J M Share & Stock Brokers Telco
The company has been able to improve on its margins (OPM increased from 15.1 per cent to 15.6 per cent and net profit margin was up from 7.5 per cent to 8.6 per cent). It benefited substantially from the sluggish steel and tyre prices.
But, the performance during the second half of fiscal 1996-97 over the corresponding period the previous year was lower than the similar first half comparison. Sales grew at a lower pace than expenditure during the second half owing to no price increases during the later part of the year.
Telco had a lower interest expense during the second half of 1996-97 as against the first half (Rs 850 million vs Rs 1,300 million - total interest expense of Rs 2,150 million).
Depreciation charge was higher at Rs 2,092 million during 96-97 as against Rs 1,644 million. The net profit was boosted by the significantly lower tax rate. The effective tax rate, which was at 30.3 per cent last year, reduced to 23.8 per cent during the current year. As a result, net profit at Rs 7,624 million reported a sharp rise of 44 per cent.
For fiscal 97-98, the company plans to launch Safari, utility vehicle, in the premium end of the market and a 909 ICV. It would also be introducing new models with the Cummins engine fitted on to the vehicles. The small car project, for which Telco has been raising substantial debt is expected to be completed by the second half of 1998. It is expected to be launched by October 1998.
We expect that Telco would not be able to sustain the volume and profit growth achieved during 1996-97. We are estimating a 7.2 per cent growth in volume sales to 231,000 vehicles. This would be largely due to the buoyant demand for Tata Sumo. We expect that operating expenses during 1997-98 would grow in line with the rise in sales revenue. Hence, the operating margin would be maintained.
Telco, like all other companies, would benefit from the lower corporate tax rate. Hence, we expect that there would be a decrease in the effective tax rate to 22.6 per cent. This should result in net profits growing by around 8 per cent to Rs 8,250 million for fiscal 1997-98.
Consequently, we expect the EPS to increase from Rs 29.8 in 1996-97 to Rs 32.3 in the current fiscal. At the current price of Rs 395, the scrip discounts the 1996-97 and 1997-98 earnings by 13.3 per cent (x) and 12.2 (x) respectively. Though valuations do look attractive, once the oil price hike is effected, we are likely to see a downward pressure on the scrip price and it would be worth considering re-entering the stock at lower levels.