Automobile major Tata Engineering and Locomotive Company Ltd (TELCO's) performance is directly linked to the performance of the economy. The health of the index of industrial production is an indicator of the company's performance.
TELCO, is India's largest commercial vehicle manufacturer. It dominates the MCV/HCV segment with a market share of 66%, the LCV segment with a 67% market share, and utility segment with 26% market share. It reported a turnover of Rs 64 bn in FY99. Its plants are located at Pune, Jamshedpur and Lucknow.
As can be seen from the chart above since FY97 the IIP did not grow very fast due to the economic slowdown and low demand from major sectors like steel, cement etc as the Indian industry faced tough conditions over the past couple of years. Telco too during this period saw a decline in its sales as it is dependant on industrial demand for its growth.
In FY2000 however things have improved for Telco as IIP too has picked up. For the 3QFY2000, Telco has reported a sales growth of 52% YoY. The IIP forecast for FY2000 as reported by CMIE too is estimated at 8%, which is a large improvement since FY99.
The improvement in sales can be attributed to the fact that the economy and industrial production is showing signs of a pick up, lower interest rates has lead to better financing options available, stability in freight rates, and a reduction in dealer inventories.
Inspite of strong commercial vehicle sales in 3QFY2000, the company’s car division continues to be a drag on profits. Also the company's margins are under pressure as it has installed the new Cummins engines in its models which has resulted in higher costs for the company. However keeping in mind future growth prospects once the Indica break's even, the stock looks attractive.
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