Telcon eyes export markets with Hitachi network

By Ramnath Subbu

MUMBAI, FEB. 5. The infrastructure sector is in the limelight with the Government's stated objectives of a massive injection of capital into this sector over the next couple of years. In fact, the Rakesh Mohan committee report which was released a couple of years ago has envisaged an investment of Rs. 62,700 crores in the construction and maintenance of roads and Rs. 15,000 crores in the additional capacity creation for ports between 2001 and 2006.

A company set to benefit from these developments when they come into fruition is Telco Construction Equipment Company Ltd. (Telcon), Telco's earth moving equipment subsidiary. Telcon came into existence when Telco restructured its construction equipment business unit into a separate company last year.

In terms of pedigree, Telco is the main promoter. Hitachi Construction Machinery Company of Japan announced last week that it would pick up a 20 per cent stake in the company at $21.5 million. The remaining 80 per cent will remain with Telco. Telco and Hitachi formally announced a joint venture (JV) for earth moving equipment manufacture in India through a shareholder's and technology licence agreement. From a licensing agreement in 1984, the two are equity partners now.

Over a decade, the product range has grown at a CAGR (compounded annual growth rate) of 21 per cent despite the economic downturn. Telcon with a 67 per cent market share is the leader in the hydraulic excavator sector. ``We are formulating our long term strategic plan which would be to broadbase our products. The construction equipment market is small so you cannot really sustain volumes and have to have a wider range to grow.'' said Mr. Sarosh Ghandy, MD of Telcon. Tendering authorities are increasingly beginning to specify certain levels of mechanisation. This is because of time overruns associated with manual labour which add to the cost of the project. Therefore, they are more specific about time and as a result, contractors have to mechanise.

Telcon manufactures its products at Jamshedpur and a greenfield project with latest facilities is being set up at Dharwad, Karnataka, where an assembly line for one model of excavators is functional. Located mid-way between the largest markets - the South and the West, it will cater to the high volume end of the business (2-20 tonnes) while the Jamshedpur unit will cater to the heavy range. Telcon envisages an investment of Rs. 100 crores, generated through internal accruals over five years to develop the Dharwad unit. The Jamshedpur unit has a capacity of 1500-2000 units annually while the Dharwad unit's capacity is 3000 units.

Telcon produces hydraulic excavators, crawler cranes, wheel loaders and backhoe loaders and markets specialised and high-end equipment outside its range by importing them from Hitachi and its associates worldwide. Regarding Telcon venturing into these products, Mr. Ghandy said, ``It does not make sense for us to go into it as the volumes are not enough. We import it and take on the job of servicing it. Once the volumes increase, we would certainly consider getting into it.''

The JV plans to export to select SAARC countries and some international markets through the Hitachi network. ``We have had our hands full with domestic business and we have not ventured into exports much. But we see it as a growth area. As per our understanding, we can freely export to some countries, to certain countries through Hitachi dealers while in others Hitachi would prefer we do not as those are their traditional markets.'' said Mr. Ghandy.

The company is in a niche market and competes with other large players. ``Today, competition is from L&T and in the future from Volvo and Caterpillar because Caterpillar has got permission from Foreign Investment Promotion Board (FIPB) to set up an independent subsidiary. Our advantage is that we have our base here and a service set up in place. I hope we will be able to produce products cheaper than them.''

The popular EX-60 model is priced at Rs. 37-38 lakhs but due to price cutting it sells even at Rs. 32-33 lakhs. After inducting new technology the price will stabilise around Rs. 40 lakhs. The 6 tonne machine sells for around Rs. 18 lakhs and the largest 60 tonne machine will sell for Rs. 95 lakhs.

For 1998-99, Telcon's turnover was Rs. 382 crores and it had an operating profit of Rs. 54 crores and a net profit of around Rs. 20 crores. This year, the company expects profits to be lower because of the financial burden.

Regarding market share, Mr. Ghandy said ``We will not be able to sustain 67 per cent market share but the market will grow sufficiently so that we can still sustain our growth rate even with a lower market share. We would like to be in the 50 per cent plus of market share. But if all the envisaged projects start coming on stream, the volume is huge so I do not think we have even scratched the tip of the iceberg as far as the Indian construction equipment industry is concerned.''

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