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Rediff.com  » Business » No immediate Nano magic for Tata Motors

No immediate Nano magic for Tata Motors

By Shobhana Subramanian and Varun Sharma in Mumbai
Last updated on: March 24, 2009 14:55 IST
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The Nano launch may have prompted a 6 per cent upmove in the Tata Motors stock in Monday's opening session of trade, but it's unlikely the sentiment will sustain. The car may well find itself a new niche in the passenger car market and go on to become a hit.

But that's some time away and it will be a couple of years before the Nano contributes meaningfully to the company's revenues. In the meanwhile, Tata Motors continues to stare at a weak demand for both commercial vehicles as also cars.

While CV volumes were lower by 51 per cent y-o-y in January 2009, compared with a fall of 46 per cent y-o-y in the December 2008 quarter, to revert to the mean could take a while given that the downtrun in the economy persists. Moreover, Tata Motors is not in great shape -- the company posted a loss of Rs 260 crore (Rs 2.6 billion, including Rs 2.2 billion of forex losses) in the December 2008 quarter with operating margins down to just 2 per cent.

While a drop in margins was expected with sales volumes slipping 32 per cent, the extent of the erosion was surprising indicating that the full impact of falling steel prices hadn't been felt yet -- raw material costs were up 150 basis points sequentially.

While lower input costs and higher volumes should help expand margins from here on, for them to move back to 8 per cent could take another couple of quarters. Initiatives to bring down costs, targetted at savings of Rs 1,000 crore (Rs 10 billion) over the next three years, too are longer term measures; in the near term the bottom line could remain under pressure.

The bigger worry is the Jaguar and Land Rover business -- volumes fell 35 per cent y-o-y in the December quarter. The strain on the company's balance sheet isn't lost on investors; the debt-equity ratio of close to 1.5: 1, is not low. Also, by mid-2009, Tata Motors needs to raise around $2 billion to repay the rest of the $3 billion bridge loan that it took to acquire JLR.

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Shobhana Subramanian and Varun Sharma in Mumbai
Source: source
 

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