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Telco: All set for a turnaround - Views on News from Equitymaster
 
 
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  • Oct 6, 2001

    Telco: All set for a turnaround

    The Chairman’s statement in Tata Engineering’s (Telco) annual report reads “ the year (2001) has, without doubt, been a year of crises for the company and while it has aggressively addressed several areas relating to cost, quality and product offerings, it should have performed better in the market place by protecting or possibly even growing its market share…” After reporting a record loss of Rs 5 bn in FY01, the company has embarked an aggressive growth strategy. If indications are to be believed, Telco is possibly heading northwards!

    Telco is India's largest commercial vehicle (CV) manufacturer. It dominates the medium and heavy CV segments and commands a 67% market share. It is equally dominating in the light CV segment with a market share of 61%. On the utility segment front, its Sumo range has a 23% market share. After initial hiccups, its foray into the passenger cars has yielded positive results. The CV division has been the key growth driver for the company. This segment accounted for as much as 76% of its turnover in FY01 with passenger division contributing to 16% of sales and spare parts accounting for another 5.6% of sales.

    But auto companies, including Telco, would love to forget year 2001, as the industry witnessed one of its worst years in a decade (industry volumes fell by 11.9%). A number of factors punctuated the downfall. Though FY01 started on a positive note, fall in agricultural production and natural calamities in various states slowed down rural demand towards the second half of FY01. Sales tax rationalisation and hike in diesel prices also did not augur well for CV majors like Telco.

    Positive signals…
    (Rs m) 1QFY01 1QFY02 Change
    Sales 17,977 16,974 -5.6%
    Other Income 285 67 -76.6%
    Expenditure 16,715 15,711 -6.0%
    Operating Profit (EBDIT) 1,262 1,263 0.1%
    Operating Profit Margin (%) 7.0% 7.4%  
    Interest 1,062 1,021 -3.9%
    Depreciation 882 895 1.4%
    Profit before Tax (398) (586) 47.4%
    Extraordinary item (346) (403) 16.5%
    Tax - -  
    Profit after Tax/(Loss) (743) (989) 33.0%
    Net profit margin (%) -4.1% -5.8%  

    As a result, in FY01, total market for CVs shrank by 15% in volumes. The effect was pronounced in MCV/HCV segments, which witnessed a 23% fall in volumes. Telco’s CV sales declined by 10% in FY01 to Rs 60 bn (while volumes were maintained at previous years’ levels, realisation fell by 10% in FY01). But things have started to look back in the current year, or so it seems. The company reported a 26.3% YoY rise in MCV/HCV sales in August 2001 to 4,293 units. LCV sales at 2,310 units grew 33.2% over July 2001, but showed a drop of 6% as compared to August last year. Cumulative CV sales for August 2001 showed a 12.5% rise in volumes to 6,603 vehicles compared to last year.

    The slow down effect…
    Sales (nos) 1QFY01 1QFY02 Change
    CVs 18,357 14,335 -21.9%
    UVs & Cars 20,588 18,537 -10.0%
    Exports 3,079 2,326 -24.5%
    Total 42,024 35,198 -16.2%

    The company has introduced a slew of new models, which should enable it to consolidate its market share in the current year. The use of Cummins engine on its M/HCV models has helped the company to comply with year 2000 emission norms. It is also strengthening its presence in Southern India (the largest market for CVs) where Ashok Leyland, its key competitor, has a big presence. To diversify revenue streams and reduce dependency on CVs, Telco has plans to sell around 4,000 series-697 engines in the current year. It had sold 2,500 engines last year for non-automotive purposes. This will also help the company in utilising its capacity optimally. Telco is also focusing on three other segments like spare parts, reconditioning and after sales service businesses. Going forward the company plans to double contribution from these businesses to its topline.

    And finally auto majors have something to cheer about. For once it seems that the Government of India has taken infrastructure development seriously. One of the key developments recently is the government’s proposed road network project, which includes the ambitious Golden Quadrilateral stretch that aims at connecting four metros of the country. Apart from this, the government has also initiated a number of rural connectivity projects. These measures are expected to increase employment and boost demand for cement, steel and other materials. As a result, demand for CVs is expected to increase in the coming years. The CV segment will also benefit from certain structural changes that are happening in the industry. For one, consolidation has gained pace in the road transportation sector. As bigger freight operators consolidate, demand for CVs above 16 tonnes and multi-axles CVs are expected to increase. It is launching new range of models in the bus segment, which has been in center of activity off late (it had won the contract to supply CNG based buses for the Delhi Transportation Corporation).

