'Other income' pulls Telco through - Views on News from Equitymaster

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'Other income' pulls Telco through

Oct 27, 1999

Newspaper reports reveal that Tata Engineering and Locomotive Ltd has posted net profit of Rs 4 m in 1HFY2000. TELCO is India's largest medium/heavy commercial vehicles (M/HCV) (65% market share in August 1999) and light commercial vehicles (LCV) (63% market share) manufacturer. It also manufactures utility vehicles (28% market share) and passenger cars (7% market share).

TELCO's Rs 4 m net profit in 1HFY2000 is attributed solely to the 210% rise on other income to Rs 998 m. Of this, profit on sale of investments accounted for Rs 732.6 m. Excluding this portion of extraordinary income, the company would have posted a loss of Rs 400 m.

(Rs m) 2QFY2000 2QFY1999 Change
Net Sales 20,859 14,364 45.2%
Other Income 959 305 214.4%
Expenditure 19,536 13,412 45.7%
Interest 1,177 743 58.5%
Depreciation 766 703 9.0%
Profit before Tax 340 (188)  
Tax - -  
Profit after Tax 340 (188)  
Net profit margin 1.6% -1.3%  

A matter of concern for the company is the decline in operating margin to 6.9% in 1HFY2000 from 7.3% in 1HFY1999. The decline in margins is attributed to a restructuring in product mix towards to passenger cars, which have lower margins.

As TELCO's plant is now fully commissioned, interest and depreciation is expected to increase significantly in 2HFY2000, and will have adverse impact on profitability.

Market view:
Although analysts had all along forecasted a weak performance, TELCO's results are still very disappointing. They have flagged a 'LONG TERM BUY' in anticipation of a restructuring of the car business, and strong CV demand.

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