Tata Engineering has recovered well to wipe enough red ink. Long-term performance continues to be suspect though
Tata Engineering's third quarter results must have surely helped erase some harsh memories. The cost rationalisation mantra is proving to be extremely potent with corporate biggies, and Tata Engineering is no exception. The company's operating profit has more than doubled for the last quarter -- it rose a commendable 47 per cent during the last nine months.
We recommended the stock seven months ago when the price was ruling at Rs 66. We had said that "any improvement in the financial performance in the ensuing quarters will get favourably discounted." Ostensibly, things have only gotten better for the company. And, the scrip has since raced 85 per cent to the current market price of Rs 122.
Apparently, the discernible shift towards multi-axle vehicles has aided the company shore up margins. All the same, Tata Engineering's efforts at containing cost by pruning manpower and restructuring debt has also played a large role. The 43 basis point reduction in staff cost as a percentage of net sales during the last nine months only confirms this fact. The company reduced manpower by 1,500 employees during the period.
Moreover, the near 10 per cent decline in interest cost also points to the company's efforts at retiring high cost debt. While cost reduction would be an ongoing process, according to S Ramnath, analyst, TAIB Securities, the trend shift towards multi-axle vehicles is also expected to continue for another 12 months. This will help the company sustain margins at higher levels.
According to the Society of Indian Automobile Manufacturers Association(SIAM) figures, the company has registered a 11 per cent growth in medium and heavy commercial vehicles (M&HCV) in December 2001 compared to a 53 per cent drop in December 2000. During the same period, the M&HCV industry registered an over 6 per cent dip.
Also, during the last nine months, Tata Engineering clocked a 12 per cent growth in the segment compared with the industry average of 5 per cent. Not surprisingly, the company's market share in the M&HCV segment has improved from 63.2 per cent to nearly 68 per cent.
With the launch of the Indica V2 in both the diesel and petrol versions, the company has been able to shore up volumes by 97 per cent over the past three months. During the last nine months, the company has registered a 29 per cent rise in passenger car sales even as industry sales slipped over two per cent. Consequently, its market share in the passenger car segment has surged from 14.4 per cent to 21.3 per cent.
However, analysts believe that in due course Fiat's Palio would eat into the Indica volumes. In the light commercial vehicle (LCV) and utility vehicle segment, the company continues to lose volumes and market share. During the period April to December 2001, volumes dropped 23 per cent and 14 per cent respectively. With the launch of the '207' model, the company expects volumes to stabilise somewhat in the LCV segment.
While the company has managed to prune losses (before exceptional items) by Rs 105 crore in the last nine months, analysts expect it to close FY02 with a net loss of around Rs 300 crore (Rs 216.27 crore for 9 months ended December 2001). Analysts believe Tata Engineering will continue to remain in the red for the next fiscal too, even though operating profit is predicted to grow by over 30 per cent to Rs 850 crore for FY03.
The long-term prospects of the company cannot be predicted with any amount of certainty, as future offtake in volume will be the key driver of sentiment. The current quarter is expected to be the best of FY02. Although the scrip has had a strong run on the bourses recently, the healthy numbers anticipated in the current quarter should keep the mood upbeat.
