It has been touted as the turnaround story of the year in corporate circles. And rightly so. Let us turn the clock a few months back.

A whopping Rs 500 crore loss to end fiscal 2000-01. Commercial vehicle sales, the mainstay of the company, showing no signs of picking up as it continued mirroring the downturn in the economy. An ambitious rights issue pruned down by 32 per cent from Rs 1,307 crore to Rs 987 crore. Even with that, the financial institutions, barring UTI, did not deem fit to touch it. Media reports of a retrofitment programme for the Indica also did not help the much-beleaguered car project. An emotional Tata Engineering (Telco) chairman Ratan Tata, responding to irate shareholders, offering to step down at the annual general meeting, if it was in the best interests of the company. It seemed that Mr Tata’s great Indian automobile dream was seriously going wrong.

And then Telco launched the Indica V2 in February 2001. While the original Indica lacked the refinement and smoothness of a passenger car diesel engine, the V2 was a virtually re-engineered car. And then the persistence paid off. The Indica gradually made its way to the top of the B-segment, displacing the firmly entrenched Santro and Zen and has since retained its top billing. Following the success of the diesel variant, Telco launched the petrol variant in September 2001. Telco vice-president (passenger car business) Rajiv Dube points out that the petrol variant has added to the numbers though he is not willing to divulge the current break-up between the two. Adds ASK-Raymond James auto analyst Satish Jain: "There are also substantial export orders expected for the Indica."

Cost Reduction Measures
But while the success of the Indica in its new avtar has been the public face of change for the company, the largely unscripted story has been the various shopfloor measures Telco adopted at its plants to cut down on costs. The change in fortunes have come with a judicious mix of aggressive cost-cutting techniques and the success story of the Indica V2.

As Telco executive director (corporate affairs & finance) Praveen Kadle puts it: "This was the appropriate time for the restructuring. During the last 21 months, we have taken various initiatives as regards operational and financial matters. This fiscal, during the first nine-month period, we have already achieved savings to the tune of Rs 160 crore out of a targeted total of Rs 200 crore. This would help us in improving our operating margins."

Indeed, the operating profit margins of the company, which slid from 7 per cent in Q1 of fiscal 2001 to 4.1 per cent in Q4 of the same fiscal, has seen a sharp rise in Q3 of fiscal 2002.

The commercial vehicle business unit (CVBU) focussed on the material cost of its vehicle as it forms a significant portion of vehicle cost. The company undertook a Project Teardown of its highest selling 407 model to combine a robust and accurate database on 407 CLB. The learnings from the 407 experience were also incorporated for the exercise on Sumo and the 1613 model.

Cross-functional teams were also formed to tap experience and talent resident within the organisation. The necessity for drastic/non-linear cost reduction was also communicated at all levels.

To ensure strict monitoring, Telco vice-president (operations) PM Telang was nominated as ‘Champion’ for the entire CVBU. Senior officers were appointed as Champions to mentor the cross-functional teams. Telco also set up four value engineering teams organised along the four aggregates — engine, gearbox, axle, cab and vehicle. Twelve teams were organised along various commodities — sheet metal, rubbers & plastics, castings and forgings among others. For example, the company took efforts at component rationalisation like use of Indica alternator on Sumo vehicle.

In another initiative, the company undertook e-procurement initiatives through Freemarkets.com. Telco has participated in nine bidding events with total purchases of the value of Rs 387 crore. The average savings obtained was around 10 per cent of purchasing value.

The efforts have resulted in cost reduction of Rs 454 crore during the last 21 months. Of this, savings on material cost accounted for Rs 294 crore, direct cost conversion Rs 64 crore and interest cost Rs 96 crore. The company has also shed around 5,000 people in the last two years.

Financial Restructuring
Telco has recently written off assets and expenses to the tune of Rs 1,180 crore from its balance sheet against its securities premium account (SPA), thereby eroding its reserves by 40 per cent and net worth by 36 per cent. The company has written off deferred revenue expenses on account of product development and employee separation of Rs 933 crore, accounting for the bulk of the write-off. The write-off due to the fall in the value of investments and fixed assets is Rs 32 crore and Rs 215 crore respectively.

According to Mr Kadle: "The rightsizing of the balancesheet will give a true reflection of the company in the future years. This is not the end of the restructuring process. We are looking at further cost reduction and the requirements of working capital." Telco has come in for some criticism for not reflecting the write-off in its profit and loss account. Says Mr Jain: "Whatever, they have undertaken is permitted under Company Law. However, I think that the product development expenditure should have come under the profit and loss account."

