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Telco's profits driven down by Indica's costs

May 29, 2000

Automobile giant, Tata Engineering & Locomotive Company Ltd (TELCO) has reported a net profit of Rs 712 m for FY2000, a drop of 26.9% YoY. If the profit on sale of the company's gear box, axle and machine tool facilities of Rs 1,343 m is removed from this the company would actually have reported a loss of Rs 591 m for FY2000.

(Rs m) FY1999 FY2000 Change
Sales 65,429 87,918 34.4%
Other Income 510 1,712 235.5%
Expenditure 59,983 82,748 38.0%
Operating Profit (EBDIT) 5,446 5,170 -5.1%
Operating Profit Margin (%) 8.3% 5.9%  
Interest 3,096 4,047 30.7%
Depreciation 2,813 3,426 21.8%
Profit before Tax 48 (591) -1339.8%
Other Adjustments 1,024 1,343 31.2%
Tax 97 40 -58.8%
Profit after Tax/(Loss) 974 712 -26.9%
Net profit margin (%) 1.5% 0.8%  
Earnings per share* 3.81 2.78  

On the brighter side the company's sales grew by a robust 34.4% to Rs 87.9 bn in FY2000 as compared to Rs 65.4 bn in FY99. The pick up in the automobile industry boosted the volumes of Telco during FY2000. The company has reported a volume growth of 55% to 1,99,365 vehicles in FY2000 as compared to 128,867 vehicles reported in FY99.

Telco's Medium and Heavy Commercial (M/HCVs) grew by 36% to 73,628 vehicles in volume terms due to the pick up in the economy. The company's market share in the M/HCV division improved to 67% in FY2000, due to the company's marketing efforts and the shift to Euro I compliant Cummins vehicles.

The passenger car division did very well and the Indica reported a sales volume of 54,992 vehicles during the year. In its first full year of operations the Indica has garnered a 9% market share in the total passenger car segment.

However inspite of strong CV and passenger car sales the company's operating margins have fallen to 5.9% in FY2000 from 8.3% in FY99 a decline of 240 basis points. On the costs side the company faced pressure due to high costs associated with the commissioning of the Indica during the year and higher costs attributed to installation of the Cummins engines.

The improvement in vehicle sales of Telco can be attributed to the pick up in the economy, lower interest rates, stability in freight rates, and a reduction in dealer inventories.

Inspite of strong commercial vehicle sales FY2000, the company’s car division continues to be a drag on profits. The company expects to break even on the Indica by the end of FY2001. Though the growth prospects for FY2001 do not look very attractive as the company would have to continue to bear costs associated with Indica and Cummins engines, we feel that the company will start showing improvement in their margins in FY2002.

On valuation terms, Telco's stock is trading at a price to earnings multiple of 44x FY2000's earnings.

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