Mar 11, 2003|
Telco: Volume update
It has been a year of fortunes for Tata Engineering (Telco), the country's largest commercial vehicle (CV) manufacturer. CV sales, which started to show signs of reversal in trend in September 2001, continued to remain healthy in FY03, as a result of which the company has reaped significant benefits.
Volume sales for the first eleven months of the current fiscal year has increased by 22% to 192,314 units. This was largely led by a 33% rise in CV sales during the same period (35% rise in domestic CV sales). There are a number of reasons for the rise in CV demand. For one, the road construction project has significantly altered the CV pie with demand for higher tonnage vehicle (i.e. above 16 tonnes) rising notably. Just to put things in perspective, the contribution of higher tonnage vehicles is expected to touch 54% in FY03 as compared to around 42% last year. Telco, with the introduction of the 'Ex' series of CVs in the current fiscal, has been the major beneficiary. Secondly, with monsoons faring poorly in FY03, select states have witnessed significantly shortfall of food grain, notably southern states. This has resulted in higher demand for tonnage to move food grain to deficient states, which has fuelled demand further.
Note: Total Volumes
Apart from CVs, LCV demand has also shown marked rise. But it has to be remembered that this segment is coming out of a trough and as a result, growth in volumes is inflated. We expect demand to remain softer in the coming fiscal. Telco, on the other hand, continues to lose market share in the utility vehicle (UV) segment. With Mahindra getting its act together with the launch of 'Scorpio' and Toyota upgrading its 'Qualis', Telco is now left with relatively outdated models. This is reflected in UV sales declining by 8% for the first eleven months. On the passenger car front, Telco has extended its market share to around 25% in 'Segment B' at the cost of Fiat 'Palio'. After the initial rise in sales, Palio's performance has been rather lacklustre. The rise in passenger car is also inclusive of Tata 'Indigo'. While we had estimated around 750 units per month for 'Indigo' for 4QFY03, the performance has been on the higher side (Indigo sales stood at 2,100 units in Jan'03 itself).
Looking at the overall picture, the company has outperformed our estimates on the volume front. As far as FY04 goes, we expect the rise in industry CV sales to be on the lower side i.e. 4%-5% because of poor monsoon and a weakening industrial sector. While the continuation of the government's thrust on the road construction project is a long-term positive, the impressive growth rate that one has witnessed in FY03 is unlikely to continue in the near term. On the passenger car front, the agreement with Rover of UK for supply of 170,000 units over five years will add to the volume growth. The stock currently trades at Rs 155 implying a P/E multiple of 14.6x FY03E estimates.
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