Tata Engineering: Hold/Buy on declines

Recommendation:Hold/Buy on declines

Raghuvir Srinivasan

TATA Engineering's performance in the second quarter of this fiscal shows the first signs of an improvement in its fundamentals.

The company appears to be slowly but steadily clawing its way out of the abyss it was in last fiscal. The incipient recovery in the commercial vehicles (CV) industry the last three months may have helped. But Tata Engineering's success in its cost-control effort and a resurgence in the sales of the Indica appear to be the prime drivers of its turnaround.

Tata Engineering's second quarter loss of Rs 52.58 crore (before extraordinary items) is just about 50 per cent of the loss of Rs 105.81 crore in the same period last year. Its loss of Rs 143.47 crore (before extraordinary items) in the first half of this fiscal is 20.36 per cent lower than the previous year.

First, the internal efforts that helped in the improved performance. Tata Engineering has been successful in reining in two of the most important items of cost -- materials and wages. Though the production and sales volumes of vehicles in the second quarter rose 10.35 per cent and 4.39 per cent respectively, the consumption of raw materials dropped by 5.27 per cent, while wage cost fell marginally. The company has evidently wrung the maximum out of its vendors in price reductions even as its voluntary retirement scheme has helped control wages.

Tata Engineering appears to have managed its working capital rather efficiently -- interest charge at the gross level is down a sharp 19.43 per cent for the quarter. Considering the difficult operating environment with funds locked up in inventory and the long credit periods for CVs, keeping the finance charges on a tight leash is indeed noteworthy. Assuming that its rights offering, which is open now, goes through successfully, Tata Engineering's finance costs could drop still further.

Now to the improvement in the operating environment which played a crucial role. Tata Engineering was leveraging on its strengths and cash flows from the CV business when it drove into the passenger car segment. Support from the CV activity was thus crucial to the company's fortunes. In fact, one major cause for the big loss last fiscal was the sharp downturn in the CV business. The turnaround in commercial vehicle sales in the last three months combined with a steady rise in the Indica's fortunes was a critical factor in the company reducing its losses in the second quarter.

Tata Engineering had its best month in recent times in September, when it bested competition in both CVs and passenger cars. The company's heavy CV sales soared by 33.57 per cent that month even as the Indica emerged the largest selling car in its segment beating rivals -- Hyundai and Maruti. The September show in CVs followed a similar performance in July and August as well. The company appears to be well-positioned now to exploit the expected uptrend in the industry. The diesel V2 Indica has caught market fancy while the jury is still out on the petrol V2.

The company, which has been without a managing director, for long, will finally have a senior executive guiding its passenger car business at the level of Executive Director. This should lend stronger focus to the car business, which is desperately needed now.

Going forward, it would be safe to assume that the company will continue on the recovery path in the second half of this fiscal. The recovery in the CV business is likely to continue, given the strong showing expected from the agricultural sector this year. Tata Engineering may prune its losses further, but loss it would be for this fiscal year.

Going by current indications, the earliest the company can be expected to report a profit would be the first half of 2002-03. The Tata Engineering stock rose 24 per cent in the last month to Rs 83 now. Shareholders can stay invested in the stock while fresh buying can be contemplated at declines.

Pic.: The Indica...Holds the key to the company's turnaround.