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TELCO: Focuses on reducing costs - Views on News from Equitymaster
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  • Oct 9, 2000

    TELCO: Focuses on reducing costs

    Tata Engineering and Locomotive Company Ltd (TELCO) has initiated a major cost cutting exercise to cushion itself from its declining commercial vehicle (CV) volumes and a slowdown in the passenger car segment.

    The company has come out with a three pronged strategy for improving the overall revenues of the company. This includes cost reduction, qualitative improvement and new product development. Besides the company has appointed a consultant to help it carry out the above.

    On the cost cutting front the company is targetting a reduction in overall costs by 4%-5% per annum. Besides the company has introduced an employee separation scheme which has been offered to 3,000 employees currently. This should help the company's gross margins in over the next few years.

    In new product development, Telco together with its consultant Warwick Manufacturing Group will come out with a product introduction strategy. This stems from the fact that competition in the commercial vehicles segment too is increasing with the entry of foreign players like Volvo in the Indian market. This will help the company to come out with products which cater to the specific needs of the consumer.

    Though all these measures will help the company in reducing costs over a three year time frame, the worry currently is that commercial vehicle volumes are not showing signs of a pick up. In the passenger car segment, the company was earlier expecting to sell 90,000 vehicles, however now they are expecting a sale of 70,000 vehicles. Considering the fact that the company has sold only 21,580 vehicles in the first five months of the current year, this target of 70,000 vehicles seems unlikely to be met. Hence its car division will not be able to break even this year.

      April-August FY01 April-August FY00 % growth
    M& HCVs 19,174 22,446 -14.6%
    LCVs 14,710 12,978 13.3%
    Utility vehicles 12,271 11,589 5.9%
    Passenger cars 21,580 16,658 29.5%
    Total 67,735 63,671 6.4%

    FY2001 is a very tough year for Telco and we feel inspite of cost reductions, the company cannot report a turnaround in the current year. Volumes in medium and heavy commercial vehicles (MHCVs) have declined by 15% in the first five months of the current year. Besides the automobile sector as a whole is faced with higher diesel prices leading to higher transportation costs for companies.

    The slowdown in the passenger car segment has added to Telco's woes. The only positive which the market was looking forward to was the tie-up for the car project, however this also does not seem to be happening. They were earlier on the look out for a strategic partner. Now the company's stance is that they will enter into a model swapping arrangement with some international companies and this will help the company in increasing its export volumes.

    On the current price of Rs 81, Telco is trading at 28.9x FY2000 EPS of Rs 2.8. It is trading close to its 52 week low.



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