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Telco: Analyst meet notes

May 16, 2001

A 15% drop in volumes, higher emission costs and higher amortisation charges related to product development expenses drove Tata Engineering's (Telco) huge loss of Rs 5 bn. The following are the main points of Telco's analyst meet held yesterday. FY01 performance

  • The company's operating margins fell from 7% in FY00 to 5.3% in FY01. Its other income too declined and it wrote off Rs 70 m on account of extraordinary expenses during the year. These too added to the higher loss during the year. This extraordinary expense includes power costs to the tune of Rs 49 m that represents costs pertaining to previous years from 1995-1996.
  • The company's EBIDTA fell to Rs 4.98 bn in FY01 as compared to Rs 7.9 bn in FY00, a decline of 36.6% YoY. The main reasons for this are lower overall volumes and the fact that it lost market share in some key markets to its competitor Ashok Leyland.
  • Telco's net interest costs went up by 5.7% in FY01, however it managed to reduce its gross interest charges by Rs 410 m through prudent working capital management. The working capital position has improved in FY01. During the year the company has also managed to reduce its forex borrowings as a percentage of total borrowing from 25% in FY00 to 21% in FY01.
  • As a result of higher amortisation of product development expenses for its car project in FY01, the amortisation costs grew by Rs 547.4 m during the year. In FY00, Rs 1,355.3 m in relation to pre-production interest, expenses and lower charge of depreciation were capitalised on 31st March 2000.
  • Despite these huge losses the company has managed to generate cash from operations of Rs 6.8 bn. Since the past five years the company has generated cash of around Rs 37.1 bn. Telco's capital employed has reduced by Rs 9.5 bn in the past three years.
  • The company's achieved a saving of Rs 2.6 bn in costs in FY01, through material, fixed and variable costs, improving operating efficiency and manpower reduction.

      Current prospects and going forward:

    • In the multi utility vehicle (MUV) segment, the company did well in FY01. The Tata Sumo continues to be the highest selling brand in its segment and is well received by the market. Sumo sales increased by 3% in FY01, while majority of other brands in the UV market did not do well. The company has been constantly upgrading the Sumo. Telco is expecting to launch a new variant of Deluxe Sumo next month to fight competition.
    • Its market share in the MUV segment stands at 23% in FY01. The company has managed to maintain this despite the launch of Toyota Qualis. Other players, like M & M have lost market share to Qualis, as they were late on new product launches.
    • The feasibility study for the new platform development with PSA Peugeot-Citroen has started.
    • For the Indica, the company is trying to improve overall efficiencies so as to increase volume growth in this segment. It successfully launched the Indica V2 in January 2001. These are already euro II compliant. The company plans to launch new variants of the car in FY02 to fight competition.
    • The company had enhanced its service network as well as expanded its full-fledged dealer network from 56 to 79 for the Indica. It is also giving an extended 18-month warranty for the Indica. Indica is among the top 3 selling cars in its segment and among the top four cars across the small, medium and large segments combined.
    • For the commercial vehicle industry the company plans to improve this segment, by cost reductions, improving efficiencies, global benchmarks. In terms of new launches, it has recently launched a new model in the heavy commercial vehicle segment. Besides they will continue to complement their 697 engines vehicles along with Cummins engines during the year, and also concentrate on the fast growing CNG bus segment in the current year.
    • The company has received an order for around 4,500 CNG buses in the current year from the National Capital Region (NCR). For the month of June 2001, they plan to supply 300 buses. However they are aiming to step these upto 500 to 600 buses in the next few months.
    • In the CV segment the company plans to add 576 Tata Certified Garages so as to improve customer satisfaction and provide them with a wider range of services.
    • The company's exports during the year grew by 19% YoY. Of total exports LCVs accounted for 48%, M & HCVs for 29%, MUVs -20% and cars only 3%. The acceptance of Telco's products is increasing in the European markets. The company plans to increase its thrust on exports from currently 8% of turnover to 20% of turnover over the next 5 years.
    • Telco aims to increase overall revenues by concentrating on non-cyclical businesses like spare parts and their financing and marine applications. The future thrust is going to be on exports, as this segment did well in the past year. The company also wants to add further value to its operations by getting into annual maintenance contract and fleet management. Besides the company may dispose off some of its financial assets during FY02 as part of its ongoing financial restructuring.
    • The company is hopeful that demand from the replacement market too will go up in FY02 due to lacklustre offtake in commercial vehicles in the past few years. Also as demand for multi axle CVs has been on the rise, Telco expects some volume growth from this segment.
    • In FY02, the company has estimated a capex of Rs 3.5-4 bn. Of this, 35% is for the commercial vehicle market and 65% for its passenger car segment. In FY02, the company aims to save costs to the tune of Rs 2 bn.
    • The company is going ahead with its rights issue and has filed the same with SEBI.

    On the whole, the company is aiming to reduce costs, by having a leaner and more efficient organisation structure, becoming globally competitive and being more responsive to customer needs.

    If agriculture and industrial growth picks up in the current year along with increased foreign direct investment, and higher investments in road transportation, the prospects in 2HFY02 could be better. For 1HFY02, the company does not see any improvement in its business prospects.

    On the current price of Rs 68, Telco is trading at 24.4xFY00 EPS of Rs 2.8.

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