"We have no plans to hive the passenger car business unit into a separate company" - Views on News from Equitymaster

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  • May 3, 2000 - "We have no plans to hive the passenger car business unit into a separate company"

"We have no plans to hive the passenger car business unit into a separate company"

May 3, 2000

To manage the finances of a company whose fortunes are linked directly to the economic performance of the country has never been an easy task and Telco is no exception. However, with an optimistic view on the economy, Mr. Praveen Kadle, Senior Vice President - Finance, Telco has reasons to smile.Mr. Kadle has been with the Tata Group since the past eight years and is currently in charge of the finance function at Telco, the flagship of the group. With over 20 years experience in management accountancy, legal, finance, treasury and general management, Mr. Kadle brings a world of experience to the company. Apart from his responsibilities at Telco, he also serves on the board of various Tata companies, including joint ventures with Cummins of USA and Jardine Matheson Limited.

In an interview with equitymaster.com, Mr. Kadle, spoke at length on what he foresees as the future of the Indian economy, his vision for Telco and his views on the restructuring efforts within the company.

EQM: What is your view on the economy? How do you foresee the sale of commercial vehicles in future?

Mr. Kadle: The economy seems to be on a path of steady growth, though the GDP growth of 5.9% achieved in 1999-2000 may not look as impressive as 7.5% achieved in 1996-97. The business confidence of the industry is better than what it was two years ago, the inflation is under control at 3%, forex reserves are at a comfortable level and even foreign trade has picked up, clocking a growth of 10-11%.

Going further, we expect the economy to grow at around 6.5% in FY2001, with the manufacturing sector growing at around 8-9%. This should provide impetus to the transport sector. Commercial vehicles sales which grew by about 25% in FY2000 are expected to grow by about 12-15% in the current year. We believe this is also a sustainable long term growth rate.

EQM: What is the status of freight rates? Are transport operators making enough profits to buy new vehicles?

Mr. Kadle: After the last diesel price hike of 35%, the freight rates shot up. The impact of diesel price hike was about 14% on the operating cost, whereas the increase in freight rate was in the region of 20-25%. This was possible because of better freight availability and higher business confidence level among the fleet owners. However, the freight rates have come down subsequently in line with the seasonal trends.At the prevailing rates the truck operators are not losing money. However, their margins have definitely gone down with increase in fuel costs, as also due to impact of higher sales tax on vehicles in states where the rates were low before rationalisation.We expect large fleet owners who constitute about 30-35% of the market will be able to expand their fleet. While speaking about smaller players the demand will largely come by way of replacement.

EQM: What is the current status on Emission Norms? Do all the new vehicles meet Emission Norms?

Mr. Kadle: As far as India 2000 norms are concerned, all the commercial as well as passenger vehicles are required to be EURO I compliant from April 1, 2000.Telco is fully geared up and all its HCV, MCVs, LCVs, UVs and Indicas are EURO I compliant. Incase of M/HCVs we have Cummins engines fitted to make them EURO I compliant. As far as LCVs are concerned we have turbocharged the Tata 407 and the Tata 709 models. The Utility Vehicles, viz Sierra, Sumo and Safari were already EURO I compliant. The Indica was EURO I compliant right from the day it was launched.

As far as the National Capital Region is concerned, all the passenger vehicles were expected to be EURO II compliant from April 1, 2000. The company has modified Sumo to make it EURO II compliant. The Safari and the Sierra were already being exported to some of the European markets in EURO II version. The diesel Indica in EURO II version has already been introduced in the last quarter of FY2000. As regards petrol Indica, the EURO II version with Multi Point Fuel Injection (MPFI) is slated for introduction very soon.

EQM: What are the reasons for medium and heavy commercial vehicle sales being sluggish in March 2000 as compared to the first eleven months of the year?

Mr. Kadle: We sold about 9,133 M/HCVs in March 2000 compared to an average sale of 5,600 per month over the first eleven months of the year, which means a growth of 63%. However, in March 1999 we had sold 9,516 M/HCVs and this YoY drop of 4% is largely attributed to impact of diesel price hike on the operating economies of the truckers.

EQM: What is the status of the Company's restructuring efforts? The Company has hived off the construction equipment business into a separate subsidiary. Which other does it plan to hive off? How much the does the company estimate to get?

Mr. Kadle: The Company had identified Axle and GearBox Manufacturing, Machine Tools, Forge Shop and Foundries as non-core activities to be hived-off. This is mainly to focus on the Company's core business of development, assembly and marketing of vehicles. The hived off units, will have world class technology and this will help Telco maintain competitiveness in the market.

