FY2001: tough year for Telco - Views on News from Equitymaster

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FY2001: tough year for Telco

Aug 26, 2000

Tata Engineering and Locomotive Company Ltd (TELCO's), performance in the current financial year will continue to face a difficult patch. The company's car division is yet to break even, which continues to be a drag on its profits. To add to this commercial vehicles sales too in the current year have slowed down considerably. Besides the above, the company is going to absorb the high cost Cummins engines as it plans to take the usage of Cummins engines upto 100% in the current year. The usage of Cummins engines stands at around 80% for the 1QFY01.

The company was earlier expecting to break even on its car division in the current year as it expected to clock in sales to the tune of 90,000 vehicles. However in the current year as car sales too have slowed down, this target seems very unlikely. As the process of amortisation of expenses on the car project have started from September'99, this too will have a negative impact on its profit and loss account.

On a more positive note the company's employee separation scheme which has been offered to 3,000 employees currently seems to be getting an adequate response. This should help the company's gross margins in future.

The company seems very clear on its plan for its car project. It is on the look out for a strategic partner, as in future competition will play a key role in the Indian car market. Also keeping in mind the consolidation in the international car market, this move by the company makes good business sense.

  April-July (YTD) volumes
  FY2000 (nos.) FY2001 (nos.) (% change)
M & HCV 17,085 15,466 -9.5%
LCV 10,641 11,371 6.9%
Utility 8,784 9,680 10.2%
CV and utility volumes 36,510 36,517 0.0%
Cars 12,019 18,085 50.5%
Total volumes 48,529 54,602 12.5%

TELCO's medium and heavy commercial vehicles have reported a fall of 9.5% for the first four months of the current financial year. However in the utility vehicles (UV) segment the company seems to be performing well with its new Sumo variants. UV sales for Telco in the 1QFY01 were up by 10% YoY. CV sales are expected to pick up in the second half due to higher activity in the festive season.

However the company's gross and net margins will continue to be under pressure in the current year, due to costs associated with 'Indica' and Cummins engines.

On the current price of Rs 95, Telco is trading at 34 xFY2000 earnings.

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