Nano, the much-applauded people's car from Tata Motors that was unveiled at the Auto Expo last week, may take about four years to break even, even if the company rapidly ramps up capacity at the Singur facility.
By then, similar models of rival companies would have rolled into the market, like Bajaj Auto's low-cost car, which has promised to deliver more fuel effeciency than the Nano.
Auto analysts suggest that Tata Motors may not be able to generate more than three to four per cent on net profit margins and five to six per cent on EBIDTA margins on the car. In addition, while production of the model is ramped up, sales will also have to rise in tandem.
The company has said that it will hike production of the car beyond 250,000 units a year if the demand is bouyant. The plant's capacity will be ramped up to 350,000 units annually in the first phase of expansion.
However, most analysts and experts believe the ramp up may do little for the company as the demand is likely to exceed supply.
"Maruti Suzuki, India's largest car maker, produces 250,000 units of the Alto, the highest selling model in India. The company has a net profit margin of eight per cent on the model. Tata Motors will have to sell the Nano in much bigger numbers at lower margin figures," said a Mumbai-based analyst.
Tata's plans to export the model will only take off only after the demand for the domestic market is met. This will translate into a period of about four years from the launch date scheduled for October this year.
Tata Motors will thus be able to generate higher margins on exports as compared with those in the domestic market as the price tag of "Rs one lakh" will ease out considerably, according to experts.
Ratan Tata, chairman, Tata Motors, said at the launch of the car that the company doesn't have any immediate export plans for the Nano.
Many analysts also feel that hiking the capacity beyond 350,000 units would prove to be the company's biggest challenge as the land acquisition process is still not complete in Singur, Nano's mother plant in West Bengal.
Tata Motors recently said that work on the Singur plant was hampered due to water-logging, which eventually delayed the project by more than two months. Tata Motors is spending Rs 1,700 crore on the plant, in addition to investments made by auto component players which are pegged at Rs 500 crore.
According to an analyst at Religare Securities who requested anonymity, "The projected sales of the car would be in the range of 60,000-65,000 units in the first year of launch. In the subsequent years, it should be 150,000, 180,000, and 210,000 units. Margins in the initial period of one to one and half years will be tight, but should ease out a bit after that."
Reports prior to the launch suggested that Tata Motors would make one million units of the car which would feed export as well as domestic markets.
As of today, the car industry has already seen sales exceeding one million units in the nine month period ended December 31, 2007, during which the cheapest car was retailed close to Rs 2 lakh.
If, however, the company hikes capacity beyond 350,000 units, more investments will have to be made not only by Tata Motors but also its auto components suppliers.
Analysts estimate that a capacity of 350,000 units would entail investments of Rs 200-300 crore that would further squeeze the company's bottom line.
