Mumbai: By fixing the Tata Nano’s booking amount at about 80% of the purchase price across its three models, Tata Motors Ltd has found the most cost-effective way of financing a large part of the project cost, provided the consumer response is overwhelming.
Based on even a conservative estimate of 300,000 applications, and all for the base model, Mint calculations show that Tata Motors will get Rs2,850 crore cheap money.
The firm has so far spent at least Rs2,000 crore on the Nano.
The company plans to allot 100,000 cars in the first phase. Those who will not get the car in that phase will have the option of keeping the booking amount with the company and waiting further for delivery.
The booking amount for the base model is Rs95,000. Assuming that all the bookings are for this model, the successful 100,000 applicants who get allotment in the first phase would have deposited Rs950 crore in April. Deliveries would commence by July and it would be a while before monthly deliveries ramp up to even 3,500.
According to at least three vendors who spoke to Mint on condition of anonymity, the Pantnagar factory in Uttarakhand is not expected to reach its peak capacity of 3,500 cars till at least July.
In other words, a large part of the Rs950 crore that the firm receives will remain with it for a considerable period before deliveries are completed.
Vendors are expecting at least 300,000 applications.
Assuming that the balance 200,000 applicants retain their bookings, that would result in a cash inflow of another Rs1,900 crore for Tata Motors.
Indeed, this is not free money. Tata Motors will give 8.5% interest on any deposit that lies with it for over a year and 8.75% for deposits above two years. This is, however, much cheaper than what it had paid for the fixed deposits that it recently raised from retail investors—about 10.5% for one year and 11.5% for three years. It has raised Rs1,300 crore from a public issue.
If Tata Motors is able to raise these funds at 8.5-8.75% through the Nano bookings, it would result in interest cost savings of about Rs55 crore.
Finally, the cost of the booking form—Rs300—will fetch the company another Rs9 crore, provided there are 300,000 applications.
“The booking amount will ease pressure on the company’s working capital requirement for the next four months. It’s a clever move by the company and one that will save them from raising expensive money in the debt market,” said an analyst with First Global Securities Ltd. “They can use it to partly pay their outstanding debt, which stood at Rs13,500 crore in third quarter of fiscal 2009.”