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Tata Engg steps on the gas for profit path

Raghuvir Srinivasan

Shyam G. Menon

MUMBAI, Dec. 11

TATA Engineering's Rs 500-crore loss in 2000-01 was one of the biggest sectoral shocks of last year. But since then, it has been reaping the benefits of some aggressive cost-cutting, earning the kudos of market analysts a mere two quarters later through impressive reductions in loss.

Mr Praveen P. Kadle, Executive Director (Finance & Corporate Affairs), Tata Engineering, took time off to speak to Business Line on the qualitative changes in the company's financials.

BL: How would you rate the response to the companys recent rights issue ?

Mr Praveen Kadle: The response was fairly good, considering the big size of issue, overall market and economic conditions. Besides, Tata Engineering had reported last year a huge loss. Though GIC and LIC renounced their rights on the fully convertible de bentures, some of the FIIs were very keen to pick up the renounced part. They have made a lot of money because the Tata Engineering stock is today at around Rs 107/108, so they are more than happy with the kind of returns they are making now.

BL : Do you feel you priced the offer too conservatively ?

PK : Not really. Because, one, we had reported Rs 500 crore-loss. The share price had fallen, the market conditions were bad and a few days prior to issues lauch we had the September 11 incident. So, we think the pricing was appropriate. The only thing i s that the market in the meantime has recovered a bit and therefore the Tata Engineering stock up.

Ultimately, the investor also has to make some money. Tata Engineering did not pay dividend last year. So that investor had to have a way to get some return.

BL : How has the company's equity holding pattern - beyond the Tatas revised share of about 33 per cent - changed ?

PK : Well, the FI holding will go down from 21 per cent to 18-19 per cent. The FII holding will grow marginally to around 8-9 per cent. Besides, the Daimler-Chrysler share is down to about 8 per cent. The share of GDR-holders, will also come down. The pr omoters stake is currently 32.25 per cent, the 6 per cent rise gained partly from Daimler-Chrysler, partly from GDR holders.

BL : Does the Rs 970 crore take care of all your capital expenditure needs ?PK : We had identified close to Rs 800 crore of capex and product development expenditure. The proceeds of the rights issue will be used mainly for that, slightly more on product development.

BL : What will be your average cost of borrowing now ?

PK : If you include our foreign debt, including the premium that we paid, then it is about 10.5 per cent. Now, the interest rates are also falling. But we still have some expensive debt on our book - about Rs 500 crore. That influences our cost of borrow ing. We have plans to repay that debt or renegotiate the interest rates. Out of that, in the first six months, we either prepaid or renegotiated for a quantum of Rs 193 crore. The balance, we will do in the remaining 6-7 months. The plan is to bring down overall interest rate to below 10 per cent, by June 2002 or so. That is because the option to pre-pay in one element of the expensive debt, falls in April 2002.

Our total debt is around Rs 3000 crore. We would like to bring it down, because it adds to risk in the kind of cyclical business that we are. Ideally, we should be at about Rs 2300 crore by say - March 2003.

The borrowings, in general, can be reduced through a variety of measures. One is improving operational performance. That is effected through either topline growth or improving the EBIDTA margins, operating margins. Topline growth is done through steps li ke new product introduction, enhancing market coverage, better marketing focus, customer satisfaction etc. Having improved the Indicas quality, we are now seeing bigger numbers from it. We are also looking at improving non-vehicle streams. Then, when it comes to improving the operating margin, we are looking at cost reduction, manpower cuts, reduction of fixed and other overheads. We are also looking at some other operating costs like power, fuel, logistics, distribution etc....that in turn improves you r returns from the business, increases the cash generation from operations and all that can be sued to reduce your borrowings.

The third area is, we are identifying financial and operating assets which are not either core to our business or are not giving the kind of returns expected. So, we are disposing those units. That will give us cash. Fourth is improvement in working capi tal. This year, we are only looking at the sale of financial assets. We are targeting the generation of around Rs 300 crore on sale of non-core financial investments. So far, we have generated cash of around Rs 250 crore.

Next year, we will also look at some of our low performing assets. We used to have net working capital of almost 111 days. It has come down to about seven days. We would like to look at the possibility of bringing it down still further, perhaps a level o f close to nil working capital. We are benchmarking ourselves to the leading global automobile manufacturers and trying to adopt the best practices. On our traditional truck and UV business, we are encouraging dealers to do business more on cash basis, r ather than on credit basis. The Indica is close to ending its third year, and we are still doing it on cash basis. In the good old days, the business was just 20-25 per cent in cash, balance was credit. Now, cash is close to 60 per cent, credit is 40 per cent.

We are putting the programmes in place where we pick up the lines of credit for our suppliers. So, the suppliers get the payment as soon as the material is received. From the bank, we get about 89 days credit. Now, since the supplier is getting payment u pfront we are getting good cash discount from him. On the other hand, because of our credit rating and the overall liquidity in the system, the interest we have to pay to the bank is lower than the cash discount. So, we are trying to compress the cash cy cle thereby bringing down the net working capital.

We still have inventories which are around 53 days of sales. We would like to bring it down to 30-35 days in the next few years. We used to have receivables of 90 days in March 98, that has come down to 24 days. We will try to bring that down further.

BL : What kind of financial assets are you disposing of ?

