With stagnant freight rates and higher input costs, the second hand truck market became more attractive in 1997-98. The effects of this are clearly reflected in the significant downturn in offtakes in both the MCV/HCV and LCV segments. It is only obvious then that the market leader in both these segments would be hurt the most and that is exactly what has happened. Telco has posted a 61.35 per cent decline in net profits at Rs 294.68 crore for the twelve months ended March 1998. Telco's problems were compounded by a miserable second half in which profitability plunged 81 per cent to a mere Rs 80.75 crore. This was despite a lower effective tax rate of 10.38 per cent compared to 23.8 per cent last year. Interestingly while the interest burden increased 26.49 per cent to Rs 272.01 crore for the full year, increased borrowings saw interest costs jump a substantial 71.6 per cent in the second half itself. That Telco was already strapped for cash was very evident from the financials of 1996-97, whenthe firm had a negative cash generation from operations to the tune of Rs 816.60 crore in 1996-97.

Telco's working capital management in 1996-97 also left a lot to be desired, which was reflected in the decline in the working capital turnover ratio from 8.35 times in 1995-96 to 4.2 times in 1996-97. This aside Telco's operational performance has also left a lot to be desired. Turnover for the full year has dipped 27.43 per cent to Rs 7,327.05 crore. Telco's plight is easily explained by the fact that while the company's unit sales of MCV/HCVs have dropped 43.1 per cent, the industry demand dipped 38.7 per cent. The recession in the car segments and the LCV segments have also adversely affected Telco, with its two offerings -- the Estate and the Sierra-also taking a beating. Thus the only saving grace for Telco has been the Sumo with a 2.12 per cent growth to 41,666 units.

Increased input costs and holding costs for inventory pile-ups mid-year reflect the erosion in margins, which dipped from 13.8 per centto 11.25 per cent. Need one be reminded of the mammoth stock pile-up in the first half with 19,969 vehicles? Which incidentally worked out to nearly 20 per cent of total production and was up a staggering 300 per cent from 6,658 as on September, 1996. Furthermore with the slowdown in offtakes set to continue, there are no signs of any recovery in the first half of 1998-99. In fact there is bad news if any, in the form of the recent excise hikes in MUVs and tyres. The increase in CR import duty could further squeeze margins due to increased input prices of domestic steel. Lastly with the `Mint' only likely to achieve a breakeven only at around 60,000 units, Telco could well have to absorb losses for the small car for the next two and a half to three years, which would further erode earnings.

RBI's view of the budget

Going forward from the budget, the focus of attention in the macro-economy will now shift to the monetary policy to be adopted as a result of the budget. DSP Merrill Lynch economistSree Kamal Sen questions that now that the 8 per cent special customs duty has been introduced and the rupee already depreciated substantially, will there be a halt to the further depreciation in the rupee? Will RBI adopt policies designed to stem the further downward revision in the rupee, now that enough protection has been given to corporates? Moreover, with widespread apprehensions of the budget being inflationary, and with a substantial deficit budgeted, will the RBI now take steps to tighten monetary policy? However, the RBI will also have to take into account the upward push on interest rates as a result of the drying up of foreign funding, and a tight money policy will hasten the move towards higher interest rates. The RBI's moves will be watched keenly to discern the central banks view of the budget's fall-out.

Petrol price

The finance minister has decided to pass on only a Re 1 hike in petrol to the consumer. It has now said that the excise duty hike from 20 per cent to 32 per cent willnot be passed on. On the contrary the hike in excise duty will be offset by a reduction of equivalent amount in the procurement prices by the marketing companies from the refineries. Reduction in procurement prices of petrol by say Rs 3.30 per litre (approximate excise amount in Mumbai) will indirectly affect the oil pool account. The amount of cross-subsidy will be reduced by that amount. The move negates the benefit that would have been accrued due to a reduction in the customs duty of crude oil. By hiking the excise duty on petrol the government has gone back on the recommendations of the Nirmal Committee and has postponed the dismantling of the administered price mechanism. Worst, the government is indirectly making the refineries bear the burden of the excise duty hike, in other words taxing the refineries for selling petrol. Apart from this the whole move will burden the oil pool account, which is being used to amortise the oil bonds issued by the government. Any increase in crude oil prices couldjeopardise the whole exercise and cause more hardship to the oil companies.

Emcee (With contributions from Percy Dubash and Shishir Asthana)