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Telco: Growth likely to sustain?

Apr 11, 2001

Tata Engineering (Telco) has reported an improvement in volume growth for 4QFY01. The company's volumes for March 2001 are up by 45% MoM to 21,431 vehicles. Overall sales volumes in 4QFY01 have reported an improvement of 46% as compared to 3QFY01. The above is the result of an aggressive sales strategy followed by most automobile companies during the 4Q of any financial year. In a bid to improve year end sales most companies offer discounts and incentives during this period. Besides this, we feel Telco's strategy to re-introduce their less costly 697 medium commercial vehicle engine as well as expand their dealer network too has added to their advantage.

However, it is important to see whether the commercial vehicle industry has reached the bottom of the trough and is headed for a recovery. Given the state of industrial and agricultural growth currently it seems that the recovery may still be sometime away. Unless these two sectors report a vast improvement over the next year, it will be difficult to sustain the growth in volumes.

Overall, the 4QFY01 results are expected to be better for Telco due to better volume growth as well as the fact that the company continues to be aggressive on its cost cutting measures. In 3QFY01, the company has managed to reduce its overall operating expenditure by 24% YoY. Hence we feel that the effect of these cost cutting measures will benefit the company's 4QFY01 results.

  Feb-01 Mar-01 % change
  (nos.) (nos.)  
M & HCVs 5,291 8,169 54.4%
Light CVs 3,109 4,353 40.0%
Cars 3,651 5,255 43.9%
Total volumes 14,759 21,431 45.2%
  FY00* FY01 % change
  (nos.) (nos.)  
Commercial vehicles 111,379 84,914 -23.8%
Utility vehicles 31,983 27,899 -12.8%
Cars 54,992 44,165 -19.7%
Total volumes* 198,354 170,599 -14.0%
* including exports

The company continues to be surmounted with huge losses, as its car division has clocked in a volume of 44,165 cars for FY01, and it is still far away from its break even target of 70,000 cars per annum. Though there is likely to be an overall improvement in car volumes in FY02, due to a reduction in excise duty from 40% to 32% for this segment, 4QFY01 volumes cannot be considered to be an indicator of better volumes in FY02.

It would be too optimistic at this stage to say that there has been an overall volume improvement for the automobile sector. Telco's commercial vehicle volumes have not reported any improvement YoY in 4QFY01. For the first nine months of FY01, Telco's commercial vehicle (CV) volumes fell by 17% YoY, while for FY01 its CV volumes have fallen by 24% YoY, implying a drop of over 30% YoY in CV volumes in 4QFY01 over 4QFY00.

In an effort to improve its current cash flows, Telco has sold its 14% stake in Mercedes Benz India for Rs 840 m. Earlier Telco had a 49% stake in this company. With this the speculation of a swap deal between Daimler Chrysler and Telco, for the former's 10% stake in the latter are put to rest. Daimler Chrysler will continue to hold its 10% stake in Telco.

At the current price of Rs 64, Telco is trading at 22.9x FY00, EPS of Rs 2.8. For FY01, Telco is expected to report a loss of Rs 4.1 bn.

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