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Telco: Tougher times ahead

Nov 10, 2000

After Tata Engineering (Telco), reported dismal second quarter results we have had to relook at out projections for the current year and the next two years. The company has reported a net loss of Rs 2.2 bn for the first half of FY01. Our previous forecast of a net loss of Rs 1.2 bn for FY01E hence seems optimistic in light of the fact that the second quarter has been very disappointing and there are no signs of a pick up in the third quarter FY01. The following are the main reasons for our forecast downgrade:

  • Decline in volume growth in the second quarter was slightly worse than our expectations. We were earlier projecting a volume growth of 6% in medium and heavy commercial vehicles (M/HCVs) for FY01. Keeping in mind, that normally the second half performance is better than the first half we were expecting a vast improvement in the second half. However, with the overall industry slowing down and M/HCVs showing no signs of a pick up, this seems unlikely.

    The recent diesel price hike has further worsened the situation. Demand from freight operators normally picks up after the monsoons and the beginning of the festive season. This year however, things are different. The prospects for the agricultural sector also do not seem bright as the monsoons have been uneven resulting in a deficit in certain states. Hence, we are now projecting a volume decline of 3% in M/HCVs for Telco in the current financial year.

  • The fall in operating margins was higher than our expectations. As the company has initiated a major cost cutting exercise in the current year, we were expecting the margins to fall but to a lesser extent. However, we now feel that the benefits of its voluntary retirement scheme as well as other initiatives will take time to show results. We are now projecting an operating margin of 3.7% in the current financial year.

  • Another reason for the forecast downgrade is extraordinary expenses on account of provision for power costs related to earlier years from 1995-96 of Rs 489 m consequent to revision of fuel cost surcharge rates by the Bihar State Electricity Board.

After taking into account the above factors we have revised our current year forecast to a net loss of Rs 3.7 bn for FY01E. The only trigger to Telco’s share price performance in the short term is rumours of a tie-up for its car project with an international car major. On the current price of Rs 84, Telco is trading at 30x FY00 EPS of Rs 2.8.

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