Mumbai: If engineering the Nano was a tough task for Tata Motors Ltd, making money on the low-cost car promises to be even harder.
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A low-margin, low-cost car—the Nano is priced between Rs1.23 lakh and Rs1.72 lakh in New Delhi—means that the company will have to sell substantial numbers simply to recoup its capital.
A day after the car’s launch, analysts tracking the company didn’t seem impressed.
Nor were the markets. Shares of Tata Motors ended the day at Rs162.05 each, down 4%, on the Bombay Stock Exchange, erasing all the gains it made on Monday when the pricing of the Nano had been announced late evening, after market hours. The bourse’s benchmark Sensex index ended up 0.5% to close at 9,471.04.
Twenty-one of the 31 analysts tracking the company reaffirmed their sell rating, according to data compiled by Bloomberg.
“We do not envisage near-term positives for the company from the launch of the Nano,” wrote analysts Amit Kasat and Rohan Korde in a research report put out by Anand Rathi Securities Ltd on Tuesday. They point to the low selling point of the car and low margins as key negatives—making it that much more difficult to recover the little over Rs2,000 crore spent by Tata Motors in developing the Nano.
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One auto industry expert said if that amount was considered on a “fully accounted basis”, including cost of capital, Tata Motors would need to sell four to five million cars by the sixth year of operation, or fiscal 2015, for the Nano project to break even or start making profits for the company.
“This car has shown the world how to think differently in designing a car and it’s amazing this has come from an OEM (original equipment manufacturer) that didn’t even make cars 10 years ago but we don’t know if this is the best thing for Tata Motors,” said Vikas Sehgal, a partner in the automotive practice at consultancy firm Booz and Co.
Sehgal’s calculations hinge on assumptions including a 12% cost of capital and Rs10,000, equivalent to about 6.67%, average net profit margins on each Nano sold. Analysts typically expect margins for the car to be between those of a two-wheeler and a small car.
To put the break-even target numbers in perspective, India sells 2.3 million cars a year domestically and exports some 200,000 a year.
Tata Motors recently had its debt downgraded by rating agency Standard and Poor’s which resulted in a rise in its cost of capital presently estimated at over 12%. The company is paying 11.5% on money raised through fixed deposits to refinance loans taken for its acquisition of Jaguar and Land Rover.
However, without taking the cost of capital into account and a healthier profit margin, Tata Motors could achieve operating profits much earlier, other analysts said.
According to Mahantesh Sabarad, an analyst at Centrum Broking Pvt. Ltd, Tata Motors will have to sell 600,000 units before it makes a cash profit, defined as earnings before interest, tax, depreciation and amortization. The first profit after tax would be made only after 800,000 vehicles are sold, he added. He agreed that project break-even would need selling a few million Nanos.
The estimate by JM Financial Institutional Securities Pvt. Ltd, according to its analyst Vijay Sarthy, was lower: “Tata Motors would need to sell 250,000 cars on an annualized basis to break even,” he said. Break-even until fiscal 2012 could likely take place on total sales of one million units, he estimated.
Profitable venture: Tata Motors managing director Ravi Kant. Abhijit Bhatlekar / Mint
A call to a Tata Motors spokesman was not replied to and the company had not responded to an email sent early afternoon asking for comment. “The Nano project is not just commercially viable but very profitable,” Ravi Kant, managing director at Tata Motors, had insisted while addressing reporters before the unveiling of the car at the Parsi Gymkhana in Mumbai on Monday.
Some experts said the market Nano was aiming at could not be exactly viewed through the perspective of current day car demand in the country.
Some expect the Nano to do well in rural areas, particularly among two-wheeler owners who aim to buy a car. Pradeep Lokhande, promoter of Rural Relations, a rural marketing firm, says that with motorbikes and cellphones becoming status symbols in rural India, the Nano is well placed to make a headway. He cites the example of Satara, a district in Maharashtra, that has close to 115,000 motorcycles. “I foresee as many as 30% of these bike users graduating to a car like the Nano. They’re impulsive buyers,” he said.
Abhijeet Naik, an analyst with CLSA Asia Pacific Markets, wrote on Tuesday that the demand for the Nano could be huge and will be tempered only by how many cars Tata Motors can produce. “There are 75 million two-wheelers on India’s roads, most of whose owners want to upgrade to a car but cannot afford one right now. This, we believe, will be the main target segment for the Nano and don’t rule out an immediate multi-million unit market size,” he wrote.
Still, industry experts pointed to the risks ahead for Tata Motors with the Nano. If, for instance, Sarthy said, commodity prices strengthen, Tata Motors would find it difficult to retain the price and remain profitable. Steel prices have declined 15% in January from Rs39/kg in March 2008, aluminium prices are down to Rs99/kg from Rs133/kg in the same period and copper down to Rs186/kg from Rs346/kg.
Without quoting them by name, Booz’s Sehgal said competitive options before rivals such as MarutiSuzuki India Ltd and Hyundai Motors India Ltd had strengthened given that the price differential between air conditioned versions of the Nano and, say, a Maruti 800 were as slim as Rs50,000. Tata’s rivals just have to reduce prices of their entry products by about Rs20,000 to present a prospective Nano buyer a competitive option.
The quality of the Nano—whose warranty on parts such as the engine and transmission expire, at 24,000km versus the typical 50,000km for other cars—will also be closely watched, Sehgal predicted. This, he said, would decide the resale value of the new Tata car and, in turn, affect demand.