Tata Engineering and Locomotive's (TELCO) 2QFY2000 results seem to indicate that the company's operating margins have come under pressure following investments in the car business (Indica) and in making its commercial vehicles Euro-! compliant.
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).
The company's margins will continue to remain slim going by the current financial scenario of the company. Both its businesses, passenger cars and CVs are very competitive and the company has had to keep costs under a tight leash.
Moreover, as revealed by the company, it has incurred Rs 7.3 bn in in-house development of products, of which the Indica constitutes close to 50% (Rs 3.3 bn). This will be written off over a period of 5 years.
TELCO has bounced into the black largely due to the Rs 732.6 m windfall from its disinvestment in Tata-IBM. The company's turnover has increased 45% on the back of higher passenger car and M/HCV sales.
Over 70% of the capital expenditure incurred on Indica was commissioned in September 1999. The full-effect of this commissioning in the form depreciation and interest was not reflected in the 2QFY2000 results and will be accounted for in 2HFY2000. This will make a bigger dent in the operating margins.
In view of the disappointing 2QFY2000 results, analysts have flagged a 'LONG TERM BUY' on the company largely due to downward pressure on operating margins in 2QFY2000 and the remaining two quarters of FY2000.
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