More car per car - A disastrous recipe

More car per car - A disastrous recipe

June, 2001

If you were bowled over by Telco's "More Car Per Car" ad jingle, here is another bouncer from the commercial vehicle heavyweight:The company reports a mammoth Rs 500 crore loss in FY01. It was the second worst financial result or rather disaster in country's corporate history, after Essar Steel's loss of Rs 580 crore in FY00. Surely, this was a sort of record no company would have ever dreamt of creating. The desire for more sometimes could lead to road of disaster, the company would surely have come to realize this fact the hard way. The falling volumes coupled with increased competition had steam out of Telco's engine. The figures do make it very clear - the auto major had a bumpy ride in the fiscal gone by.

For this disastrous performance, the company puts blame on the continuing economic slowdown, combined with the surge in diesel prices and the rationalisation of sales tax. This was further impacted by the increased new truck prices, prompted by changes made to meet stricter emission standards, which hit offtakes in many of the plum markets. However, this apart, the shift in focus could also be held as a reason for the company being pushed to the slippery ground. Unlike its competitor Ashok Leyland, Tata Engineering underwent a shift in focus from its core line of business by pursuing its dream car project quite vigorously. However, the heavy interest burden has cast an equally heavy shadow on its bottomline. On paper, the idea of extending from manufacturing trucks to making cars may appear a logical one, however, unlike heavy-duty vehicles, the latter calls for a different driving approach. The bleeding balance sheet leaves no room for any doubt about that.

Telco reported a whopping Rs 500.34 crore loss for the 2000-01 fiscal against a profit of Rs 71.2 crore in the previous financial year. This forced the company to transfer Rs 353.70 crore from the general reserve to set off those losses. The company's net sales slid 7.89 percent to Rs 8,095 crore, on account of a 20 percent drop in mainline commercial vehicles sales (from 1,03,171 units to 82,718 units) and a 13 percent decline in passenger car and utility vehicle sales (from 71,880 units to 82,769 units), in FY01. A substantial fall in other income, from Rs 171.23 crore to Rs 68.43 crore, too bloated the losses. Falling volumes coupled with the uncovered cost of emission compliance led to a decline of profit before interest, depreciation and amortisation by about 37% to Rs 497.90 crore, as compared to Rs 785.80 crore in last year. As a result of higher amortisation of product development expenses for its Indica Car Project in FY01, the amortisation costs grew by Rs 54.74 crore during the fiscal. While amortisation of deferred revenue expenditure amounted to Rs 137.36 crore (Rs 82.62 crore), the depreciation charges accounted for Rs 347.37 crore (Rs 342.61 crore). Deductions by way of extraordinary/exceptional items accounted for Rs 69.90 crore (including Rs 48.99 crore as power cost from previous years, Rs 16.71 crore by way of employee separation cost and Rs 4.20 crore through adjustment on sale of undertaking) as compared to the Rs 134.34 crore gained as profit on sale of undertaking in the previous fiscal. The fiscal marked the loss in company's market share in some of its key markets to its competitor Ashok Leyland, surely a cause of concern. Quite clearly, on volumes and market share, Telco has been losing ground. Needless to say, the weak financials are not going to make it easier for the company to aggressively push the product in the marketplace.

Though the sheer size of loss in FY01 tells a sorry tell about the performance of the company, there are some positives to talk about. On the positive side, the company achieved a saving of Rs 2.6 bn in costs, and cash from operations of Rs 6.8 bn in FY01. This was achieved through cost-cutting, improved operating efficiency and organisational restructuring through rightsizing (11,500 employees reduced over the past 3 years in all) and de-layering. Going forward, the company is aiming to reduce costs, by having a leaner and more efficient organisational structure, becoming globally competitive and being more responsive to customer needs. If agriculture and industrial growth picks up in the current year along with increased foreign direct investment, and higher investments in road transportation, the prospects in second half of the ongoing financial year FY02 could be better. However, in the first half of FY02, the company does not see any improvement in its business prospects. On the anvil is also the plan to increase overall revenues by concentrating on non-cyclical businesses like spare parts and their financing and marine applications. The company's future thrust is going to be on exports, as this segment did well in the past year. In order to move up the value chain, the company is eyeing annual maintenance contract and fleet management businesses.

However, in the wake of a grim outlook on the industrial front, in general, the future does not look very promising. Also, the fact that overall sales growth in car segment in India in FY01 declined to 8% (16% growth in FY 2000), does not augur too well for the future. Further, earlier expectation of a growth of 12-15% in FY02 have been belied, going by the figures of the first 2 months of the current fiscal. The industry now expects to grow at 8-10% this year. This apart, the company's bread-and-butter division, commercial vehicles, is also not expected to revive soon, given the present state of sluggish demand. The company expects its commercial vehicle sales to be more or less at FY 2001 level. And, if at all the company's sales are to go up, this will be possible only in the event of a satisfactory monsoon in the key markets.

Coming to the company's car project, though the Indica has come of age, it would be better if the company sticks to its mainline business of manufacturing trucks and buses, taking a cue from its competitor Ashok Leyland, which is focused on its core competency. Further, given the rough patch the industry as a whole is going through, it makes eminent sense to hive off the car project. A deteriorating sales product mix coupled with falling market share does not augur well for the auto major. Pulling itself out of the disaster zone, and putting on the road to recovery, will be a real litmus test for the heavy vehicle giant.