Tata Engineering & Locomotive Company Ltd (Rs197 BUY)
Indian Stock Market
Investment Ideas June 10, 1999
tata-telco.com
Investment rationale
Automobile revival in sight : Commercial vehicle sector sales, affected by the economic slowdown, recorded steep volume decline in the last two years. In FY98, sales dropped by 28% yoy while the decline in FY99 was 15%. With signs of economic revival (as indicated by the positive growth recorded by most sectors in April), a demand revival in automobiles, and particularly in commercial vehicles, seems imminent. The April figures for medium & heavy commercial vehicles appear encouraging with sales recording 65% yoy growth. Tyre production numbers and growth in the ancillary industry also indicate towards a demand revival.
Valuation : At the current market price of Rs200, Telco trades at 15.4x FY2000 estimated earnings. We expect the Telco stock to witness significant price appreciation if the demand revival is sustained and recommend investment at the current price
The Tata Group management is amongst the most regarded ones in India. Telco has developed strong in-house R&D capabilities. With a high level of indigenization, Telco is one of the most cost-competitive manufacturers in the automobile industry
Telco is the market leader in the commercial vehicle market, with a 65% share in medium and heavy commercial vehicle segment and a 69% share in light commercial vehicle segment. In the utility vehicles, the company has a market share of 28%. Telco has also created a strong niche of diesel based, rugged, large, passenger vehicles. The launch of its small passenger car Indica has been extremely well received. Telco is expected to sell 40000 Indica in FY2000.
Key earnings growth driver is commercial vehicles business : While Telco has successfully entered the passenger car as well as utility vehicle segments, commercial vehicles will continue to be company's main earnings growth driver. Profitability revival hinges on reversal in commercial vehicle sector trend. In April '99, Telco's medium and heavy commercial vehicle sales were 3064 vehicles recording a robust 129% volume growth over that of 1338 vehicles sold in April '98. Production increased by 180% in April.
Strategic moves : The construction equipment business has been hived off as a separate company Telco Construction Equipment Company Ltd, in a joint venture with Hitachi. In a radical departure from the past, Telco is reducing its level of vertical integration by hiving off component manufacturing into joint ventures. These moves will go a long way in reducing the capital employed in the business.
Background
Telco was formed in 1945, originally to manufacture steam locomotives. In 1954, Telco started manufacturing automotive vehicles in technical collaboration with Daimler-Benz. Telco has absorbed the technology from Daimler-Benz and has further built up a strong in-house R&D Center - ERC (Engineering Research Centre) at Pune. Telco forayed into the manufacture of construction equipments in 1962. Over the years Telco has absorbed technology from several collaborations and co-operation agreements with international giants. Its strong R&D capabilities are borne out by the fact that it has grabbed a dominating 70% of the LCV market, with fully indigenous models developed by in-house R&D. The first indigenously designed small car has been launched by the company in December 1998.
Financial highlights
Rs mn 03/96 03/97 03/98 03/99 03/2000P
Gross sales 76,365 97,683 70,265 62,996 70,300
Net sales 68,175 85,874 60,567 54,177 60,458
Other income 2,446 3,601 3,363 3,374 3,750
PBIDT 11,101 14,247 8,601 5,957 10,098
Adjusted OPM(%) 12.7 12.4 8.6 4.8 10.5
Financial exp (1,608) (2,150) (2,720) (3,096) (2,250)
Depreciation (1,644) (2,092) (2,592) (2,813) (4,000)
Provision/tax (2,307) (2,381) (341) (97) (577)
Extraordinary/ (242) 0 0 1,024 0
PAT 5,300 7,624 2,947 975 3,271
Equity capital 2,418 2,559 2,559 2,559 2,559
EPS(Rs) 21.9 29.8 11.5 3.8 12.8
RONW %(post tax) 21.9 20.9 7.8 2.7 8.7
ROCE % (pre tax) 25.6 19.7 8.5 4.3 8.5
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