Nano's nano impact

The irony couldn't have been starker. Less than 24 hours after Tata Motors launched its 'people's car' that riveted world attention as a symbol of Indian ingenuity, Chairman Ratan Tata was busy telling Sky News that Jaguar Land Rover would face 'devastating' results and may be forced to cull its 15,000 workforce in the UK unless the government could guarantee loans to the company. The firm has already axed 450 jobs, including 300 managers in January.

This, in a sense, puts the hype over the Nano, the world's cheapest car, in perspective. No amount of 'Nano news' can disguise what has been one of the most difficult periods in Tata Motors' history. And few see the snub-nosed mini-car being able to turn around the company anytime soon.

Let's first look at the benefits that the Nano will bring to the company. No one can dispute the fact that the Nano is innovative at multiple levels -- from its engineering, to its marketing, to the new concepts it has brought about in manufacturing. Despite its cheap price, it meets all government-required safety and emission standards. That's remarkable considering the fact that many thought that the company would come out with a poor excuse for a car.

Ratan Tata himself had said earlier that the company initially conceived this as a low-end rural car, probably without doors or windows and with plastic curtains that rolled down, a four-wheel version of the auto-rickshaw, in a manner of speaking.

Also, apart from giving Tata Motors the first-mover advantage in a price-sensitive Indian market, the pricing band is compelling and credit rating agency Crisil has estimated that this would reduce the cost of ownership of an entry-level car by up to 30 per cent, below three times the cost of owning a motorcycle. This would make the Nano affordable to an additional 14 million families. So the addressable market is huge.

Though Managing Director Ravi Kant would only say that "the Nano has had a stupendous response so far, breaking all class and other barriers," considering that the Nano website had 40 million hits till Monday night, a minimum booking of 500,000 looks reasonable.

Going by an average booking amount of Rs 1.13 lakh (Rs 1,13,000) for its three variants, Tata Motors will potentially get over Rs 5,600 crore (Rs 56 billion) for at least three months before it starts giving an 8.5 per cent interest on this to those customers who don't figure in the list of the first 100,000 allottees.

Tata Motors is clearly banking on this and, at least partly, this is what prompted Tata to tell journalists just before the launch that the project was not going to be an act of philanthropy.

Tata Motors is also aiming to export the car to other markets starting in 2011, at a time when cheap cars are the way to go. Ratan Tata sees a huge potential here and said that "certainly the present economic situation makes the Nano more relevant to the buying public."

The company could also thank the Trinamool Congress leader Mamata Banerjee for the project delays. For it has been a blessing in disguise in terms of material costs. Prices of hot rolled coils, a benchmark for steel prices, have fallen nearly 60 per cent since June 2008, making the nearly-600 kg car cheaper to produce.

So far, so good. But look beyond the initial Nano halo and it's clear that Tata Motors is struggling, from the $2.3 billion in debt it took on to purchase Jaguar and Land Rover from Ford Motor last year to the money that got sunk with the Nano assembly plant in West Bengal which had to be abandoned.

"Nano is exciting, but the rest is not," say S Arun and Kunal Tayal of Bank of America Merrill Lynch. Considering that the Nano project cost has increased by 25 per cent to Rs 2,000 crore (Rs 20 billion), they estimate a break-even on annualised sales of 225,000 cars in only FY 2011.

That, however, is the most-generous estimate as others feel the slim margins and muted sentiment mean that the break-even on the project could take a minimum of five to six years.

By the company's own admission, the Pantnagar facility can produce only 50,000 Nanos annually and the Sanand facility in Gujarat with an annual production capacity of 250,000 cars can be operational only earlier next year. Analysts say at that rate of production, it is doubtful whether the company can achieve operational efficiencies in the near future. "Scaling-up challenges are expected to be humungous," says Crisil.

Competition will also not be far off. The delays might mean that the company may have lost some of its initial momentum, giving competitors time to catch up.

Apart from the host of automakers that are on track to launch a similar-priced car in 2011, the original price warrior -- Maruti Suzuki -- will certainly not give up without a fight, a fact that perhaps prompted Ratan Tata to say he expects price correction from other small carmakers.

Besides, while the Nano will give a lot of people a chance to own a car, the two-wheeler sector could continue to have an edge because of the lower variable cost of maintenance, fuel and spare parts.

The most worrying fact is that the company's bread and butter business -- the commercial vehicle industry -- is unlikely to grow in the short- to medium-term due to the current economic uncertainty.

The company reported its first quarterly net loss in seven years in the October-December 2008 quarter against a profit of Rs 500 crore (Rs 5 billion) a year ago, and saw its debt-rating cut by ratings firms (the latest was by S&P on Wednesday, two days after Nano's launch). Also, including the JLR debt, the company's debt to equity has gone up from 0.48 in March 2008 to 1.13 in December.

Tata Motors' commercial vehicle sales fell 40 per cent during the quarter, while sales of cars and utility vehicles declined 14 per cent. Sales have, however, improved since then because of fiscal incentives offered by the government and de-stocking of inventory -- but not by very much.

HDFC Securities, for example, says the medium and heavy commercial vehicles segment will decline by 38 per cent in FY 2009, while light commercial vehicles sales will decline by 12.6 per cent.

Except for Tata Technology, all subsidiaries have performed dismally in the third quarter of this financial year. On top of that, Tata Motors expects JLR numbers to get consolidated shortly. With volumes rapidly eroding in the US and UK markets, JLR's consolidation will strain the company's financials further.

So, even as Nano enjoys global attention for its engineering marvel, investors are unlikely to applaud. The company's market capitalisation has slumped 79 per cent from a peak of Rs 39,691 crore (Rs 396.91 billion) on January 3 last year to Rs 8,334 crore (Rs 83.34 billion). The Nano, it seems, will have only a 'nano' effect on the stock -- at least in the near future.