On March 28, 2000 the company has sought the shareholders' approval to hive off Machine Tool and Growth divisions at Pune and Jamshedpur, as also Heavy Axle and GearBox divisions in Jamshedpur into three subsidiaries. On March 30, 2000 the business transfer has taken place. The Company is in talks with world class manufacturers for strategic partnership in Axle and GearBox subsidiaries. As regards, Machine Tool Business, they have already acquired technical know-how from various world-renowned companies for manufacturing high precision machine tools and robots.The company will be receiving a consideration of Rs 3,830 million for transfer of these three businesses. In this process about 4,000 people will get transferred out of Telco.

EQM: What are the cost control measures being adopted by Telco?

Mr. Kadle: Some of the major cost reduction initiatives adopted are:

  • Material cost reduction through value engineering, wastage control and strategic sourcing.
  • Operating efficiency improvement through reduction in process rejection, cycle time improvement, energy conservation and better logistics management with third party support.
  • Reduction in financing costs through better management of Receivables and Inventory, pre-payment of costly debt and issue of commercial paper.
  • Overhead reduction through enhanced productivity and expense control.

EQM: When does the Company expect to break even on Indica? There was an indication of creating a separate unit for the car division. When will this happen? How does the Company aim to benefit from this? What growth rate is expected for the car division?

Mr. Kadle: The break-even point of the Indica Project is around 1,00,000.As planned before, we have just created two strategic Business units - one for the passenger cars and the other for commercial vehicles. However, we have no plans as of now to hive the passenger car business unit into a separate company.Once you have a strategic business unit being run with a certain degree of autonomy, it helps to focus on its core activities and it will be easier to have strategic alliances for technological or marketing tie-ups if need arises. Intrinsic shareholder value of individual businesses also come under a sharper focus when you have SBUs instead of having a functional or a location based organisation structure.

EQM: How is Telco planning to tackle the existing and growing competition in the small car segment? Does the Company plan to come out with any new product launches in the car segment in future?

Mr. Kadle: Having consolidated its position in the diesel segment, Telco is soon launching a fuel efficient EURO II compliant Indica in petrol version with a Multi Point Fuel Injection. This will help us further build volumes. We are also looking at variants of Indica using the common platform to cater to various niche segments. We have identified some right hand drive markets for export of Indica and about 500 cars have already been shipped to Malta.

We are looking at the option of introducing luxury sedan, the Magna, so that ultimately we have a full range of products. With an emphasis on development of indigenous products and having a flexible manufacturing set up, we should be able to widen the product range at minimal incremental investment.Keeping the fast consolidation of world auto majors in mind, we are also open to strategic alliances for either joint product development, joint manufacturing or joint marketing.Thus we are fully alert to competitive developments in the car market and have drawn up a long-term strategy to try and stay competitive.

EQM: Internationally, cars are being sold through the Internet and has resulted in savings to the end consumer by way of lower prices as dealer margins are avoided. When do you see this happening in Telco?

Mr. Kadle: The way consumers survey the market place and make their choice for the car, they want to buy is very much influenced by his demographic profile. If the person is a young professional belonging to the higher income group and residing in a metropolitan city, chances are that Internet may be a preferred mode of communication for him to update himself on availability of various models and order it on the Internet.However, our marketing team has observed that still majority of customers in India enjoy visiting the showroom with the entire family and then take a decision. Thus, it may take some time for people to change their habits. Affordability and easy availability of connectivity will also determine the time span within which the scenario will undergo change.

EQM: What are the plans for exports in future?

Mr. Kadle: We had been exporting mainly commercial vehicles to traditional markets like Sri Lanka, Bangladesh, Middle East and some of the American countries in the past. However, since mid-90s our thrust has been more on utility vehicles and cars (Sierra), and that too in the more demanding markets of Europe. In Financial Year 2000 we exported more than 3,700 Safaris to Europe. We have identified potential markets for the Indica too. More than 500 Indicas were shipped to Malta last year.

We plan to upgrade continuously our products with new generation of engines, axles and transmissions. We also plan to adapt the domestic product for specific markets through customisation. With wider product range, greener engines, and niche marketing, we expect a significant growth in exports in future. Our target is to achieve export volume of 20% of domestic sales within the next 3-4 years, compared to 6-7% presently.

We would like to mention that we continue to be India's largest automobile exporter.

EQM: What are Telco's capex plans for the next three years and how does the Company expect to fund this?

Mr. Kadle: For new product development, and for maintaining the health of the manufacturing plants, we expect to incur a capex of about Rs 4,000 million per annum for the next 2-3 years. This will be funded through internal accruals and reduction in working capital.

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