Mr Kadle, however, contends that the restructuring process was a transparent one. Crisil has also reaffirmed the outstanding ratings of the company on account of the fact that the impact of the restructuring on Telco’s reserves was already substantially factored into the Crisil ratings on the company’s debt instruments.

Says Crisil auto analyst Ajay Dwivedi: "There has been no change from the creditor’s perspective. It will enhance the financial flexibility and credit-risk profile." The effect of the write-down of fixed assets, which was not factored into the company’s outstanding ratings, has not impacted the credit profile to an extent that would result in a change in Telco’s outstanding ratings.

Moreover, the asset write-off (comprising deferred revenue expenditure and fixed assets) will also buoy future profits of the company due to a reduction in the amortisation/depreciation burden, says Mr Dwivedi.

Passenger Car Division
With the success of the Indica V2 firmly behind it, where does the passenger car business go from here? Telco is coming out with its Indica Sedan by the second half of the calendar year. Another area of concern has been the fact that Indica sales comprise overwhelmingly of diesel sales with the petrol variant being launched only in September 2001. This when with the APM dismantling from April 1, 2002, the petrol-diesel price differential is expected to come down. Mr Dube, however, points out that despite the price dismantling, the differential is expected to remain. Moreover, diesel is about 30 per cent fuel efficient than the petrol variant. Though the Sierra and the Estate has been phased out, the Safari has picked up volumes with the launch of the Safari EX. "The Safari, despite being in a smaller segment, has outsold the sedans. We are doing around 250 vehicles per month," added Mr Dube.

Analyses Mr Dwivedi: "Product development costs in India are among the lowest in the world. Telco should have a model by model approach. Commercial vehicles making money is very important. The downturn in the CV segment after 1997 had coincided with the car project."

In another move which is in consonance with its forward looking plans, Telco roped in Dr V Sumantran, formerly with General Motors, as executive director (passenger car business unit and engineering research centre). A former Formula Four racer, Dr Sumantran was working on premium platforms which would succeed top Fiat models like Santro and Alfa Romeo (as part of the GM-Fiat alliance). Interestingly, he was actively involved in drastically curtailing lead time for product development.

A lot also hinges on finding a suitable strategic partner for the passenger car business.

Commercial Vehicle Division
Commercial vehicles, the company’s mainstay, has been passing through a downturn for most of the fiscal. However, there are some signs of the segment looking up. Commercial vehicle sales were up by around 1 per cent at 12,475 units (12,349 units in January 2001) primarily due to a 5.2 per cent rise in the medium and heavy segment at 8,205 units. The LCV category saw a 6.1 per cent decline at 4,270 vehicles.

According to Mr Dwivedi: "Telco’s market position will remain in the commercial vehicle segment. Competition from Ashok Leyland Ltd (ALL) and Volvo will not materially dent Telco’s market share. Volumes will, however, not register high growth rate."

During the April-February period this fiscal, Telco has managed to increase its market share in the medium-heavy CV category by 5 per cent to 68.3 per cent at the expense of ALL (from 36.49 to 31.6 per cent). However, analysts point out that with the golden quadrilateral and the connectivity projects becoming operational in the near future, there will be a gradual polarisation between higher- and lower-tonnage vehicles as opposed to the medium-tonnage vehicles which are currently pre-dominant. Telco is also looking at both these categories.

The company currently has a 40-tonner with a 210 HP engine and is also looking at both the 44-tonne and 49-tonne categories. In another move, Telco has started using the Cummins engines only for the 145 HP and above category while the Telco 407 engines are used for the below 125 HP category.

Telco is also looking at new introductions in the sub 4-tonne segment, which has been heavily hit due to competition from three-wheelers. LCV sales remain an area of concern for the company, where during the April-January period, sales have plummeted by 33.7 per cent at 24,511 units (37,007 units) in the year-ago period. While Telco is overwhelmingly the major player in this category, competition, especially Eicher Motors and Swaraj Mazda, has registered positive growth during the period defying the slowdown.

Future Outlook
Telco is looking forward to further measures at boosting its profitability. Mr Kadle elaborates: "We are also looking at increasing our non-vehicular revenue. We are looking at pre-payment of expensive debt. We have achieved Rs 260 crore out of a targeted Rs 500 crore. We expect to complete this by the next fiscal."

The company’s net working capital has come down from 111 days in March 98 to 5 days in March 2001. "We are looking at improving the quality of the balancesheet. We have completed the first tranche of the rights issue of Rs 672 crore. The borrowings have been brought down below Rs 3,000 crore," sums up Mr Kadle. Analysts are also optimistic about Telco’s future and see a substantially improved bottomline for the company to end the fiscal.