Telco shows thumbs down to workers - Views on News from Equitymaster

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Telco shows thumbs down to workers

Mar 30, 2000

Telco's management has declared an indefinite lockout in its Lucknow plant following violent agitation by the workers at the plant. Telco's Lucknow plant has a capacity of 30,000 units per annum and assembles medium and light commercial vehicles and Sumo. 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. Its plants are located at Pune, Jamshedpur and Lucknow.

The main reason for this being that workers in the Lucknow plant were demanding parity in wages with Telco's Pune plant. The workers wanted that their pay should go up by Rs 4,000 per month, however the management had settled to a rise of Rs 2,000 per month with the UP state government's labour department and the workers union.

As the Lucknow plant produces around 12,500 units per annum as compared to its total capacity of 30,000 units per annum, the management feels that the shortfall due to the closure of this plant will be met with higher production in its Pune and Jamshedpur plants. In FY99 the Pune plant was operating at a capacity utilisation of 33% and the Jamshedpur plant operated at a capacity utilisation of 56.6%.

Even if Telco were to double its production at its Jamshedpur and Pune plants they could easily accommodate producing additional 30,000 units per annum to make up for the Lucknow plant. Hence this closure will not have a significant impact on Telco's production and hence on its performance.

The Lucknow plant has 1,000 employees this accounts for only 2.8% of Telco's total employee strength of 36,350 as on March'99. Telco's total wage bill for FY99 was Rs 6.9 bn, hence even if the company was to increase the salary levels of the Lucknow employees by Rs 4,000 per month as against Rs 2,000 per month this would have a marginal increase to its employee cost. The additional Rs 2,000 per month would have a negligible impact on salary costs as this accounts 0.3% of the total wage bill. Though the increase is minimal the Telco management may not be agreeing to this due to workers attitude and productivity levels.

As Telco enjoys good relations with its employees we feel that this lockout will soon be called off. In its FY99 annual report under "Human Resources" the company mentions the steps taken by it to promote harmonious relations with its employees. They signed a wage settlement at the Jamshedpur plant whereby compensation would be linked to productivity. They had a training programme during the year with thrust on total quality management and customer focus to increase productivity of employees. The company has also entered into an agreement with Massachusetts Institute of Technology, USA for participation in the Industrial Liaison Programme for its employees.

Given the company's thrust on human resource management Telco's management may in future agree to this wage hike provided the workers also meet up with the management's expectations.

Market View:
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.

March 30, 2000

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