Date: 11th July 2000
TELCO - on reverse gear
Current market price - Rs134
BSE Sensex - 4898                

Tata Engineering is facing a crisis situation. This admission has come from the doyen of Indian business Mr. Ratan Tata himself. The consensus here is that it has no one else but itself to blame for it. All the troubles seem to start when Mr. Tata's dream 'Indica' project entered its commercial phase. Sadly for Telco, this coincided with the worst ever recession in the commercial vehicle sector. Since then, the company has found it hard to extricate itself from the morass it finds itself in. Will it ever find back its moorings? Many would argue that the malady has reached a terminal stage when only a surgical amputation will do. And the sooner the better.

What is the Business?
Having chugged off in 1945 with the intention of manufacturing steam locomotives, it soon changed track and in 1954 started manufacturing automobiles in association with the then Daimler-Benz. Over the years, it has established itself as the largest player in the duopolistic heavy commercial vehicle (HCV) and the light commercial vehicle (LCV) segments. It had to give way to M&M as the largest player in the utility vehicle segment while in December 1998 it ventured into the economy car segment and has plans to test the luxury car segment two years hence. But the fact remains that a commercial vehicle manufacturer has turned into a passenger vehicle manufacturer. And here is where the first problem lies - that of perception. After all isn't it difficult for a rugged performer to acquire a soft touch overnight.

Who is the Management?
Read this sample from the FY98 annual report of the company. "Perhaps the most disappointing fact is that despite the call over the years that 'Telco must redefine the way it conducts its business', the Telco team has failed to do so". This was a few months after the company unveiled the small car Indica during the Auto Expo of December 1998. In the next year's message to his shareholders Mr. Tata wrote about the "enormous sense of national pride evoked and the unprecedented demand for the Indica" and paid tributes "to the effort of all those who worked on the project". So has the small car succeeded in redeeming Telco's management? As things have turned out since then, the opposite seems to be true. Well, the FY2000 report states that the realization has finally seeped in that the old scheme of things need to change. We could only wait for that to happen.

Whither Cash flows?
It would seem that Telco has been putting good money after bad. The Indica project has already consumed Rs3bn and the company had to resort to debt to finance it. The obvious corollary being the fact that interest charges have risen by 14% in FY99 and 31%yoy in FY2000. However, the kitty has been kept warm by infusion of Rs2.36bn of income earned from selling the construction division and three ancillary firms in the past two years. Yet an another concern relates to operating profit. Though the implementation of a uniform rate of sales tax across the country will add to the government's finances, it has also meant that Telco's truck prices will be costlier. Moreover, the new Cummins range of engines for its trucks will extract its own price. And Indica, till it attains break even levels, will be a drain to the company's finances.

Why should I Sell?
"It would be essential for Tata Engineering to establish a partnership or alliance with one or more global car-makers", thus wrote the venerable Ratan Tata in the latest annual report of a company which prides itself of being a true Indian multinational. It would seem that the chairman has only given a nodding acknowledgment to what analysts have been crying hoarse about. And not without reason too. The company started by declaring that it would require 60,000 Indica units to achieve break-even. It was soon revised upwards to 90,000 units. One and a half years on, it is yet to reach that mark and given the way things have shaped up in Q1FY01, the company's enthusiasm to do it this year seems a little misplaced.

Where can I go Wrong?
In the FY2000 annual report, the chairman has emphasized the need to review the way the company does its business. He has identified quality, costs, margins and customer satisfaction as important priorities for the company. Moreover, the company has already reduced its levels of vertical integration. All this, coming from what basically is a manufacturing firm not exactly known for its quality, is refreshing.