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Telco: Consistent gainer?

Dec 19, 2000

Telco has been a consistent gainer in the markets from a low of Rs 69 in October 2000 to Rs 96 today, a gain of 40%. On the fundamental side however, there is no good news as vehicle volumes continue to be lacklustre. The company's dismal November volumes is certainly not the reason why Telco's share price has run up in recent times. Telco has evinced buying interest in the stock markets due to attractive valuations, likely tie-up with an international car major for its small car the 'Indica', expectations of excise sops for the small car segment in the upcoming budget and higher import tariffs which will protect Indian companies from more competition.

Of the above, Telco definitely looks attractive on valuations. It is trading at 0.83x its FY00E book value of Rs 116 per share. The share price has come off from a high of Rs 259 a year ago to Rs 96 today, a decline of 63%. In the commercial vehicle industry it is best positioned to gain from an economic recovery when it happens. Its widely accepted and vast range of commercial vehicles, strong distribution network, no capacity constraints and its national presence make it an attractive commercial vehicle player in the long run.

The company has indicated that at this stage it would not like to sell of the car division to an international car major. However, it is keen for a model swapping arrangement to widen its product range and boost the exports of its small car, the 'Indica'. The nature of their tie-up is difficult to comment on until it actually happens. The fact is that consolidation in the automobile segment is happening the world over with India being no exception. This initial tie-up will increase the company's chances of a merger with an international brand at a later date and give it better bargaining power.

The industry is expecting a reduction in excise duty from 40% to 32% for the small car segment in the upcoming budget. This expectation has given further impetus to Telco's share price in recent trading sessions. Though we would not be very bullish on this factor from the view of generating higher demand for smaller cars as a result of this. This being due to the fact that most small car manufacturers are no longer able to absorb costs as they have been hit by the weakening rupee and euro compliant costs, hence they have decided to increases prices of their cars effective January 2001. This in effect would result in no change in the overall price of small cars in the hands of the consumer, as the hike in tariffs would nullify the beneficial impact of lower excise.

% change
M & HCV 3,343 5,162 -35.2%
Cars 2,424 5,266 -54.0%

Telco's commercial vehicles (CVs) business continues to face trying times. For the month of November 2000 its CV sales fell by 35% YoY and for the period from April-November 2000 its CV sales have declined by 27% YoY. The factors responsible for this are the recent oil price hike, slowdown in key sectors like agricultural and industry. Also the uneven distribution of the monsoons has not improved the situation in the 2HFY01.

 April-Nov 01
April-Nov 00
% change
M & HCV 29,422 40,395 -27.2%
Cars 29,867 31,773 -6.0%

In the meantime the company is not sitting back and taking things lightly. They are taking on hard cost cutting measures like a VRS and other measures to reduce costs. The company aims to reduce overall costs by 4% to 5% per annum. It has introduced an employee separation scheme which has been offered to 3,000 employees in the current year.

Also they are widening their product range and plan to launch new models ranging from 2 tonnes to 40 tonnes with a focus on specific requirements of customers to widen their product offerings.

Keeping in mind all of the above, we feel that Telco has more reasons to look forward to than brood on the past year's performance. Its share price performance over the last two months is a reflection of this.

On the current price of Rs 96, Telco is trading at 31.4x FY00 EPS of Rs 2.8.

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