Tata Motors may charge the losses on its small car Nano, the world's cheapest car at Rs 1 lakh, against the profit it earns from selling trucks, according to industry analysts.
Chairman Ratan Tata has pledged to sell Nano, touted as the common man's car, at Rs 1,00,000 even though the cost of making and selling the car is expected to be higher because of rising steel, battery and other input prices. Tata Motors has formed a team to evolve a plan to keep the costs closer to the sale price.
"The challenge for Tata Motors is not to sell the car at Rs 1 lakh but to produce the car substantially below the Rs 1 lakh barrier so as to be profitable. With the recent skyrocketing increase in prices of raw materials it is next to impossible to maintain that limit. The company will look to counterbalance the heavy initial loss on Nano by margin gain on the commercial vehicle segment. The production numbers (of the Nano) will be considerably lower in the initial quarters", said a Mumbai-based auto analyst from one of the leading brokerage firm.
The car, which may be sold starting October, is expected to turn to profit in four years, automobile analysts who declined to be identified said. The car will be built at Tata Motor's plant in Singur, West Bengal.
The company intends to produce about 250,000 units of Nano's per annum in Phase I of expansion with a gradual increase to 350,000 units per annum in Phase II.
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Tata Motors' Managing Director, Ravi Kant declined to comment on if the company was planning to set off the loss of margins on the Nano through commercial vehicles.
"For any new product development there are immense costs involved. The project of Nano has never been tried earlier and hence the cost of development of the model will be more than the cost of any other project.
In addition, with the kind of price hikes we have seen recently in input costs, its virtually impossible to maintain the price at Rs 1 lakh", a city-based analyst said on the condition of anonymity.
For the financial year ending March 31, 2008, the company sold more than 3.12 lakh commercial vehicles (CV), witnessing a growth of almost 5 per cent, over the previous year to that when it sold a little more than 2.98 lakh vehicles, according to the latest annual release of the company.
Sales revenue for the company grew by 4 per cent, at Rs 33,093.93 crore for the same period even as the company's passenger vehicle (cars and utility vehicles) segment reported a fall of almost 4.5 per cent during the year.
Tata Motors will need to sell a large number of units of Nano to recover the cost of investment analyst said. "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 higher number at lower margins".