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Telco: Old economy woes

Jun 12, 2001

The slump in the commercial vehicle (CV) segment continues to haunt Telco's financials. The company's dismal stock price performance is the result of a weak balance sheet considering that its car project is yet to show any signs of a break even and CV volumes not moving. Though, it seems that the CV industry is at the bottom of its trough and is likely to report better volume growth going forward, all this depends on an improvement in the country's economic scenario. Unless there is substantial upside to agriculture and industrial growth in the current financial year, Telco's volumes will continue to languish.

Telco, as compared to Ashok Leyland has lost market share because it was slow in realizing the potential in the bus and defence segments in a bid to cover the declining volumes in the heavy and medium goods segment. As a result Telco's market share fell to 63.4% in the medium and heavy commercial vehicle segment (M/HCV) while Ashok Leyland's market share went upto 36.4% in FY01 from 33.5% in FY00.

In an effort to push volumes, most manufacturers offer discounts and incentives in 4Q of a given year. Telco too became aggressive in tackling the situation and re-introduced its less costly 697 medium commercial vehicle engines as well as expanded its dealer network in 4QFY01. As a result, Telco managed to report an improvement in its volumes in 4QFY01 over 3QFY01 by 46% QoQ. However, this aggressive sales strategy is followed by most automobile companies during 4Q of any financial year and is hence not that unusual.

Indica volumes FY00 FY01 % change
April 5,155 3,247 -37.0%
May 5,150 4,763 -7.5%
Total 10,305 8,010 -22.3%

Unfortunately, the scenario has not really improved for the company in the current financial year. For the first two months of FY02, its volumes have continued to report a decline. Its car division too is facing tough times. Indica volumes continue to report a YoY. The decline April & May was 22% due to higher competition and lack of demand. Though it should be noted that in the same period of FY00, car volumes did unusually well due to the sales tax rationalisation that followed last year. To add to this year's lower sales is the component supply constraints that the company faced in April and May'01. However, the fact remains that passenger car demand is not showing any major signs of moving in a positive direction.

The company continues to be surmounted with large losses, as its car division has clocked in a volume of only 44,545 cars for FY01 and is still far away from its break even target of 70,000 cars per annum. Even though the excise duty for cars has fallen from 40% to 32%, recently most companies have increased prices as their costs continue to soar, hence resulting in no gain to the consumers.

  FY00 FY01 % change
  (nos.) (nos.)  
M& HCVs 73,759 55,511 -24.7%
LCVs 37,816 39,553 4.6%
Utility vehicles 32,032 30,990 -3.3%
Cars 55,758 44,545 -20.1%
Total volumes 199,365 170,599 -14.4%

The trigger for Telco's share price will be a better demand scenario, normal monsoons, and if the company decides to share the burden of its car division by way of a joint venture or sale. On the positive side the company has clocked in an order of 4,590 CNG buses in the National Capital Region. This order is expected to be completed by September 2001.

In the interim though, shareholders will have to be content with an expected loss of Rs 4.2 bn for FY01E, due to decline in volumes and lower operating margins. Telco will be reporting its FY01 results on 14th of June 2001. On the current price of Rs 74 , Telco is trading at 26.4x FY00, EPS of Rs 2.8.

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