Telco: 3Q loss doubles YoY

India's leading commercial vehicle manufacture, Tata Engineering (Telco) has reported yet another quarter of dismal performance. The company's net loss for 3QFY01 increased by 101% to Rs 1,214 m. The decline in sales by 26% YoY and lower operating margins are main reasons for the above performance.

(Rs m)	3QFY00	3QFY01	Change	9m FY00	9m FY01	Change
Sales	23,690	17,620	-25.6%	60,191	54,592	-9.3%
Other Income	50	313	525.2%	1,048	856	-18.3%
Expenditure	22,275	17,043	-23.5%	56,179	51,981	-7.5%
Operating Profit (EBDIT)	1,415	577	-59.2%	4,012	2,612	-34.9%
Operating Profit Margin (%)	6.0%	3.3%		6.7%	4.8%
Interest	854	972	13.9%	2,607	2,938	12.7%
Depreciation and amortisation	1,215	1,081	-11.1%	3,053	3,495	14.5%
Profit before Tax	(604)	(1,163)	-	(599)	(2,964)	-
Other Adjustments	-	-51		-	-573
Tax	-	-		-	-
Profit after Tax/(Loss)	(604)	(1,214)	-	(599)	(3,538)	-
Net profit margin (%)	-2.5%	-6.9%		-1.0%	-6.5%

Its total volumes have reported a degrowth of 34% YoY to 35,908 vehicles in 3QFY01. All its divisions: commercial vehicles, cars and utility vehicles reported a sharp decline during this period.

Its operating margins fell to 3.3% YoY in 3QFY01 as compared to 6.0% in 3QFY00. This was despite a 24% decline in operating expenditure during this period. The company has been very aggressive on cost cutting across the board. The company aims to reduce overall costs by 4% to 5% per annum. However, poor topline has resulted in a pressure on its margins.

(Nos.)	3QFY00	3QFY01	% change
Commercial vehicles	29,493	18,665	-36.7%
UVs and passenger cars	21,930	12,922	-41.1%
Exports	2,682	4,321	61.1%
Total volumes	54,105	35,908	-33.6%

For the consolidated nine months in FY01, its other income includes profit on sale of investments to the tune of Rs 415.7 m. Of this, a large chunk is likely to have come in 3QFY01, from sale of shares of a group company.

The company has spent Rs 51 m in 3QFY01 as part of its employee separation scheme, the benefits of which will accrue later.

The main reason for the dismal performance in 3QFY01 is declining volumes. The 3QFY01 volumes of 35,908 are 34% lower YoY and 17% lower QoQ (i.e. 17% lower over 2QFY01 volumes of 43,277).

The company's Indica project has achieved a cash break even in 1HFY01. However, the operating break even is yet to be achieved. The company had revised down its estimates for the Indica car division in the current year from a sales target of 90,000 vehicles to 70,000 vehicles. This too looks unachievable considering that in the first nine months of the current year the company has sold only 32,560 cars.

The management expects an improvement in 4QFY01 volumes, as Telco is aggressively expanding its dealer network by March 2001 and is extending incentives. It has re-introduced its cheaper range of 697 engine vehicles in the hope that it will revive its medium commercial vehicle (MCV) business. 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 signs of an improvement. 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.

As the above results are lower than our full year expectations we will need to revise our current forecast of Rs 3,680 m loss for FY01E downwards by around 20% to 25%.

At the current price of Rs 94 Telco is trading at 33.6x FY00, EPS of Rs 2.8.