Tata Engineering Limited (Telco) is reported to be aggressively pursuing strategies to shift its customers to Cummins powered vehicles, which are Euro compliant. These vehicles are costlier than existing models.
Telco is India's largest heavy commercial vehicles (HCV) (65% market share) and light commercial vehicles (LCV) (69% market share) manufacturer. It also manufactures utility vehicles (28% market share) and passenger cars.
The aggressive stance can be attributed to the approach of the April 2000 deadline, post which all vehicles sold in the country must be Euro II compliant. The switch over has adversely affected the margins, as the incremental cost of these engines has been partly absorbed by the company. This was largely due to the sluggish economic conditions prevailing in the economy.
Initially the company plans to go 100% Cummins for its M/HCV range of vehicles, while in case of LCVs, it is upgrading its own engines to meet the norms. To enable customers to switch to the new vehicles, the company has consistently brought down the price differential between the existing and new products.
Telco is well placed to meet the deadline set by the government to meet the Euro II norms. In a proactive step, the company had set up a 50:50 joint venture with Cummins to manufacture engines. As the demand for the new vehicles picks up, scale economies will ensure that the costs of these new engines reduce, thus benefiting companies like Telco in terms of better margins.
An implied advantage of this switchover would be to narrow the technological gap between the company’s products and those of newcomers such as Volvo.
Analysts have rated the stock as a ‘BUY’ on account of the recovery in demand for commercial vehicles and the success of its maiden car venture. The attractive valuations have also been highlighted as a reason for the attractiveness of the stock.
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