Hitachi is one of the foreign companies with which the automobile manufacturer is holding talks, but nothing is finalised as yet. The unit contributes 5.6 per cent to Telco sales and 12 per cent to its profits.

The approval was given at an extra-ordinary general meeting convened on Monday, which was attended by Telco's new directors Nusli Wadia and R Gopalakrishnan. It comes barely a week after group company Tisco received shareholder approval to hive off its cement division.

Giving the rationale behind hiving off the division, Tata said that the unit could not survive on its own in a competitive market and would need to expand its product base. This will entail foreign participation, and as a foreign partner cannot bebrought into Telco, to cater to the future of the unit, creation of a subsidiary is imperative.

The business valuation was carried out by DSP Merrill Lynch. The transfer would work like this. The assets of the division, valued at Rs 400 crore, would be transferred to the books of the new company. The subsidiary will raise Rs 200 crore as loan from banks and financial institutions on its balance sheet and pay this amount to Telco. Telco will also be allotted 10 crore shares of Rs 10 each at a premium of Rs 10, amounting to Rs 200 crore in the share capital of the new subsidiary.

Tata said that temporarily, the profits of the division would not accrue to Telco but said that there was no downside to the hive-off. The loss on turnover would be Rs 400 crore. The division posted a profit before tax of Rs 65 crore for 1997-98.

In the explanatory statement to the EGM notice, Telco has said that the unit is one of the major players in the domestic construction-equipment industry. It is the market leader inhydraulic excavators and also commands a large share of the mechanical crawler-crane market. The market share in excavators is 61 per cent and in mechanical cranes is 85 per cent.

The construction-equipment industry in the country is becoming competitive, with some major international players joining hands with Indian entrepreneurs and others promoting subsidiaries to manufacture construction equipment in India. Tata said that the company's competitors included Bharat Earth Movers, L&T's venture with Komatsu, and the Hindustan Motors-Caterpillar combine.

"In order that the construction business gets due focus and for faster introduction of new products with alliances with world-wide players, it is proposed to transfer by way of sale, the company's unit as a going concern to Telco Construction Equipment Company," Telco has stated.

"With the addition of new products like backhoe loaders, wheel loaders, dumpers, and dozers to the existing range, it is proposed to make Telco Construction a one-stop shop forconstruction equipment and earthmoving machinery," the notices says.

The transfer to the new company is expected to take place by March 31, to incorporate any advantages in the budget.

"We are in talks with two-three foreign partners for a joint venture with the new subsidiary. Hitachi, which is our licensor for excavators, is among those with whom we are talking to but nothing is finalised as of now, and talks are still on with the other prospective partners," said Tata.

Tata said that with infrastructure projects expected to take off in a big way, there is a tremendous growth potential for the new subsidiary. "It's a Rs 3,000-crore industry, and the division itself is worth Rs 400 crore. This shows that there is tremendous growth. This is not a mere cosmetic change but an attempt to create a vehicle for future growth," Tata said.

The future inflow will be in the form of dividend and appreciation on the share capital as and when the subsidiary is listed.

INSIGHT

Indica investmentsprompted move

Telco's decision to hive off its construction-equipment division into a separate joint venture appears to be a fallout of its investments in the Indica project. The company needs funds for its traditional heavy-commercial vehicle business, and as its own internal accruals will be required for the car division, offering an equity stake to a foreign player in the proposed venture makes sense. This not only takes care of funding requirements but also helps to ensure a brighter future for the division as far as access to technology is concerned. The company's decision to transfer a high-margin, low-volume business is, therefore, a result of its decision to get into the more competitive small-car segment.