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Telco: Positive developments? - Views on News from Equitymaster
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  • Jan 10, 2001

    Telco: Positive developments?

    Tata Engineering (Telco) has been in the news lately. The company's voluntary retirement scheme is going on full swing, it plans on re-introducing its 697 engine range of commercial vehicles and has raised prices of its Indica car by 1%-2%. The most recent news is its technological tie-up with the French car maker PSA Peugeot Citroen.

    Of these, lets see which of the above are likely to have a positive impact on the company. The company had decided to lay off a total of 3,000 employees through its employee separation scheme. As per market news, the company has already laid off around two thirds of the above. This scheme will result in an annual savings to the company of Rs 340 m. In 2QFY01, the company spend Rs 34 m for its VRS.

    The re-introduction of its cheaper range of 697 engine vehicles is being done in the hope that it will revive its medium commercial vehicle (MCV) business. The company had withdrawn these and introduced the euro compliant Cummins engine vehicles, however as the cost differential between 697 and Cummins is significant and the commercial vehicle (CV) business is performing badly, this move is a step in the right direction. The upgraded 697 range is expected to cost the consumer Rs 35,000 - Rs 40,000 less than the Cummins range of vehicles. Of course, the revival also depends on industrial and agricultural demand, which is not showing any significant signs of a pick up currently. Rise in freight demand is the key to any improvement in future.

    The company, like other players in the small passenger car segment has raised prices effective January 2001. The reasons for this is that Telco is hit by higher euro compliance costs and falling demand hence it had no choice but to raise prices. For the month of December 2000, Indica sales fell by 58% YoY. However, the company is in a catch 22 situation as demand continues downhill. On the positive side as excise duty on passenger cars is likely to go down by 8% to 32%, this would result in some beneficial impact on the selling prices of cars and hence on their demand.

    Telco has jointly decided to come out with a three box sedan car on the Peugeot Citroen platform-2 for the Indian market in a tie up with Peugeot. The two companies will initially carry on a feasibility study for a period of six months, and this tie-up is expected to be technological in nature. This news has acted as a dampener on the company's stock price as the market expected a tie-up which would add greater value like an equity tie-up to reduce the burden of the losses on the Indica project for the company. Else the market had expected a sale of the company's car division to an international major.

    Telco's official numbers for December 2000 are yet to come out, however rumours are that its CV sales have improved month on month (MoM) as compared to November 2000. However there is no improvement on a year on year basis. This MoM improvement is slated to be due to higher dealer inventories offered by Telco to push its sales.

    On the whole 4QFY01 volumes are expected to improve over 3QFY01, as the company is aggressively expanding its dealer network by March 2001 and extending incentives to improve its volumes. However, the crux is an improvement in volumes on a year on year basis which will happen only if other major sectors in the economy show an upturn.

    Telco's share price which run up from a low of Rs 69 to Rs 98 today, will be difficult to sustain in the short term. There has to be an improvement in the fundamentals of the company to warrant a rise in share price. The recovery in the CV market seems to be a long way off.

    On the current price of Rs 98, Telco is trading at 35.0x FY00 EPS of Rs 2.8.



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