Big is better

There's a shift in consumer preference to larger cars

The passenger car market has had a solid run this year, with sales increasing by 27.4 per cent in the period from April 2003-January 2004, according to figures reported by SIAM (Society of Indian Automobile Manufacturers).

Interestingly, within the four-wheeler vehicles, customers are upgrading from small and compact cars to bigger sized cars. The Maruti 800s, Santros and Indicas of the world increased sales by 20.23 per cent in the April-January period. But all other bigger vehicles, right from the mid-size to the luxury segment, grew at a much higher 60.94 per cent.

Nor is that higher percentage entirely due to the lower base. In April-Jan FY03, these segments accounted for 17.66 per cent of total volumes. This fiscal, their contribution has jumped to 22.31 per cent. Needless to say, the contribution in rupee terms would be much higher.

This is a welcome development for car manufacturers, especially since there are pressures on the costs front, what with prices of inputs such as steel and tyres rising. A better product mix will obviously help in negating the impact of higher costs.

But then, the relatively higher sales of bigger cars this fiscal was largely because of new product launches. Besides, the value-for-money Indigo accounted for over 56 per cent of incremental sales in the mid-size segment. The growth reported by other players who operate in this segment was lower.

Among the listed players, Tata Motors is a clear beneficiary of this shift. Its bread-and-butter, 'Indica' grew sales only 9.3 per cent, much lower than the 27.4 per cent growth for the entire car market.

But this was more than made up by the impressive performance of its mid-size offering, 'Indigo'. Overall car sales rose 41.3 per cent, as a result.

Maruti, on the other hand, could get impacted if the trend continues, simply because it's the biggest player in the small cars segment. Growth in sales of Maruti 800 was slightly lower than the market at 24.16 per cent.

In Maruti's case, however, overall margins are cushioned because of savings on parts sourced from Suzuki and other cost-cutting initiatives taken by the company. Yet, according to reports, it plans to increase prices of some of its models, which seems an attempt to protect even per-unit margins.

The Data Access flotation

Data Access, one of the four ILD (international long distance) players in India is out to woo investors to buy 25 per cent of its equity. The timing, clearly, is not great.

What works in the company's favour is that it's a low-priced offer at a band of Rs 17-20. This gives retail investors the impression that they aren't paying too much in terms of premium to face value.

Besides, based on rough estimates, Data will report an EPS of Rs 2 in FY04 (ended September), which gives it a discounting of 8.5-10, depending on which end of the price band investors bid. This, again, will not be seen as too expensive.

But then, the ILD business is almost like a commodity business. In some ways, it's worse""physical commodities have a limited supply, but supply of things like bandwidth are almost unlimited. High competition is expected to keep ILD rates at rather low levels.

In India, VSNL handles traffic for BSNL and MTNL, Bharti and Reliance handle their own ILD traffic, while Data Access does it for Hutch, BPL, RPG, HFCL and a few circles of Idea and Spice. The situation may not change much, because BSNL is expected to enter the ILD market. Growth, in that case, would have to come from other areas.

The company also has licenses to operate ILD services in the US and UK, which, in a way, makes it a specialised ILD player. And with a global network operating centre in India, its costs are relatively much lower, making it possible for it to quote low rates.

Another reason the company can quote low rates is that its bandwidth requirements are lower, which it can afford because it offers only voice services.

This may be a hindrance for growth going forward, as the voice segment is a low margin high volume business, and sector analysts feel corporate data services is the big growth engine.

On the other hand, the company is trying to replicate what it has done in India in other neighbouring markets such as Pakistan, Mauritius, Sri Lanka and Bangladesh which will soon be deregulated.

Another opportunity is call centres who are large volume players. Data Access already has 22 such clients and is adding 4-5 every month. The company also expects that the expected launch of pre-paid ILD cards will increase volumes in the market considerably. All told, the offer price reflects the risks and the commodity-like nature of the business.

With contributions from Mobis Philipose