actually be a quarter where we're in credit, and therefore the ultimate amount of fines will be lower than the GBP 90 million we would hope at the back end of this year. The actual payments period for the fine and the pure assessment from externals will be into the second or third quarter next year. We're hopeful GBP 90 million is the worst it's going to get, and we do expect it to actually reduce. It really depends on the timing of those PHEVs coming through as mentioned earlier.
Thank you. Moving on to the next question from, again, from Jinesh. In India PVs, what is your aspiration of market coverage on product portfolio perspective, by when would you be able to achieve it? What are the gaps that you'd like to fill? Shailesh, would you want to take that?
Yeah, Balaji. If we really see the next five years and the segments which are going to really grow in the coming years, there are three, four segments. One is the compact SUVs. The other one is the midsize SUVs, including the seven-seater versions that we are seeing gaining traction. In hatches, it will be the premium hatch which will see growth. There will be a growing demand for sub-compact SUVs also, which will be even smaller than the compact SUVs that we see today. I think, as far as we are concerned, this is how we had planned our product portfolio also. If you see in compact SUVs, we have a Tata Nexon, which is a very refreshed one. In the midsize SUVs, we have the Tata Harrier.
At the same time, as I said, that seven-seater version is also gaining a lot of traction, therefore the Tata Gravitas is going to fill this space for us, as and when we launch it. The premium hatch segment we have entered this year, which is Tata Altroz, and therefore it will serve us, and we will be coming with variants like the DCT, the automatic transmission, as well as turbocharged version in the future. The sub-compact SUV, I think the one which we have already announced, which is Tata HBX or codenamed Hornbill. This is going to sit in this space. Our portfolio is pretty much aligned to those segments which are going to grow in future. With the launch of Tata Gravitas and Hornbill, I think our portfolio will be complete and sit in a very sweet spot of where the market is going to grow for us.
Electrification will be another area where the penetration is going to progressively increase in the years to come. As per our plan, we should have the widest portfolio there also. Thank you, Balaji.
Yep. Thanks. A related point on PV coming from Aditya Makharia from HDFC Securities. Last quarter, we were despondent, and this quarter we have turned EBITDA breakeven. Are plans to find an investor partner now delayed? I won't characterize last quarter as despondent. I thought we said to do watch this space. There a lot of work is happening. We were driven is a better way of putting it there. Our decision on the investor or a partner is long-term, and we did say that we need a partner not as an imperative for today. The turnaround of this business will be done by us with our own portfolio that's out here.
It is more about the opportunity for tomorrow, which is what we are trying to capture with this particular move of getting a partner in. Conversations are underway, and as and when something comes up, we will definitely share it with you. This is Raghunandhan N. L. from Emkay Global. Over the medium term, xEVs could reach a sizable portion of the volumes in the luxury segment. Would you be confident that JLR can have a similar market share in the xEV segment? Can you quantify or give some color on the CapEx R&D spend plan for EVs over the next few years, and also the areas of tie-ups and alliances that the company is exploring? Adrian?
Thank you, Balaji. Would I be confident? Well, I'll be confident that we will hit the targets we're intending to hit, which will underpin the capital investments we need to make. I think I referenced earlier our growth towards EV will be a little slower than the competitors. Technology is changing significantly quickly, as you know. We will put in place the technologies we need at the point in time we need to be compliant. We desperately will be compliant. We want to be compliant. We aren't happy that we won't be in calendar year 2020. A lot of that has been taken out of our hands due to the unfortunate events, of course. We were intended to be compliant in CY 2020 as well. We will be again in CY 2021. I'm not going to break down investments by what's EV, what's BEV, what's PHEV.
We will talk in more detail on the 2nd of December about our strategy, and we will share some of the technologies, and we'll give you a lot more information about what we're planning to do over the next five to seven years at that point in time also.
Thank you. Thanks, Adrian. Second question from Raghunandhan N. L. again is, on the target of becoming debt-free in three years, can you indicate how important the divestments will be to meet this target? Also please indicate which all entities are likely to be considered for sale. As we said, there are three verticals that we see in terms of using our debt to near zero, automotive debt to near zero. Number one will always be free cash flows. These are business operations led, these ensure the more we generate free cash flows, we continue to earn our right to win in this market. We have to earn our right to grow and win in this market. Free cash flows being positive is an imperative, that will be a very important and large lever that we will play with, number one.
Second lever will be divestments, and there are two non-core investments we've already identified. That is Tata Technologies and Tata Hitachi. We are also looking at parts of the business that were core for us earlier, but when we look at it may not be the future core, and therefore that is something that we will take a hard look at, and we have time to do that entire piece. Lastly, once we have done these two, then whatever is remaining is that it is an equity top-up that is needed. We will look at it at that point in time. That's how we see that. Divestments are important, but even more important are the operating and free cash flows of this business. Further, next question from Amyn Pirani, CLSA. The emission charge for EU is under which line item, and in which quarters was it charged?
I think quarters we already talked about. Can you just clarify the line item made here?
I think it goes into revenue, and then it's on the balance sheet as a part of the legal and product liability reserves.
