Tata Engineering -- Revving up, but long way to go

Recommendation: Buy on declines

Raghuvir Srinivasan

THE financial performance of Tata Engineering for 1999-2000 once again draws attention to the impact of the passenger car project on the company's fundamentals.

Tata Engineering reported a pre-tax loss of Rs. 59.14 crores for the year-ended March 31, 2000 compared to a profit of Rs. 4.78 crores at the pre-tax level in 1998-99. However, with some generous help from a one-time profit on the sale of its divisions, Tata Engineering managed to show a post-tax earnings of Rs. 71.20 crores for 1999-2000. A profit of Rs. 134.34 crores from the hive-off of its gear-box, axle and machine tool divisions, which took place on March 30, 2000, went a long way in wiping off the red from the books.

It is notable that Tata Engineering posted a loss in spite of an impressive top-line growth of 34.37 per cent in 1999-2000. The company realised a net income of Rs. 8,791.79 crores in 1999-2000 against Rs. 6,542.91 crores in 1998-99. In fact, 1999-2000 was good in terms of vehicle offtake. Tata Engineering's sales of heavy commercial vehicles grew 36 per cent in 1999-2000 compared to the overall industry growth of 32.90 per cent. Sales of its multi-utility vehicle -- Sumo -- and light commercial vehicles grew by a smaller 2-3 per cent, but the company certainly made a strong showing in the passenger cars segment with sales of 55,776 vehicles.

Tata Engineering's pre-tax loss would have been higher but for a buffer from `other income' of Rs. 127.19 crores in the form of profit on the sale of investments. But for this, the pre-tax loss for 1999-2000 would have been Rs. 186.33 crores. In fact, even the profit on the sale of its three divisions would not have been adequate to cover up this loss. That the company's operating contours have been affected is evident from the fact that operating profits have dropped. In spite of a higher turnover, operating profit (difference between net sales and operating expenses) dipped in 1999-2000 to Rs. 516.98 crores compared to Rs. 544.63 crores the previous year.

Interest costs rose about 31 per cent to Rs. 404.74 crores from Rs. 309.57 crores in 1998-99. This is obviously a direct result of the company's foray into the passenger car business. Fiscal 1999-2000 was good for the commercial vehicles business and the cash flow from this ought to have been quite healthy. If Tata Engineering's borrowings and, consequently, interest costs, have risen in spite of this, it is certainly due to the investments in the passenger car project.

Even in fiscal 1998-99, the company had to take cover under extraordinary income; it had then sold the construction equipment business. But the difference between then and now is that 1999-2000 was a good year for the main business of commercial vehicles whereas 1998-99 was a bad one. It is certainly worrisome that the red ink in the books has once again been washed off by extraordinary income in a year when the main business of the company did well.

Click here for Table

However, the good news is that the Indica is fast approaching the declared break-even volume of around 90,000 cars. This should bring a measure of comfort to the operating economics of the company but the shadow of the car project is bound to remain on the overall performance of Tata Engineering this fiscal too. It is Tata Engineering's good fortune that the commercial vehicles industry has bounced back to good health, in the process helping the company cover up its financial commitments in the car project.

However, the long-term implications of the company's foray into passenger cars are quite significant. Tata Engineering's risk profile has certainly undergone a qualitative change upwards as the passenger cars segment has become competition-intensive with formidable players such as Maruti Udyog, Hyundai, Ford and Daewoo in the fray. The company, if it hopes to grow in this industry, has to constantly keep investing in developing new models. All this calls for investments in assets and access to technology.

The company chairman, Mr. Ratan Tata, has indicated that the company may enter into model swaps with others, DaimlerChrysler, in particular. That would give the company access to a range of models even while obviating the need to invest in developing new ones of its own. But it is early days and there are no concrete moves on the ground as yet.

Meanwhile, the commercial vehicles industry is expected to continue to do well this fiscal with an average growth of 15-20 per cent. The light commercial vehicles segment is also beginning to catch up with the heavy vehicles segment in growth. However, the outlook in the multi-utility vehicles sector is not too good for Tata Engineering.

The entry of the Qualis from Toyota has brought in a new qualitative dimension to the industry even as leader Mahindra and Mahindra is quietly working to strengthen its position. Tata Engineering may have to rework its strategy in this segment if it hopes to retain its place next to M&M.

Earnings may remain flat, at best, at least in the first half of this fiscal. The Tata Engineering stock may continue to remain subdued in the near term. Existing shareholders can stay invested while fresh investments can be considered at declines from the current level.