PK : We came out of our joint venture with Daimler-Chrysler. We got about Rs 84 crore there. We sold our investments in UTI. That was about Rs 145 crore. Then, there were some miscellaneous investments - all put together, we got about Rs 250 crore. The i nvestment of about Rs 70 crore made in Haldia Petrochemcicals, has not been budgeted for this year. The Rs 300 crore targeted from divesting at non-core financial assets, is excluding that.

BL : What steps have you taken to both control and compensate for the exposure you had to Tata Finance ?

PK : Our direct relationship with Tata Finance was through the dealer financing they were doing against vehicle sales and the retail financing they offered in the form of hire purchase contracts. Now, as far as the first is concerned where we were discou nting our bills with Tata Finance - as the money market conditions improve, RBI has come out with a policy encouraging bill discounting by the banks. They have given the flexibility for banks to charge interest rate lower than PLR. In this situation whic h developed over the last 12-18 months, bill discounting through Tata Finance - irrespective of their problems - would have been uneconomical, because they have their margins to protect. So, prior to their getting into all the recent problems itself, we had started discontinuing bill discounting with Tata Finance and switched over to the banks. In the process, we brought down our funding costs, besides getting for ourselves better flexibility on deciding how much interest to charge our dealers.

As far as hire purchase is concerned, many NBFCs had been doing retail financing for Tata Engineerings vehicles, along with Tata Finance. There is no preferential treatment. We did not really suffer because of the problems at Tata Finance.

BL : How much would you attribute the reduction in interest you achieved in the first half, to working capital improvement, and how much to terms loans ?

PK : The repayment of the term loans happened more towards the end of the first half. It is more due to improvement in working capital or the interest rates have come down.

BL : But how did you manage the reduction in dealer finance given the kind of market we have at present ?

PK : There are a few things you need, the first being discipline - within Tata Engineering and with the dealer. We need to have very clear policies for doing the business, including cash and credit businesses. You must have proper credit control. We laid down the policy and decided to implement it with discipline. Just by having a policy on paper and not following it, makes no sense.

Second, we gave incentives to dealers to shift more to the cash business. If you have high cash discounts for dealers and if the cash discount is more than his cost of capital, naturally he will shift to the cash business. And we believe that doing cash business is much better in the long run, for everybody, because in our association for credit business there are so many overheads which the conventional accounting does not capture.

Third, we gained from our SAP implementation. Availability of online information has improved significantly. That helps us know where the outstandings are going out of control and what immediate steps to take. In fact, our credit control mechanism is sys tems-driven, not man-driven.

Further, we have a very senior person who has been designated Credit Controller and nobody interferes. He has full authority.

BL : Are your funds requirement fully met or would you need to raise anything more ?

PK : We dont need to raise any funds right now. If at all we decide to, that will be strictly for the purpose of retiring our existing debt. More of a debt swap.

BL : Where are you taking your break-even level in commercial vehicles ?

PK : 1996-97 was our best year, in terms of both topline and bottomline growth. But our break-even point in commercial vehicles was about 105,000 units. Last year was our worst year. However, the break-even point had come down to 85,000 vehicles. This wa s despite so many negatives like the sales tax-related issues, cost incurred for complying with new emission norms which again could not recoup fully owing to the depressed market. We had unrecovered costs that hit our bottomline.

We have plans to reduce break-even further, the exact numbers are being looked into.

BL : What about break-even in the Indica project - will you be able to reduce that too from earlier spelt levels ?

PK : When we launched the Indica plan, we had said then that break-even would be 60,000-70,000 units. Then costs rose, market conditions dampened and we had to offer higher marketing discounts bringing down earlier projected realisations - so break-even has gone up to 80,000-90,000 units. This year, we should be achieving the cash break-even at 55,000-60,000 units. Our next target would be to see how we can bring down the break-even point...ideally, I think, it should be 70,000.

BL : But briefly, what does it take to bring down break-even levels ?

PK : See, 60-70 per cent of your cost is material cost. That should be attacked right away. The second, is your variable conversion cost which must be brought down significantly. Then, any variable expense that can be reduced and finally, look at your qu ality and bring it on par with the international brands.

BL : What are your expectations on the ancialliary units which were spun-off and where partners have not been found yet ?

PK : We are still trying to get the joint venture partners in place. But the market conditions being what they are, if we cant get those partners now, we could look at getting the technology licensing agreement and then if possible, get aboard some kind of a private equity participant.

The potential partners we were talking to, they are very keen even today to take an equity stake. And, over a period of time, even become majority shareholders. However, the current industry conditions dont justify it. So, they are saying that within 3-5 years or after five years we will take equity stake. In the interim, somebody can hold the equity. We are looking at all options.

BL : In the last few months your cash flows would have easened a bit. Are you still offering discounts in the market for CVs ?

PK : We do offer offtake-related incentives. We also have some specific schemes.

BL : The market is moving towards higher tonnage vehicles. How are your margins there ?

PK : They are improving. Our effort is to improve operating margins through improved price realisation and cost reduction.

BL : So, the higher the contribution from the higher tonnage vehicles, the better it is for you ?

PK : Yes.

BL : What about joint ventures like Tata-Holset, Tata-Cummins - would you consider them candidates for reviewing your investment?

These are core to our business. So, we have no plans for review. I would include Concord and TACO also in the same category.

BL : Over the last couple of quarters you showed how costs can be cut. When do you think will the company be back in the black ?

PK : The market analysts expect us to do that in the next year, 2002-2003. Our job is not to disappoint them.

Pic.: Mr Praveen P. Kadle, Executive Director (Finance & Corporate Affairs), Tata Engineering.