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Telco: All round performance

May 27, 2003

FY03 has been an eventful year for Tata Engineering. With the turnaround in the commercial vehicle (CV) sector in September 2001, the largest CV manufacturer in the country has also seen a revival of sorts. For FY03, the company has posted a net profit of Rs 3 bn as against a net loss of Rs 537 m last year.

(Rs m)4QFY024QFY03ChangeFY02FY03Change
Net sales 25,868 29,910 15.6% 75,055 90,932 21.2%
Other Income 27 69 151.8% 233 180 -22.4%
Expenditure 22,946 26,033 13.5% 68,553 79,564 16.1%
Operating Profit (EBDIT) 2,922 3,877 32.7% 6,503 11,368 74.8%
Operating Profit Margin (%)11.3%13.0% 8.7%12.5% 
Interest 810 646 -20.2% 3,822 2,790 -27.0%
Depreciation 878 916 4.3% 3,547 3,595 1.4%
Profit before Tax 1,262 2,384 88.9% (634) 5,164 -
Extraordinary items (200) (60) - (458) (60) -
Tax (555) 948 - (555) 2,103 -
Profit after Tax/(Loss) 1,617 1,376 -14.9% (537) 3,001 -
Net profit margin (%)6.3%4.6% -0.7%3.3% 
No. of Shares (m) 255.9 319.8   255.9 319.8  
Earnings per share (Rs)* 20.2 17.2   (1.7) 9.4  
P/E (x)     17.9  

Total unit sales in FY03 is higher by 20% and was primarily led by robust rise in CV sales. SIAM numbers for FY03 suggest that the CV sector grew by 30% with demand growth led by continued shift towards higher tonnage vehicles. Though as a percentage of total CVs, the contribution was lower at 40% in FY03 as compared to 42% last year, multi-axle CVs continue to gain acceptance among transport operators. In FY03, there was a rise in medium CV sales owing to higher transportation of food grain following the relaxation of norms by the central government. Telco, with a pan Indian presence, has capitalised on the upturn and consequently extended its market share to an estimated 78% in FY03. With consumer durable sector also showing a rise in volumes, LCV unit demand perked up.

However, on the utility vehicle segment front, Telco has lost out to its key competitors like M&M and Toyota. The company's market share has come down from 24% in FY02 to 22% in FY03 in absence of competitive models. After 'Scorpio' and renewed 'Qualis', both M&M and Toyota have gained incremental share in the pie. However, Telco is working on a new UV platform through which it expects to regain market share over the next two years. It has been a positive year for Telco's passenger car division. Total unit sales was higher by 22%. This was partially led by better performance of the newly launched sedan 'Indigo'. Total volumes sold in 4QFY03 were the highest ever for the company and reflects the success of the new model (2QFY03 also saw a spurt on account of order pile up in light of the planned shut down).

The quarterly trend…
M&HCVs 15,254 17,025 19,953 24,700 76,932
% YoY change49.5%19.7%34.4%22.6%29.5%
LCVs 7,337 8,651 8,844 11,300 36,132
% YoY change26.0%22.8%16.3%12.9%18.5%
UVs 6,744 5,960 5,116 8,468 26,288
% YoY change8.1%-1.4%-12.3%-5.8%-3.0%
Cars 11,623 23,536 17,234 28,371 80,764
% YoY change-9.7%58.8%17.3%18.2%21.7%
Total unit sales 40,958 55,172 51,147 72,839 220,116
% YoY change16.6%30.9%19.0%15.4%20.0%
Source: Company website

Operating profit margins have shown a marked improvement on the back of benefit from higher productivity arising from increased capacity utilisation and other cost control initiatives. In the last three years, average sales per employee has almost doubled for Telco, signifying the success of the restructuring exercise undertaken by the management. As expected, interest costs have also declined by 27%, which is in line with the trend one has seen ever since the rights issue in FY02. Since then, the company has repaid debts to the tune of Rs 5.6 bn, which is marginally higher than the sum earmarked during the rights issue. But for a sharp rise in tax outgo, net profit would have been even higher.

As far as the growth prospects in FY04 are concerned, the company expects the CV sector to grow between 7%-8% on account of replacement demand. As seen in FY03, basic sectors of the economy are expected to perform well in the coming fiscal as well, which could eventually result in higher movement of road cargo. Just to highlight the potential from replacement demand, of the total CV population of 2.7 m currently, 39% are more than 10 years old. This is the potential segment. Though the general weakness in the economy could slow growth, support would come from such demand in the near term. Telco, with a commanding market share in the CV sector, is likely to take advantage of the trend. On the passenger car front, the Rover deal and other export initiatives will enable Telco to maintain a healthy capacity utilisation. Overall, we expect growth in passenger car sales in FY04 to be on the lower side.

The stock currently trades at Rs 168 implying a P/E multiple of 17.9x FY03 earnings (13x FY04E earnings). Though valuations seem to be on the higher side at the current juncture, we expect CV sector to grow at a CAGR of 7% over the next five years. A favorable interest rate scenario and expected growth in road cargo movement is likely to result in higher demand for larger CVs. However, stiff competitive pressure in the passenger car segment is a cause of concern. The company may have to incur significant capital expenditure to introduce new models, which have an inherent risk of failure. Given this backdrop, while one remains positive on the CV segment front, the overall risk profile remains on the higher side.

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