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TELCO haemorrhaging money making cars

Robin Elsham and Sitaraman Shankar

Too many carmakers, too few buyers.

So why did Tata Engineering and Locomotive Co Ltd, India's largest truck maker, invest Rs 17 billion to enter the domestic passenger car business three years ago?

There are 10 automakers competing for sales in India, too many for a market of only half a million vehicles per year, according to analysts.

Seven of those carmakers are foreign, and have entered the Indian market since Delhi opened the door to foreign competitors 10 years ago this month.

Nevertheless, in 1994 TELCO - part of the Rs 360-billion Tata conglomerate - decided to begin making passenger cars, and two years later began work on the first car developed and produced entirely in India.

Fittingly named the Indica, the first model rolled off the production line in 1999.

TELCO sold about 55,000 of the cars the first year, and 44,000 in 2000-01, or 20 per cent fewer as new car sales fell sharply industrywide.

TELCO has quickly become the third-largest carmaker in India, after homegrown market leader Maruti and Hyundai of South Korea. Still sales of the Indica remain far below the level merely needed to break even, making the car division a major drag on TELCO's finances and earnings.

TELCO lost Rs 3.54 billion in the nine months through December, and is expected to post a loss for the full year to March when it announces results for the 2000-01 year on Thursday.

Satish Jain, an auto analyst at ASK Raymond James, says Indica sales must double to about 90,000 a year for TELCO's car division to break even on a cash basis, and top 110,000 for it to be profitable after figuring in depreciation.

IN HINDSIGHT

In 1994, getting into the Indian car market seemed a reasonable thing to do, especially for TELCO.

The economy was booming due to expectations raised by liberalisation. Yet few foreign automakers had entered the market because duties and other barriers stifled auto imports, and foreign corporations still could not set up fully owned subsidiaries.

For TELCO, making cars was also a way to reduce its reliance on the volatile truck market, where sales are whipsawed by business cycles and seasonal factors.

But in the five-year period between the decision to enter the car market and the start of production, other aspects of the equation changed drastically.

India began allowing foreign automakers to set up 100 per cent owned subsidies, and small car makers like Hyundai and Daewoo piled into the Indian market, going after the same buyers.

And the Indica, once it appeared in showrooms, proved to have shortcomings.

"The problem is the product failed to live up to expectations," says Satish Ramanathan, an auto analyst at ICICI Securities in Bombay.

The Indica had a nagging fan belt problem, and in hindsight it proved unwise to initially produce only a diesel-powered version, Ramanathan says.

Environmentally conscious car buyers balked at buying a car powered by a "dirty fuel". And economy-minded buyers were turned off by the fact the fuel consumption of the 1.4-litre engine compared unfavourably with competing models with smaller engines.

HAEMORRHAGING

Now two straight years of losses have provoked shareholder criticism of the decision to enter the domestic car market, in which few automakers are profitable.

But the company is adamant that it has no intention of jettisoning the venture, widely seen as a pet project of group chairman Ratan Tata.

"The company's management is not so fickle that it will invest Rs 17 billion in the project only to walk away from it two years down the line," says TELCO general manager (passenger cars) Rajiv Dube.

If so, analysts say TELCO must act soon to stem the financial haemorrhaging.

Ramanathan said the company had Rs 30 billion in debt and a debt-to-equity level of 105 per cent. TELCO officials could not be reached for confirmation on the figures.

He estimates it costs Rs 2-3 billion simply to update an existing model, let alone develop the new products TELCO needs to become more than a one-trick act.

Still, TELCO will begin selling a new mid-sized car next year, the Magna, and is working on developing a car with Peugeot of France, using a Peugeot platform, possibly as part of wider technological alliance.

"We're exploring an alliance with the Peugeot Citroen group" says TELCO car division head Dube. "The feasibility study will soon be completed and we will take a view on it by July-end."

Auto analysts widely expect TELCO to forge a tie-up with some major foreign automaker as a way of saving its car division.

"Definitely they will remain in the car business. I don't see them getting out," says Ramanathan. "But they will reduce the risk by getting foreign technology."

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