What is the level of PHEV and EV penetration you need in order to meet the emission norms of EU going forward?
It'll be in double digit percentages, so low double digits for CY 2021.
Okay. What is the level of model flexibility you have between U.K. and E.U. capacity? I think we have already covered this question. Next question is from Mr. Rakesh Jhunjhunwala again. What is the capacity of Defender that you have?
Well, it depends on how many shifts we pull on. We're looking to pull up to 5,000 units a month into the marketplace.
Okay. Question from Kapil Singh, Nomura again, Tata Motors Finance. Oops, that moved around. What is the collection efficiency as of the latest available figure? We are now starting to cross the 92% mark. That was September month. October, we expect to improve that even further. Overall, I think we are seeing far better collections than what we were worried about, but at least sometime in September post-moratorium. Moving on to the next question. I think this is from Sunil Sharma, IDBI Capital. Is the company still looking for a strategic partner for its CV segment? How is the company planning to be debt-free? I think we have covered both of these in my comments. I think I have one from Tata Mutual Fund, Surjit Singh Arora.
In your assessment, when is the M&HCV industry likely to report growth, and how big could that replacement demand for CV be? Girish, would you want to take that?
Yes, Balaji. As I said, month-over-month, the M&HCV volumes have been growing, and the de-growth over the same month previous year has been going down. In the month of September, we have seen a very low single-digit kind of a de-growth with respect to September 2019. Looking at the way the pipeline, I think in this quarter itself, we will probably start seeing a YoY growth in a particular month. I am not still talking of the entire quarter, but at least a month or two within this quarter, one should certainly see that.
I think as I also spoke earlier, there are quite a few lead indicators, new construction, infrastructure, cement are doing pretty well. I think we will keep on tracking how these lead indicators are moving, basis which we can then start looking at a very good growth in M&HCV going ahead. Balaji?
Yeah. Thanks, Girish. I have the next question from Basudeb Banerjee, Ambit Capital. With JLR inventory now under control, would it be right to assume approximately 30% rise in wholesale volume in third quarter, under larger assumption of flat retails quarter on quarter, thus better operating leverage going further? Adrian?
Yes. Thank you, thank you for the question. Yes, dealer inventories are now back where we wish them to be. Therefore, going forward, our levels of production and our levels of wholesale and our retails outside of CJLR, excluding CJLR, excuse me, should broadly be consistent with each other. Yes, they will be higher than quarter two, and as a guide for quarter three, 30% increase quarter-over-quarter or thereabout is a good guide, actually. Maybe a bit more.
Okay. Thanks, Adrian. Next is from Nitin Arora, Axis Mutual Fund. Two questions. JLR EBITDA, GBP 481 million, and CapEx is GBP 531 million. JLR has not generated any free cash flows. It looks more a working capital which went higher in Q1 that got reversed and JLR generated cash. How much of this working capital reversal can happen, which generates free cash flow, because, or is it largely done? I think we answered this question in terms of the sequence of how we see the priorities. This quarter was important to get back the free cash flow, the loss because of working capital unwind. We have done that. Going forward, it'll obviously be a mix of demand as well as profitability improvement for us to drive the free cash flows that we are looking for. Second, we are seeing JLR losing market share, especially in China.
Do you think you are running a risky strategy of reducing CapEx, which looks like will be equal to your depreciation rather than working on model cycle and generating free cash flow? This, again, I think Adrian has covered at length, saying that we are looking at the health of the sale that we are doing out there in China and improving and driving the profitability. I agree to the point saying that reducing CapEx is impacting market share in China today. We are ensuring that we are having a healthy ecosystem between us, our dealers, as well as an exciting range of products that is out there. Don't forget that we launched Defender in the peak of a pandemic, and we are continuing to introduce our electrified portfolio, and we will continue to have the top products that are coming into the market there.
CapEx and its implications going forward and the portfolio, I think it will be a very good discussion that we can have on the 2nd of December. We will talk about this in greater detail there. Let me reassure you that we are not looking to become a zombie company where we cut our CapEx out, generate cash, pay down the debt, and after that, we have no products to sell thereafter. That will not be acceptable and that'd be quite a silly strategy, too. Yeah. We now have one from Shyamsundar, Sundaram Mutual Fund. On JLR retail inventory, we see that inventory days are at pre-COVID levels. Are you seeing the need for further destocking? Housekeeping question, depreciation in JLR U.K. P&L has been lower quarter-on-quarter. All plants other than Castle Bromwich are operational. Can you help us understand this depreciation number, Adrian?
Yep. Okay. Thank you for the questions again. At the average plant level, dealer inventories are absolutely where we'd wish them now to be. When we break that down by market and by nameplate, there are still some nameplates and some markets which are higher, some overseas markets in particular, and we will continue to take those down. Conversely, there are also some nameplates in some markets which are too low, and good examples of that would be RRS within North America in quarter two, which is why I mentioned earlier, North America retails were partially lower in the quarter year-over-year because of supply constraints. We expect all of those market-by-market nameplate issues to be resolved as we go through Q3 and into quarter four. Depreciation year-over-year lower, yes, that is overwhelmingly as a result of the Range Rover and the Range Rover Sport.
