The Tata engineering (Telco) stock flared up by 8% during the last trading session on unconfirmed reports that the company may be looking at hiving off its car project to a 100% subsidiary. The company has denied all such reports and stated that the car venture was being made a strategic business unit (SBU).
TELCO is India's largest medium/heavy commercial vehicles (M/HCV) (65% market share in September 1999) and light commercial vehicles (LCV) (63% market share) manufacturer. It also manufactures utility vehicles (28% market share) and passenger cars (8% market share).
Telco's car project has been much admired by the public at large. Company watchers, analysts in particular, however were skeptical from the start regarding the company's car venture. The concern emanated from the burden the project would have on the overall profitability of the company rather than the success of the product. A new project would entail large capital expenditure (Rs 17 bn) that would translate into higher interest and depreciation costs.
Its been slightly over one year since the launch of the car and the figures reveal it all.
Profit before Tax
Profit after Tax/(Loss)
Net profit margin (%)
Hiving off the car project would result in an immediate reduction in the company's interest and depreciation burden, which have put under pressure the profitability of its commercial vehicle division. Further more, the hive off would open up the possibility of participation of an international auto major. Telco would also benefit from the inflow of cash resources once it dilutes its stake in the subsidiary.
The hive off is widely desired. However, the company has preferred to adopt a cautious approach by first converting it into a SBU. In view of the highly competitive scenario in the passenger car market, it is more likely than not that the company will hive off the car project. The issue is the timing of the hive off.
Given the strong CV demand, and robust Indica sales, analysts have recommended a 'LONG TERM BUY' on the stock. Concerns about the capitalisation of the Indica and its break-even still persist.
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