    Despite stiff competition, Telco’s passenger car sales are impressive in the current year. Indica sales for the month of September 2001 have increased by 51% to 5,405 units thus taking its total sales to 27,535 units for the first half of the current year. This is higher by 10.4% over the corresponding quarter of the previous year. The company has reported a robust growth in Indica sales for the fourth month in succession thanks to the newly launched, improved version, of Indica labeled “Indica V2”. To widen its product offering it has also launched the CNG version of Indica in an effort to tap the taxi market. With stringent emission norms, two of the four metros in India viz. Delhi and Mumbai are expected to rule for compulsory CNG taxis. This should benefit Telco in the long run.

    In the multi utility vehicle (MUV) segment, the company did well in FY01. Tata Sumo continues to be the highest selling brand in its segment and is well received by the market. Sumo sales increased by 3% in FY01, while majority of other brands in the UV market witnessed a fall in volumes. Its market share in the MUV segment stood at 23% in FY01. The company has managed to maintain market share despite the launch of Toyota Qualis. Other players, like M & M, have lost market share to Qualis, as they were late on new product launches. The company has been constantly upgrading the Sumo and recently launched the deluxe version of the same to fight competition.

    The company's exports in FY01 grew by 19% YoY. Of the total exports LCVs accounted for 48%, M & HCVs for 29%, MUVs -20% and cars only 3%. The acceptance of Telco's products is increasing in the European markets. The company plans to increase the share of exports from 8% of turnover currently to 20% of turnover over the next 5 years. In FY01, Telco had test marketed its products in European countries like Italy and Portugal. It hopes to expand its presence in select other European countries and consolidate its presence in neighboring countries like Bangladesh and Sri Lanka. However, slow down in the global economy might affect demand prospects in export markets.

    Efforts to improve to profitability do not end here. To fund expansion plans and retire high cost debt, Telco is tapping the markets through a rights issue. If the proposed rights issue of the company goes through successfully, Telco’s interest burden will fall significantly. It plans to retire debt worth Rs 5.2 bn in the next three years, out of which around Rs 2 bn will be retired in the current year itself. The rights proceeds will also help strengthen its research and development for new introductions. Telco plans to utilise 53.8% of rights issue proceeds i.e. Rs 7 bn towards product development in coming years.

    Break-up of proceeds use…
    Use of funds FY02 FY03 FY04 Total % of total
    CBU* 1,300 1,020 950 3,270 25.0%
    Car project 3,190 570 - 3,760 28.8%
    Engineering research centre 360 380 30 770 5.9%
    Sub-total 4,850 1,970 980 7,800 59.7%
    Prepayment/Repayment 1,950 2,250 1,070 5,270 40.3%
    Total 6,800 4,220 2,050 13,070 100.0%
    *Commercial Vehicle Business Unit

    On the restructuring front, Telco is reducing the level of backward integration. It is focusing on assembling MCVs/cars as against manufacturing them completely. It has also tightened its belt through value engineering and as a result margins have improved in 1QFY02. Telco also has plans to prune the vendor list in coming weeks to 200 from 700 currently, in order to cut direct material costs that account for 75% of the company’s operating expenses. The number of employees has also come down by 13,000 (34% of the workforce) over the last four years through voluntary retirement schemes and exit from non-core business activities. Telco exited from Mercedes Benz following the receipt of necessary approvals from the government. It sold its 14% stake in the company for Rs 850 m. The axles division hive off is also in line with the company’s overall vision of streamlining operations and bringing in more focus to the core activities.

    But the road ahead is not smooth, as it seems. For one, Telco has to introduce new models other than variants every year to boost volumes and sustain market share. That requires significant investments in R&D. On the other hand, the company could bring in a foreign partner for a platform sharing agreement and utilise the multinational’s existing product line. Telco has been eyeing for a partner for quite sometime. It had entered into a platform sharing agreement with PSA Peugeot Citroen last year for introducing high-end premium models. However, the project was abandoned after the feasibility study. High logistic costs and lower volume growth in the premium segment were cited as the key reasons for abandoning the tie-up.

    Roping in a partner to help Telco broaden its offerings in the passenger car segment seems to be the biggest imperative. This is critical for sustainability of the car project in the long run in light of prevailing competitive scenario in the industry. Besides, the entry of formidable international players like Volvo, has intensified competition in the higher end of the CV segment. With India coming under the WTO purview, multinational companies are contemplating imports of semi-knocked down kits, which would result in lower customs duty. In that case, Telco’s volume growth might be tested.

    And as Mr. Ratan Tata himself puts it “ the task ahead is not easy, and some of the decisions that would need to be taken along the way could be hard and painful, but there is however a commitment and a great sense of pride in the people of Tata Engineering which I am sure will enable this effort to succeed…”

     

     

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