Those cars are now almost eight years in life, and therefore, the residual depreciation to go is much, much lower than it was 12 months ago. Ultimately, in 18 months' time, those cars will be replaced with all-new, fresh vehicles. That's partially as a result of COVID and everything going back a little bit, but mostly speaking, those cars are still significant in the marketplace, selling really well, generating a lot of money, but they've just gone beyond a natural eight-year cycle, and therefore D&A, they're much left to write off.
Thanks, Adrian. The next question is from Antique Limited, Priya Ranjan. What are we doing to contain warranty cost increase, as quarter- on- quarter it has increased again?
Who said that one as well?
Yep
Okay, many thanks for the question. Quarter- on- quarter, the increases were bespoke around the campaigns. I referenced them, Jaguar I-PACE campaign and the reversal last year of a PHEV campaign in China. I have also mentioned, I think on at least two or three occasions, we can see the underlying data for our 2020 model year vehicles is actually performing much better than 2018 and 2019 model years. We have accounting rules of the road, which only allow us to take effect of those 2020 model years at a certain point in time. 75% of the sales need to be through into customer hands of a model year. That will start to happen in quarter three. My expectation is you will start to see warranty from quarter three this year below 4%.
Don't forget, just like I mentioned, 7% was a line of good or bad for VME, 4% is that line in warranty. My expectation is we will be lower than that level, in the 3% plus range in quarter three. That's where the warranty will start to come through as a positive in the second half of the year.
Thank you. One more question coming through, which I will take. We have seen the withdrawal of Jaguar XE from the U.S., can we see more such as withdrawal of other Jaguar models? Do hold your questions on anything related to portfolio to December 2nd. That may be a better time to answer it comprehensively. How long can we see plant CapEx going on related to the modular platform? This again, linked to industrial footprint and portfolio. Let's pick it up on the December 2nd one. Next question is from JP Morgan, Jemma Permalloo. Can you please give us some indication on how increased electrification will impact gross margin? Second question, an updated view on how much excess inventories JLR will need to hold in case of a no-deal Brexit. Adrian?
Thank you for the questions. Margins, obviously depends on how you measure the margin. If you measure it before fines, there obviously is a reduction of a margin we'll make on an electrified vehicle rather than a traditional ICE. However, we put vehicles into the marketplace for compliance purposes, and if we weren't to do that, the losses we'd make on those vehicles will be even higher. Our compliance strategy, our electrification strategy, follows our value maximization strategy, and it's the right thing to do also as well, of course. From an excess inventory level, again, we're on record previously, we continue to raise our parts inventories, particularly just in case there is friction at the borders over the first days and weeks of January. We have done the same again over the last several weeks leading up to the end of this year.
We've added an extra day's worth of buffer inventory and stock, which is in place. We can't hold inventory forever, of course, and therefore, will help us with days rather than weeks into January. Finished vehicle inventory, similarly, we will grow it in between U.K. and Europe over this period of time just to avoid that level of friction. Our expectation is over time, whatever the challenges are at the border, they will be factored into working capital, into operational requirements over the following months. I suspect we'll work through this during quarter four, or it's likely to be a big deal in the early part of quarter four, but we'll work through it. We're doing exactly what we've done in previous quarters. We've built where we can, but you can't hold inventory. There's just so many parts come into our factories.
You can't hold enough to trade through that uncertain period.
Yeah. Thanks, Adrian. Question, Girish, coming your way. This is from Siddharth, India M&HCV . What's your understanding on the willingness of financials to fund new trucks, especially M&HCV? How's the resale value of trucks and risk of defaults of repossession post the end of the moratorium period? The next question is to PV. If you could take these two.
Okay, thanks Siddharth. I think we have seen gradually from Q1 and then to Q2 that the financials have reduced their risk aversion, and I think they are coming forward and funding not only the large customers but also the retail customers. Even the loan-to-value ratios have been improving as we moved from Q1- Q2. I think there is a good openness and funding which is now available for the M&HCV customers. On your second question regarding what is the status after Moratorium 2, I think would have been better answered by my colleague Samrat, but as I know from him, I think this is also being managed very well as we move from Moratorium 1 to Moratorium 2 and from Moratorium 2 to structured loans, so to say.
I think we don't see too many NPAs which are happening as we go ahead in the M&HCV . Not only M&HCV , but even in the ILCV domain. That's how I see the financing environment. There has been a very good improvement as we moved month-over-month from Q1- Q2, and as we stand now. Balaji?
Yeah. Thanks, Girish. I think conscious of time, I think we have run out of time. Once again, for the rest of the questions that are out there, do reach out to us. We'll try and meet with you in any case. At that time, we can answer these questions. Once again, thanks a lot for your time and patience in going through the questions and listening to us. Look forward to seeing you again in the coming days. Thanks to the team on the call as well. Response is much appreciated. All of you stay safe and catch you soon, and look forward to seeing you on December 1st and December 2nd in the two Investor Days. Thank you.