Tough times continue……. - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Tough times continue…….

Oct 14, 2000

Going by the growth numbers of India's largest commercial vehicle (CV) manufacturer, Tata Engineering Ltd (Telco) for financial year 2000, the company should have been laughing all the way to the bank. Instead, Telco reported a loss before extraordinary gains to the tune of Rs 591 m. The company's medium and heavy commercial vehicles (M & HCVs) volumes grew by 36 percent, utility vehicles (UVs) by 2 percent and passenger cars by a stupendous 2,439 percent in financial year 2000. However, the company's maiden car project (Indica) drained the company's bottomline. A subsequent slow down in demand post April 2000 added to the company's woes. As a result, the markets have hammered the stock to new 52 week lows every now and then.

First, the drought conditions and then the unevenly spread monsoons have resulted in a slowdown in industrial and agricultural activity. The government's decision to implement a uniform sales tax, across all states resulted in higher prices of vehicles. Added to this, the recent oil price hike has made matters worse.

No signs of any improvement
Telco 1HFY01 1HFY00 % change
M & HCVs 23,475 29,687 -20.9%
LCVs 18,321 16,172 13.3%
Utility 15,235 14,656 4.0%
Cars 25,189 21,774 15.7%
Total 82,220 82,289 -0.1%

The company's main businesses too have slowed down in the current financial year. Its M & HCV volumes have dropped by 21 percent in the first half of financial year 2001 to 23,475 vehicles as compared to 29,687 vehicles for the same period of the previous year.

In the UV segment the company has fared better. Though most other players saw a decline in volumes in the current year, Telco's UV volumes grew by 4 percent for the first half of financial year 2001. This was achieved by the timely introduction of its Sumo variants in the market.

Internally too, since the past few years the company's operating margins have been under pressure. In the first quarter of financial year 2001 its operating margins fell to 5.8 percent as compared to 6.8 percent in corresponding period of the previous year due to higher costs related to its car division and Cummins engines. The company will absorb the high cost of the Cummins engines as it plans to take the usage of Cummins engines in its operations upto 100 percent in the current year. The usage of Cummins engines stood at around 80 percent for the first quarter of financial year 2001.

In September the slowdown gains momentum
Telco Sep-00 Sep-99 % change
M & HCVs 4,301 7,241 -40.6%
LCVs 3,611 3,194 13.1%
Utility 2,964 3,067 -3.4%
Cars 3,609 5,116 -29.5%
Total 14,485 18,618 -22.2%

The company was expecting to break even on its car division in the current year as it expected to clock in sales of 90,000 vehicles. However in the current year the passenger car segment too has slowed down. The company has subsequently revised its sales target to 70,000 cars. This target too seems unachievable as for the first half of the current financial year, the company has sold only 25,189 cars. This would delay the company's break even further. As the process of amortisation of expenses on the car project have started from September 1999, this too will have a negative impact on Telco's margins.

Telco is unlikely to show a turnaround in the current year, as the recent hike in diesel and petrol prices would further act as a dampener to its performance in the second half. The overall slowdown in the economy has resulted in a reduction in demand across all the major sectors. Financial Year 2001, will be a tough year for Telco and its losses are likely to increase.

Operating margins under pressure
(Rs m) 1QFY00 1QFY01 Change
Sales 15,801 18,029 14.1%
Other Income 38 285 641.1%
Expenditure 14,720 16,977 15.3%
Operating Profit (EBDIT) 1,081 1,052 -2.7%
Operating Profit Margin (%) 6.8% 5.8%  
Interest 684 910 33.0%
Depreciation and amortisation 771 1,171 51.9%
Profit before Tax (335) (743) 121.7%
Other Adjustments - -  
Tax - -  
Profit after Tax/(Loss) (335) (743) 121.7%
Net profit margin (%) -2.1% -4.1%  

On a more positive note, Telco has initiated a major cost cutting exercise to cushion itself from its declining CV volumes. The company has come out with a three pronged strategy for improving its overall revenues. This includes cost reduction, qualitative improvement and new product development.

The company aims to reduce overall costs by 4 to 5 percent per annum. It has introduced an employee separation scheme which has been offered to 3,000 employees in the current year. This should help sprucing up the company's gross margins over the next few years.

In new product development, Telco together with its consultant Warwick Manufacturing Group will come out with products which cater to the specific needs of the consumers. This stems from the fact that competition in the commercial vehicles segment is increasing with the entry of foreign players like Volvo in the Indian market. Hence, Telco needs to gear up and get its act together.

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 any signs of a pick up. The stock markets were looking forward to a strategic alliance for its car project. However, the company's stance is more towards a model swapping arrangement with some international car companies. Considering that consolidation in the sector will play a key role in future, the company will have to look out for a strategic partner and add new models to survive in midst of higher competition.

However, the overall situation for Telco is not that bad. In the commercial vehicle industry it is best positioned to come out of the slump incase of a recovery. Its widely accepted and vast range of commercial vehicles, strong distribution network, no capacity constraints and the fact that it is a national player, make it an attractive longer term bet.

Equitymaster requests your view! Post a comment on "Tough times continue…….". Click here!


More Views on News

Massive Surge in the Shares of Tata Motors Today. Key Factors Favouring the Rally (Views On News)

Oct 13, 2021

Tata Motors zooms 23% after report of TPG investing Rs 75 bn in EV arm.

Tata Motors Fails to Take Advantage of Rising Demand as Chip Shortages Hurt (Views On News)

Jul 27, 2021

A global chip shortage, Covid uncertainty, and commodity inflation are likely to impact Tata Motors in the short term.

TATA MOTORS 2020-21 Annual Report Analysis (Annual Result Update)

Jul 26, 2021 | Updated on Jul 26, 2021

Here's an analysis of the annual report of TATA MOTORS for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of TATA MOTORS. Also includes updates on the valuation of TATA MOTORS.

India's Edge in Electric Vehicle Stocks podcast (Views On News)

Sep 9, 2021

India has a huge advantage in using climate friendly EV batteries.

4 Ways to Play the EV Opportunity (Views On News)

Sep 6, 2021

The EV disruption is happening faster than you think. Here's how you can ride the Indian EV megatrend.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

The Biggest Winners and Losers in India's Transition to Electric Vehicles (Profit Hunter)

Nov 26, 2021

How India's EV transition could be a major headwind for the incumbents.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Dec 7, 2021 11:39 AM


  • Track your investment in TATA MOTORS with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks