New Delhi: Bajaj Auto Ltd’s alliance with Renault SA to build a car for $3,000 (Rs1.2 lakh) may benefit the company, India’s second largest two-wheeler maker, in the long run, but is likely to affect the company’s bottom line in the short run, analysts say.
On Saturday, Bajaj Auto and the French car maker had said they were “in preliminary deliberations to jointly understand customer requirements and business potential for very competitive vehicles in India.” Renault had previously declared its intent to make a $3000 car in India.
“Strategically, it’s a step in the right direction as it helps in expanding Bajaj’s product portfolio and de-risk its business,” says Vaishali Jajoo, an analyst with Mumbai brokerage Angel Broking Ltd.
Bajaj Auto, which also makes three-wheelers, has seen its two-wheeler sales declining in line with the industry as higher lending rates and tighter credit make customer avoid or defer purchases. The company has previously said it was interested in the cargo four-wheeler segment and passenger cars. Bajaj Auto’s managing director Rajiv Bajaj was not available for comment over the weekend.
“They’ve (Bajaj) got lots of surplus cash, but the question to ask is, is it worth spending so much money in this business,” says S. Ramnath, vice-president at SSKI securities. Bajaj Auto had Rs5,400 crore of reserves in 2006-07.
India’s largest auto maker by revenues, Tata Motors Ltd, is spending Rs2,500 crore to build a factory in Singur, West Bengal, that will make a car that costs Rs1 lakh. The company plans to make 250,000 of these cars a year starting 2008. Companies such as Tata and Renault are targeting this segment with the hope of inducing some of India’s 45 million two-wheeler owners to upgrade to inexpensive cars.
There would be enough takers for such cars, says Huzaifa A. Suratwala, senior analyst with Networth Broking Ltd. “They (the companies making inexpensive cars) will be looking at volumes and in India there will always be takers for cheap products,” he adds.
While India is the fourth largest automobile market in Asia, only seven of every 1,000 Indians own passenger cars, compared with 12 of every 1,000 in neighbouring Pakistan. Car makers such as Tata Motors Ltd, Renault SA and Volkswagen AG will invest Rs30,000 crore in the country over the next three years to build new car factories in an attempt to tap this opportunity. However, given rising costs of raw materials, analysts say it is very difficult to make money on very cheap cars.
“Making money is important. We are not really sure how it (making a $3,000 car) would add to the bottom line (of these companies),” says Suratwala.