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Tata Motors: Conf call extracts

Dec 15, 2005

Tata Motors sold its 20% stake in one of its subsidiaries, Telco Construction Equipment (Telcon), for US$ 44.5 m (Rs 2 bn) to Hitachi Construction Machinery Company (HCMC) of Japan, thus valuing the company at Rs 10 bn. It should be noted that HCMC already had a 20% stake in the Telcon. Here are the extracts of the conference call that Tata Motors held to give an insight into the deal and benefits accruing from the same. About Telcon
Telcon manufactures construction equipments that are used in infrastructure projects in India. It has remained a market leader for the past five years, despite stiff competition. The company manufactures excavators and backhoe loaders and has collaborations with Hitachi, John Deere, and Lebrero for its products. Post the 20% stake sale, Tata Motors’ holding in the company will stand reduced to 60%.

The deal: Key highlights

The rationale of stake sale: Currently, Telcon’s presence is largely in excavators (54% market share) and wheel loaders (22% market share). With large-scale investments expected in the infrastructure sector of the economy (led by both government and private sector participation), Telcon expects the construction equipment segment to grow at a healthy pace. In order to capitalize on the same, the company has felt the need to expand into other segments (mining and road infrastructure). Since building this expertise on its own would require significant investments, by selling additional stake in the company to Hitachi, Tata Motors has shortened the cycle.

Potential benefits…

Sourcing of components: Hitachi has identified India as one of the important destinations for its global operations. For this purpose, Hitachi has agreed to actively help Telcon in improving quality and enhance its technical skills. In the long run, this could directly benefit Telcon in terms of higher exports. The company expects share of exports to touch 7% in the next 3 to 5 years. However, if the technical integration is achieved at a faster pace, the share of exports could be as high as 15% going forward.

Preferential treatment: Going forward, Telcon will benefit from significant reduction in the royalty charges and technical fees. Similarly, Telcon could benefit from the international tie-ups of Hitachi with respect to acquiring components.

Introduction of new products: With the technical assistance of Hitachi, the company is contemplating an entry in the mining segment with the launch of dumpers and dozers. Similarly, it also plans to enter the road construction segment with asphalt plants and compactors. Currently, Telcon does not have any significant presence in the aforesaid segments.

The financial effect: The management expects total volume sales to touch 3,500 units in FY06, representing a 40% YoY growth. Similarly, it also aims to treble its volume sales by FY10. Improving financial health coupled with better product mix and higher utilisation levels, the company expects operating margins to improve from the current levels of 9% to around 14% in the next three to five years.

Capacity expansion: In the next three years, Telcon is likely to invest around Rs 1.2 bn to Rs 1.5 bn for capacity expansion at its Dharwad plant.

What’s in store for the shareholders of Tata Motors?
In FY05, Telcon constituted around 2.6% of the consolidated profit after tax (PAT) of Tata Motors. We have projected the same to improve to around 3.7% in FY08. This was based on the premise that Tata Motors will have 80% stake. Having said that, based on the information provided by the management, we believe that the shareholders of Tata Motors are likely to benefit in the long term. Based on the deal, the per share value of Tata Motors’ investment in Telcon works out to Rs 16 per share (60% stake). Once again, this deal highlights the importance of looking at the consolidated picture while analyzing companies.

Net profit contribution FY05 FY06E FY07E FY08E
Tata Motors 97.9% 90.9% 89.0% 88.6%
Telco Construction (60%) 2.6% 2.7% 3.5% 3.7%
HV Axles (99.11%) 3.4% 2.6% 3.7% 3.7%
HV Transmissions (99%) 2.1% 1.8% 1.6% 1.5%
Tata Daewoo (100%) -6.5% 1.5% 1.7% 1.9%
Tata Technology (INDIA 94.6%) 0.5% 0.5% 0.5% 0.5%

Looking beyond Telcon, Tata Motors’ other key subsidiaries like Tata Technologies, HV Axles and HV Transmissions, all have aggressive growth plans. We continue to have a positive view on Tata Motors from a long-term perspective.

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