Tata Motors Ltd. will begin taking orders next month for its Nano, the world’s cheapest car, after a failed effort to build a new factory for the vehicle delayed production. The low price and late sales mean the car won’t generate enough revenue to refinance by June $2 billion of a bridge loan Tata used to buy Land Rover and Jaguar from Ford Motor Co.
“It won’t solve the cash-flow problem they are having right now,” said Vaishali Jajoo, an analyst at Angel Broking Ltd. in Mumbai. “They will have to take more debt.”
Pushed into its first loss in seven years last quarter, Tata Motors will only build 30,000 to 80,000 Nanos in the fiscal year starting April, according to analysts. Moody’s Investors Service and Standard & Poor’s downgraded the automaker due to slowing sales of the U.K. luxury units and the need to fund the $2.4 billion purchase from Ford last year.
The company has $915 million of bonds and loans due by 2012, according to Bloomberg data. Sales of trucks and buses, the company’s traditional models, have plunged as economic growth in India cools.
“If you try too many things, you may fail,” said Edwin Merner, president of Tokyo-based Atlantis Investment Research Corp., which manages $3.1 billion. Tata Motors needs “deep pockets to pour in money” into revive Jaguar and Land Rover, he said.
Debt Costs
“Tata Motors is progressing on the refinancing options and in discussions with banks,” Tata Motors spokesman Debasis Ray wrote in an e-mailed response to questions.
The extra yield over government bonds of similar maturity that investors demand to own Tata Motors $490 million convertible bond due in 2012 surged to 3,164 basis points as of March 20, up from 483 basis points on June 2, when the acquisition of Land Rover and Jaguar was completed, according to data compiled by Bloomberg.
Last year, the carmaker began offering the public 11 percent annual interest on three-year deposits as it tried to raise cash. It was the first time in 13 years Tata Motors had turned to the public for funds.
Bookings
Tata Motors will begin accepting bookings for the car between April 9-25 and deliveries will start in early July, Ratan Tata said at a press conference in Mumbai today. The company will guarantee prices for the first 100,000 units. Customers must pay deposits of 95 percent of the car’s price, Managing Director Ravi Kant said at the same event.
Tata said it’s too early to comment on break-even for the Nano project.
Tata Motors shares gained as much as 8.1 percent to 173.85 rupees and changed hands at 167.7 rupees at 2:51 p.m. in Mumbai. The shares have gained 4.9 percent this year.
The company’s plan to start selling the Nano in the last quarter of 2008 was delayed after the company had to shift the location of its factory due to protests by farmers losing their livelihood.
Tata Motors will make profit from the Nano only when annual sales cross 350,000 units, according to India Infoline Ltd. analyst Jatin Chawla, who wrote a report titled ‘The Nano Effect.’ The project will be profitable in three years, he said.
The abandoned factory in eastern India had an annual capacity of 250,000 Nanos.
Family on a Scooter
The company’s factory at Sanand in western Gujarat state will have the same initial annual capacity when it opens by the year-end. The company will supply initial demand from other factories.
Tata, 71, a Cornell University-trained architect, decided to develop the car when he saw a family on a scooter. Almost seven motorcycles are sold for every car in India, a nation of 1.1 billion people. The company first showed the 623-cc car in January 2008. Tata Motors will announce details of the booking process in Mumbai March 23.
As sales in the U.S., Japan, and Europe tumble, Toyota Motor Corp., the world’s largest carmaker, Renault SA, France’s second-biggest automaker, and other automakers plan to build cars for the middle class in emerging markets. Indian annual light vehicle sales will surge to about 2.8 million units by 2014 from about 1.72 million last year, according to Tim Armstrong, director of Global Insight Inc. The Nano could account for as many as 450,000 of that, he said.
Toyota has an early prototype for a model that may be able to compete with the Nano, President Katsuaki Watanabe said in Detroit last year. Renault and Nissan Motor Co. have teamed up with Bajaj Auto Ltd., India’s second-largest motorcycle maker, to build a $2,500 car. They are targeting a middle class population of 50 million in India, where incomes have doubled in the last eight years.
The Nano may end up selling as many as 2 million units annually in 10 years according to India Infoline’s Chawla, who estimates that the cost of owning the Nano may be about $4 a day.
“The only formula that works with the masses in India is compelling value-for-money offering,” Chawla said.
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