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Telco: Turnover spurts 23%

Jul 25, 2002

Tata Engineering (Telco), the commercial vehicles major, has posted a sharp rise in sales on the back of impressive rise in CV sales in the first quarter ended June 2002. The auto major is back in black, which was also aided by improvement in operating margins.

(Rs m)1QFY021QFY03Change
Net sales 14,223 17,477 22.9%
Other Income 67 69 4.2%
Expenditure 13,283 15,463 16.4%
Operating Profit (EBDIT) 940 2,014 114.3%
Operating Profit Margin (%)6.6%11.5% 
Interest 1,021 800 -21.6%
Depreciation 895 895 0.0%
Profit before Tax (909) 388 -
Extraordinary items (80) - -
Tax - 108 -
Profit after Tax/(Loss) (989) 280 -
Net profit margin (%)-7.0%1.6% 
No. of Shares (m)255.9319.8 
Diluted Earnings per share* (15.5) 3.5  
P/E Ratio (x)  41.1  
(* annualised)   

Demand for medium and heavy commercial vehicles have risen sharply in 1QFY03. This could primarily on account of the lag effect of good harvest last year that could be transforming into higher tonnage demand for transportation. Freight rates in key sectors have seen a notable rise over the last four months. This combined with a favorable interest rate regime could have aided such a strong volume growth. Moreover, Telco had initiated measures to boost volume growth by entering into hire purchase contracts with fleet operators. This seems to have received encouraging response if one were to go by the numbers in FY02. Value of vehicles purchased and issued on hire purchase contracts in FY02 amounted to Rs 6,205 m. If we extrapolate it further into volumes (based on average realisation per vehicle of Rs 520,300 in FY02), volume sales through hire purchase works out to 11,290 units or 10% of CV sales in FY02. We expect hire purchase sales to grow at a faster clip for the company in the future as well.

The surprising aspect of Telco's first quarter performance was the spurt in LCV sales by 44% to 6,747 units. LCV demand has remained subdued in the last three years on account competition from MCVs, UVs and three-wheelers in the rural market. Telco's performance in the UV segment however, is a cause of concern. Clearly, Toyota and M&M have made significant inroads into the company's market share. Given Telco's aged models like Sumo, there seems to be no respite in sight. Though Telco has plans to launch new variants, one wonders to what extent would the new models help Telco in the future considering the options available (apart from M&M's Scorpio, Toyota is all set to introduce 'new-look' Qualis in 2QFY03). We expect Telco's market share in the UV segment to touch 19% levels in FY03 (estimated 22% in FY02).

First quarter snapshot...
(Nos)1QFY021QFY03Change
M/HCVs10,25215,25448.8%
LCVs5,8137,33726.2%
UVs8,4036,744-19.7%
Cars10,70811,4296.7%
Total35,17640,76415.9%
Source: Company website

Passenger car sales in the first quarter is comparatively lower on account of planned shut down of its plant for the integration of the soon-to-be-launched 'Indica Sedan' and power shortage. The Sedan version is slated for launch towards the end of the second quarter and the company is believed to have targeted around 1,000 units per month.

Moving away from turnover, Telco's performance at the operating level is commendable. Operating margins have increased notably because of lower employee costs and value engineering efforts initiated by Telco last year. Interest costs have fallen notably as the company has utilised funds raised from rights issue to retire high cost debts.

Sales mix...
(Nos)1QFY021QFY03Change
Domestic33,22638,96617.3%
Exports1,9501,798-7.8%
Total35,17640,76415.9%

It needs to be mentioned that volume growth as witnessed in 1QFY03 may not sustainable in the coming quarters unless there is good monsoon in current fiscal. Given the fact that there has not been any encouraging sign on the industrial sector front, CV sales might slow down towards the end of FY03. In line with company's expectations, we estimate CV sector to grow by around 4%-5% in FY03.

Moving away from CVs, competition has intensified in the passenger car segment post the success of Fiat's new model, 'Palio'. This combined with the price reduction by Maruti on its flagship model 'Maruti 800' recently might slow volume growth in the coming quarters for Telco. The price reduction by Maruti could actually shift some demand for 'Segment B' cars like Santro, Indica and Fiat to 'Segment A' that is dominated by Maruti. While the company has plans to increase passenger car prices in an effort to pass on the rise in input cost, it remains to be seen whether Telco goes ahead with the same. The stock currently trades at Rs 144 implying a P/E multiple of 41x annualised 1QFY03 earnings.

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