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Telco: Round two - Views on News from Equitymaster
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  • Jun 4, 2002

    Telco: Round two

    It was an eventful year for auto majors. Led by recovery in commercial vehicle sales and robust passenger car demand, turnover grew at a healthy rate in FY02. Tata Engineering (Telco) was one of them. With the company expected to announce its full year results tomorrow, we take a look at the company's first nine months performance and future growth prospects.

    Telco's overall volume growth of 7% in FY02 was primarily led by its renewed 'Indica V2', giving the company the much needed impetus. Passenger car sales increased by 49% to 66,370 units in FY02. One of the most encouraging aspect of its performance is the rise in medium and heavy commercial vehicle volumes, where Telco has a commanding market share (66% share). The table highlights the recovery in CV sales. After plummeting by 24% in FY01, CV demand started showing signs of recovery in early part of 2QFY02. This is a cash cow for the auto major.

    The V2 effect…
    (Nos) FY00 FY01 FY02 Change*
    M/HCV 73,759 55,420 59,281 7.0%
    LCV 37,816 39,598 30,476 -23.0%
    UVs 32,032 30,975 27,104 -12.5%
    Cars 55,758 44,534 66,370 49.0%
    Total 199,365 170,527 183,231 7.4%

    This along with improved operating efficiency is clearly reflected in the first nine months performance. Compared to a net loss of Rs 3,537 m in 9mFY01, net loss stands reduced to Rs 2,162 m for 9mFY02. Net sales has gone up by 7% with operating profit margins increasing by 210 basis points to 8%. The company is expected to end the year with a net loss of around Rs 2.4 bn in FY02.

    Apart from passenger cars and CVs, performance of other key divisions like LCVs and utility vehicles (UVs) are not encouraging. Competition has significantly increased in the UV category with Toyota and M&M making inroads into Telco's market share. Though 'Tata Safari' has performed well in the current fiscal, 'Tata Sumo' is clearly losing out to its peers. Together, both LCVs and UVs, account for as high as 32% of volume sales, causing concern. But the company has lined up a number of new models in an effort to increase its share in the coming fiscal.

    Another worrying aspect is the reversal in trend of CV sales starting February 2002. For instance, M/HCV sales in March 2002 declined by 16% for Telco. The reason could be subdued demand in Western region, which has been hit by a series of events. Besides, there is not much positive on the economy front with the industrial sector still struggling. Nevertheless, we expect CV demand to increase by 5%-6% in the coming fiscal led by higher replacement demand and increased demand for higher tonnage vehicles thanks to the road project.

    On the passenger car front, volume growth was lower last month on account of planned shut down. The company has targeted total volumes of around 90,000 units in FY03, a growth of 35%. Indica Sedan is set for launch towards end of 1QFY03 and monthly volumes are expected to be in the range of 1,000 units. Apart from sales, margins would continue to show improvement on the back of improved operating efficiency and retirement of debt. Overall it should be a positive year for the auto major. But it has to be kept in mind that the auto sector is extremely competitive and given the choice available to the customer, Telco cannot afford to make a wrong move.



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