Driving figures up the graph

In order to push HCV sales, the Finance Ministry has recently allowed the Defence Ministry to buy 2,000 HCVs while the Post and Telegraph Department is buying a similar number of vehicles. It is also planning to give depreciation benefits to those truck owners who are planning to scrap their 15-year old vehicles.

The sales ofHCVs 8212; mainly originating from the government sector 8212; should not be the barometer of the industrial revival, says analysts with HSBC. quot;Private entrepreneurs must come forward to buy commercial vehicles8230; that would the real barometer of an economic revival,quot; say analysts.

Both Telco and Ashok Leyland are expected to be the beneficiary of the Government-sponsored move in the short term, but for a genuine economic revival, the private sector should equally participate in the buying spree, analysts add.

Industry insiders say in October and November there has been a more than usual number of trucks being sold. An official of Tata Finance, a leading truck finance company admits that there has been a pick up in sales since October but adds that quot;it is a usual festival time phenomena.quot;

quot;The buying is continuing in November too. I expect the sales to gather momentum in the coming months,quot; says T T Srinivasaraghavan, Deputy managing director, Sundaram Finance, India8217;s largest truck financiers.

According toSBI Caps, the commercial vehicle sector has now bottomed out and sales were mainly low due to lower freight rates and fall in prices of used vehicles. quot;With an upturn in the economy now evident, freight rates should be firm and from a low base sales should increase as freight operators reconcile to lower prices of the used vehicles,quot; it says.

Truck sales and freight rates are considered a barometer of the industrial activity of the country. Both were down to their lowest levels in recent times. The freight rates have also hardened by about 20 per cent since the last few weeks.

quot;The rates have definitely gone up but we can8217;t really say these reflects the correct growth in the industrial production which has recorded only marginal growth in the first-half,quot; says a Mumbai-based transport operator, adding, 8220;The exports of CVs are also showing no signs of picking up.quot;

quot;Sales of HCVs usually do pick up around the festival time. The recent hike in railway freight rates could have triggered a shift in freighttonnage from the railways to road transportation,8221; says a UTI Securities official.

quot;The acute shortage of wagons, could be another reason for the revival of road freight rates, which could have triggered fresh buys,quot; he adds.

quot;We have to wait for at least three months. If the trend continues, then it can be interpreted as signs of some revival in industrial activity,quot; he says. According to a transport operators, the spurt in freight rates could be due to shortage of vehicles in the market and floods in many parts of the northern India. The rates generally shoot up if there are not enough vehicles to the cargo.

For India8217;s largest automobile manufacturer, Telco any signs of sales and freight rate picking up is a good sign. The company, which is now all set for a major launch of its small car Indica in December, the worst is finally over.

The company is now switching tracks as sales of Telco have taken a major hit in the first six months of the current fiscal plunging the company into red. Thanks toits poor sales, huge inventory and lack of foresight, the company made huge losses in the first half and Standard amp; Poor8217;s downgraded its local currency outlook to negative from stable. Besides, the company8217;s scrip is also falling to record lows in the last few weeks 8212; much to the annoyance of its shareholders.

The waning of investors interest in the company is understandable given the bad business conditions and lack of profitability in the near future. Telco has been the largest loser in the CV segment with overall unit sales in the MCV and HCV segment dipping by a massive 37 per cent. However, the dip in fortunes for Ashok Leyland has been limited.

Interestingly, Telco8217;s loss in market share has been Ashok Leyland8217;s gain as the demographics of the southern region wherein Ashok Leyland operates has helped the company to garner a market share of 38 per cent in the HCV segment, improving from 24 per cent last year.

Another important aspect of both the companies operations is the induced cutbacks inproduction, which would result in prudent inventory management. While Telco8217;s 48.29 per cent drop in production to 29077 units from 56226 units at first glance looks abysmal. One has to consider the fact that though the slowdown began last year, Telco cut production only in the second half of 1997-98. Therefore, Telco8217;s production figures will look better in the second half of the current year than in the first half.

However, Ashok Leyland taking cognizance of the lower offtakes had cut back production earlier, a fact mirrored by the minimal 24 per cent cutback in production for the first quarter. Thus, Ashok Leyland got a chance to use the free cash flows which were not tied up in inventories.

On the other hand, battered by a falling CV sector, Telco is now making a desperate attempt to shift from being a truck major to a car and utility vehicle manufacturer. Car and UV8217;s now account for almost 33 per cent of Telco8217;s total unit sales, which is a marked improvement from the 20 per cent in 1996-97. Moreimportantly the dip in Telco8217;s margins would have been even higher had it not been for the company8217;s improved product mix which tilts more towards the higher margin utility vehicles namely 8211; the Sumo and the Safari.

Any revival of Telco would be closely linked to the market acceptability of the Indica. If this project were to be successful, Telco would have to garner 25 per cent of the car market by the turn of the century. Even then the small car might contribute only 30 per cent to the turnover in two years8217; time. The crucial imponderable for Telco is the success of the Indica, which will make or break the company.

However, with any possibility of a turnaround in the commercial vehicular sector dependent on an overall economic revival, the prospects for the sector look increasingly bleak at least till the end of current fiscal.

The Finance Ministry8217;s move will only help both the corporate to cut back its inventories, but for a real industry revival, the infrastructure projects like roads andhighways, and construction projects must take off.