In line with these developments, the Telco stock has once again started to decline. The company's scrip on Wednesday pierced a new 52-week low of Rs 116. Giving the Telco stock company, is another commercial-vehicle major, which has been piercing new lows everyday. The Ashok Leyland scrip is trading precariously close to its 52-week week low of Rs 20 on the bourses.

The reasons for this waning investor interest in the commercial vehicle segment are understandable, given the wretched business conditions that have plagued offtakes and thus, profitability in this sector. A fact amply mirrored in the 46.81 per cent dip in unit sales at Telco for medium- and heavy-commercial vehicle, which stood at a mere15,012 units for the five months ended August 1998. Telco has been the largest loser in this segment, what with overall unit sales in the MCV and HCV categories dipping by 37 per cent. The dip in fortunes for Ashok Leyland has, however, been limited to 10.5 per cent, with sales of 9,159 units. Telco's loss in market share has been Ashok Leyland's gain. Thus, obviously, the demographics of the southern region, wherein Ashok Leyland operates, have also helped the auto major to garner a market share of 38 per cent in the HCV segment, improving from 24 per cent last year.

For Telco, the decline has also continued in the light-commercial vehicle (LCV) segment, with sales dropping 14.16 per cent to 14,291 units. Ashok Leyland, however, is a marginal player in this segment, with sales of a mere 122 units for the five-month period.

Another important aspect of both the companies' operations is the induced cutbacks in production, which will result in prudent inventory management. While Telco's 48.29 per cent dropin production to 29,077 units (56,226 units) at first glance looks abysmal, one has to consider that though the slowdown in offtakes began last year, Telco cut production only in the second half of 1997-98. Therefore, Telco's production figures will look better in the second half of the current year than in the first half. But Ashok Leyland, taking cognisance of the lower offtakes, cut back on production earlier, a fact mirrored by the minimal 24 per cent cutback in output for the first quarter. Thus, imagine the free cash flows for Ashok Leyland, which were not tied up in inventories.

The Centre for Monitoring Indian Economy's (CMIE's) figures also bring out Telco's desperate attempt at shifting from being a truck major to a car and utility-vehicle manufacturer. Car and utility vehicles account for almost 33 per cent of Telco's unit sales, which is a marked improvement from 20 per cent in 1996-97. More importantly, the dip in Telco's margins would have been even higher, had it not been for the company'simproved product mix, which tilts more towards the higher-margin utility vehicles, namely, the Sumo and Safari.

This aside, another positive aspect of Telco's performance has been the excellent working-capital management in 1997-98, which was achieved despite an inventory pile-up. In fact, this has helped saved the day for Telco. This is in stark contrast to the negative cash generation from operations worth Rs 816.60 crore in 1996-97 and its poor working-capital management, 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.

However, with any possibility of a turnaround in the commercial-vehicle sector depending on an overall economic revival, the prospects for the sector look increasingly bleak. The increasing popularity of transportation by the railways, which is only hampered by an inherent lack of wagons, further threatens the commercial-vehicle segment.

Telco and Ashok Leyland, which till now were enjoying a near duopoly inthe commercial-vehicle segment, now face the onslaught of competition in the form of Volvo, which could well end up gaining an important market share in a declining market. Lastly, with the Indica likely to achieve a breakeven only at around 60,000 units, Telco could well have to absorb losses for the next two to three years. All this will further erode earnings. Thus, with no hope of any recovery in the interim, these depressed market conditions could well manifest themselves in dwindling market sentiment for both the scrips.