Monday, December 10, 2012

Small package...

...but is the Tata Nano actually going to be a good thing for Tata Motors? The answer to that question is littered with ‘ifs’ and ‘buts’

How expensive (oops, cheap) is Tata Nano? Well, it’s as ‘expensive’ as a CD player fitted into the ultra luxurious Lexus. So, for a Lexus-owner, Tata Nano may just appear to be a toy, but for Ratan Tata and millions of Indians, Nano personifies their reveries – Ratan Tata’s dream to manufacture the world’s cheapest car, and the hope of millions of Indians who always aspired to own and drive a four-wheeler. Though the people’s car was launched on March 23, 2009, it is expected that bookings would commence only by the second week of April. If you thought that manufacturing the world’s cheapest car was the most daunting task, then think again, for achieving break-even looks even more daunting.

As if ominously, Tata Motors suffered a net loss of Rs.2.63 billion for the quarter ending December 2008 – a dreadful decline by 152%. The earning per share (EPS), too, went down to a negative Rs.5.51 per share for the quarter from a healthy Rs.12.95 yoy. Its arch rivals Maruti Suzuki and Hyundai Motors posted healthy numbers at a time when Tata Motors saw a fall of 19% in total sales for the month of February. Will Tata Nano indeed be their saving grace?

At the risk of being daring, the answer to the above question, with a short term perspective, is a big NO! Tata Motors has already invested over Rs.20 billion in the Nano project so far. Although the car would be rolled out in June 2009, it won’t be sooner than 2011 that the company can ‘hope’ to start making profits out of this car. Reason: Nano is a low cost, low-margin car and therefore the company will have to rely on huge volumes to pump in profitability. However, since the manufacturing plant in Gujarat is not ready at the moment, it would be difficult to manufacture more than 3,000-4,000 cars per month initially. “We estimate Tata Motors to sell 50,000 units and 1,50,000 units of Nano in FY’10 and FY’11, respectively. Assuming realisation of Rs.1,00,000 per unit, it will add just Rs.5 billion and Rs.150 billion to the company’s sales in FY ’10 (E) and FY ’11(E) respectively, which is not very significant considering the size of Tata Motors,” points out Vaishali Jajoo, Senior Research Analyst, Angel Broking. So despite the hype that Nano is generating, it would end up spilling more red ink on the balance sheet of Tata Motors in the short run. Trade pundits have predicted that Tata Motors will have to sell at least four to five million cars to break even and make profit. Considering Nano’s rate of production, Tata Motors will be able to reach this figure only by the sixth year of operation, i.e. FY’15. Even the Nano Europa, the European version of Nano, will not be launched before 2011.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri

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