Telco's car division to be a distinct unit- is positive
Tata Engineering and Locomotive Co. Ltd (TELCO) has finally created a separate business unit for its car business. As per the company spokesperson it will continue to be a part of Telco but will operate as a separate profit centre. Hence now Telco will have two distinct divisions commercial vehicle business unit and passenger car business unit.
TELCO, is India's largest commercial vehicle manufacturer. It dominates the MCV/HCV segment with a market share of 66%, the LCV segment with a 67% market share, and utility segment with 26% market share. It reported a turnover of Rs 64 bn in FY99.
This separation will help the company optimally use its resources as each business unit will have its own financials and operate as a separate profit centre. It will enable the company to decipher the performance of each division separately. Till now this division was funded from earnings of the commercial vehicle business and has been a drag on the overall business.
Currently the main product of the car division is "Indica". Though the car has been well received in the market the project is yet to break-even. Going forward this business is going to be tough given the intense comeptition on this segment. The company will have to come out with newer models and newer products to keep up with the increasing competition in the passenger car segment. This would entail huge designing, production and marketing costs which would be a drag on the profits of Telco even if the commercial vehicle business does extremely well. This move will also help the company to value this business incase it decides to hive it off in future.
Also with the economy showing signs of improvement, the commercial vehicle's business is now looking up and it is expected to generate substantial earnings as a result of this. Hence with separate financials atleast Telco's improving performance in the commercial vehicle's business will get highlighted.
Though the management has denied it, this move can be seen as a precursor by Telco to eventually hive off the passenger car division into a separate company. Incase it is eventually separated it will enable the company to attract joint venture partners for this.
Analysts are positive on TELCO, however most of them have rated it as a long term "BUY", mainly because the car division is a drag on the company's profits.
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