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Raghuvir Srinivasan

IT IS a turnaround that has been achieved in textbook fashion. From a loss of Rs 500 crore in 2000-01 to a pre-tax profit of a similar amount in 2002-03, Tata Engineering's bottomline has swung Rs 1,000 crore in just two years. A tight control on costs, efficient working capital management, streamlined production and marketing and the success of the passenger car project were some of the factors responsible for the turnaround.

Of course, as always, luck played a crucial part too as the commercial vehicles industry emerged from recession simultaneously. Yet, the challenges that lie ahead for the company in its pursuit for growth may make the struggle of the last two years appear rather easy in retrospect. Tata Engineering now faces the challenge of transforming itself from a company that was focussed more on itself in terms of raising its operating efficiencies and controlling costs to taking competition in the market head on. To its credit, the company has, in the last one year, begun to do this already. The launch of the Indigo and the EX series of commercial vehicles(CV) are proof of this. Yet, that can but only be called the beginning as competition has already responded, be it through the Santro Xing (by Hyundai) or the H-series of trucks (by Ashok Leyland).

Limits to cost control

Tata Engineering has done extremely well in shaving off Rs 947 crore from its cost structure in the last three years. The impact of this is seen clearly on the operating margin which has doubled from a low of 5.3 per cent in 2000-01 to 10.5 per cent in 2002-03.

The company has succeeded in controlling finance costs in the last couple of years with about 35 per cent of the overall cost savings attributable to this aspect. Staff costs have also been reined in through a VRS scheme. The write-off of the accumulated costs of employee separation against the Securities Premium Account in 2001-02 has certainly helped in making the bottomline look better now.

But there is a limit to the benefits of cost-control on the bottomline. The dramatic reduction in the last three years only goes to prove how much flab Tata Engineering was carrying. With most of it gone now, the yield curve from cost benefits will begin to dip downward. Material costs have been reduced, staff costs reined in, overheads controlled and finance costs optimised. From here onwards, business earnings has to take over from cost-control efforts as the main contributor to the bottomline. And that is where the challenge begins.

Girding up for battle in cars

The Indica has proved successful, bringing in its first profits in 2002-03 but Tata Engineering cannot rest on its oars. Competitors such as Hyundai are probing the market, as seen by the Santro Xing which is but a cosmetic makeover of the original version.

Even as Tata Engineering counters such moves by introducing newer versions of the Indica, it will simultaneously have to look ahead over the next three-five years when the Indica will begin to suffer model fatigue.

That will mean investing in the development of a second platform right now. Hyundai is already planning its second mass-car in the Getz.

In the mid-size segment, the Indigo has received good initial response but it is early days yet to call the model a success.

Competition is only going to get tougher and the company will come under increasing pressure to keep up the pace of launch of variants/models.

That will mean continuous capital investment; indeed, the company is talking of an investment of Rs 500 crore every year for the next two-three years. And this is obviously not including the probable investment in designing a second platform.

Besides, marketing and sales promotion costs will go through the roof in a competitive milieu; the company is fortunate that it did not really have to spend heavily on the Indigo, thanks to the good initial response. But its impact may not last long.

An encouraging fact is that exports are beginning to acquire importance for the company. It plans to double its exports of cars and utility vehicles this fiscal and the deal with Rover to market the Indica in the UK will aid this effort.

CVs — the (E)X factor

The EX series of vehicles launched last year will carry Tata Engineering's hopes in the CV segment. This is a redesigned range addressing the key issues of fuel efficiency and higher power for its vehicles.

Competitor Ashok Leyland has introduced its own H series of trucks fitted with the popular Hino engine that address the same issues. However, the critical `X' factor that will determine Tata Engineering's fortunes will be the performance of the economy which, in turn, depends on the monsoon.

A second successive year of bad monsoon could dampen sentiment for the CV industry which was saved last year by inter-state food grain movement. That buffer may not be available this year with food grain stocks drawn down already.

The ongoing highway development projects will sustain demand for vehicles used in construction. The boom in the housing industry is expected to add to demand but there is no escaping the long shadow of the monsoon on the industry.

However, the general assessment is that the CV industry is now on the approach to an "up-cycle" which means that demand should be growing in the next three-four years.

Strong financial position

Tata Engineering is at the critical point where it has to consolidate on its position for future growth.

It is now a leaner company and the lessons learnt when in hibernation should stand it in good stead for the journey forward. It has a strong balance sheet with a debt:equity ratio of 0.56 only.

The plan to prepay/substitute high-cost debt with lower cost loans should strengthen the balance sheet. Financially, the company is well-placed to take on the challenges in the market.

The first half of this fiscal will be important as the verdict on the Indigo as also the monsoon performance will be known.

The Tata Engineering stock has strengthened in recent times. Shareholders can continue to hold the stock while fresh acquisitions can be considered with a medium-to-long term perspective.

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