Date:05/09/2008 URL: http://www.thehindubusinessline.com/2008/09/05/stories/2008090552501500.htm

Nano uncertainties may cloud Tata Motors

A file photo of Nano car.

BL Research Bureau

Tata Motors has spent about Rs 1,500 crore in setting up a plant for its ultra low-cost car, the Nano.

With the company now backed into a corner and considering the option of winding up and relocating the project to another State, uncertainties relating to financial implications of the pull out and the possible delay in the roll-out of the Nano may bog down the company’s stock in the near-term.

Raises concerns

The Singur plant was to initially produce 2.5 lakh cars a annum which could be scaled up to 5 lakhs depending on the demand.

The search for an alternate location at this point in time may entail three concerns - one, relocation costs; two, whether the company be able to stick to its initial production schedule once it shifts to an alternate location (possibly Uttarakhand).

In a low-margin, no-frills product like the Nano, it is volumes that bring in profitability.

A delay in reaching the required break-even might be a drag on the margins of the company.

These were already thin at 7.5 per cent for the June quarter. Three, what would happen to the suppliers who have also set up dedicated facilities at Singur?

The original idea on the Nano project was to have all the suppliers close to the OEM, to save on freight and interest costs by just-in-time delivery to the facility.

Now, if the plant is relocated, the question is whether the suppliers will have the ability and the financial wherewithal to relocate their facilities too, at the new location.

Until the air is cleared on this front, worries on cost control will remain.

Sedate outlook

In a separate development, the company also announced the details of the proposed rights issue to repay part of the bridge loan taken for the JLR acquisition.

Priced at a 20-30 per cent discount to the current market price, the two simultaneous offers will dilute Tata Motor’s equity base by 33 per cent.

This, along with the company’s heavy interest burden plus the uncertainty on the Nano front, presents an uncertain outlook for earnings over the next one-two years.

(The analysis and opinion expressed in these columns are based on the technical analysis of the past price behaviour. The stop-loss level provided with the recommendation is important. The original view would stand negated if the stop-loss level is breached. There is a risk of loss in trading)