There is a marked difference between the Indian commercial vehicle (CV) and the global CV market in terms of competition. While the international market is fragmented in nature, there are only four CV manufacturers in India viz. Telco, Ashok Leyland, Volvo and Eicher. Tata Engineering (Telco) dominates the domestic CV segment with a 68% market share. But how does the company compare in terms of technology and cost efficiency with global peers?
2002 sales number
Besides commercial vehicle segment that encompasses medium and heavy CVs (below and above 16 tonnes), light CVs and utility vehicles (UVs), the company is also present in passenger cars (21% of revenues). Telco has a pan-Indian distribution network that has enabled it to outperform its competitors over the years. It has entered into an agreement with Rover UK for supply of around 12,000 cars per annum.
Scania of Sweden is the 4th largest heavy CV manufacturer in the world with a global presence (8.4% share in the above 16 tonne segment). While Western Europe accounted for 69% of its FY03 unit sales, Latin America and Asia contributed to 11% and 8% respectively (the rest is from rest of Europe and others). It uses one of its manufacturing capacities in Latin America for supplying CVs to Asia, Africa and Europe. In terms of revenue mix, trucks and bus accounts for 65% of revenues followed by services at 23% (this includes financing of purchases, spare parts and services). It has exited from sale of used car operations.
It is a US based company with a 4.6% share in the above 16 tonne CV segment in the world (9th largest). Navistar is largely focused in the US and South American market with leadership position in the bus segment in US. While sale of trucks accounted for 70% of sales, engine sales accounted for 26% with the rest coming from offering of financial services.
Revenue mix comparison
Truck & buses
Used vehicles and others
*FY02 stats. For global companies - FY03 stats
Telco and Scania are almost head-to-head in all paramaters, be it operating margins, select return ratios and on valuation basis. But in terms of revenue growth, Telco is far ahead of its international peers with a 12.5% CAGR growth in sales in the last five years. Given the recovery in the CV sector in India, Telco has grown at a faster rate in the last two years viz. FY02 and FY03 whereas it is not the case with Scania and Navistar. While Telco and Scania have operating margins excess of 10%, Navistar margin stood at a meagre 2.2% (excluding restructuring costs towards the closer of its Brazil facility).
A comparative view*…
Working capital to sales
R&D as a % of sales
*FY03 numbers for Telco, Dec'02 numbers for Scania and Navistar
**Excluding charges for restructuring for Navistar
***Current price for Scania and Navistar in US$
In terms of asset utilisation and control over working capital, Telco is far more efficient. In fact, the company in its analyst meet had indicated that almost 80% of unit sales in FY03 were cash based. This enables Telco to have a control over its working capital, which is in the negative zone in FY03, which is commendable. Though R&D spending as a percentage of sales is on the lower side despite lacking in terms of superiority in products, the company has made significant progress on this front. Considering the stricter environmental norms that are expected, we expect Telco to spend Rs 5 bn as capital expenditure in the next three years.
As far as growth prospects of Telco are concerned, we expect demand for higher tonnage vehicles (> 16 tonnes) to grow at a faster clip post FY05 in line with the completion of the ongoing infrastructure projects. Currently, of the industry M/HCV sales of 115,000 units in FY03, only 40% is accounted by the higher tonnage segment. In the international markets however, bulk of industry sales is accounted by 16 tonnes with 12 to 16 tonnes accounting for the rest. Despite this, India is already among the largest market compared to European countries (graph below). Though the CV industry is cyclical in nature, replacement demand, low interest rates and higher transportation of cargo through roads could reduce the cyclicality going forward in India. Telco, as the market leader, is likely to take advantage.
The stock currently trades at Rs 181 implying a P/E multiple of 19.3x FY03 earnings. Valuations are on the higher side not only when compared with Scania, but also in relation to its auto business profile. While we continue to remain positive about Telco's CV manufacturing abilities, perhaps the only apprehension is the company's presence in the car segment. With the entry of MNCs, competition has intensified and there is also an inherent risk of new product failures. This increases the risk profile of the stock.
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