Nano - Dream car or Dream - II

Nano if successful is expected to define a new segment, a segment somewhere between the two/three wheeler user market and the current entry level passenger car market. Both these segments need to be absolutely convinced that Nano is going to benefit them to turn this venture a success. Whether this initial pricing is based on a penetrative pricing strategy to gain market share or if it is sustainable in the long run leading to long term market share and profits needs to be seen . To turn a cost leader profitable, Tata Motors will need to sustain and introduce variants at similar cost as initially promised. There is no doubt competition will soon follow suit. Renault-Nissan has already announced plans to introduce a $2500 car, Maruti would compete as well (or rather be forced to compete), rather than risk losing their strong hold in the current entry segment.

Can Tata Motors convince the two wheeler user to shift to Nano? See the production trends graph for two and three wheelers since 2002. Both Passenger car and two wheeler segments have been growing at a steady and almost similar pace, however the two wheelers have been outselling passenger cars 5 to one since 2002 A typical two wheeler user who makes the shift, will have to contend with about 30 – 40 Km less per litre of gas, and he has got a big decision to make there. If one argues that he is going to use it as a weekend vehicle, whether the insurance and maintenance for a vehicle /Asset whose value is rapidly decreasing every passing day is worth buying needs to be considered as opposed to using a Taxi or Auto.

If we consider that users of the current Entry level passenger car segment or for the sake of example the users Maruti 800, then one needs to think whether Tata Motors can do enough to convince a Maruti 800 user to shift to Nano. Few factors at least initially would strongly favour Maruti. The reliability and track record that a Maruti has got is a proof to the fact that Maruti has got its own set of loyalists. There are still many happy Maruti customers driving the same car out there even after 10, 15 and even 20 years. These loyalists, I would expect to go out strongly consider buying another Maruti when they decide to replace their first car. It is these loyalists and it is against this track record that Nano will have to fight. Nano is also expected to have basic features as a car and the presence/lack of regular and safety features will play an important part in the final decision made. Alternate uses for Nano as an auto rickshaw is also being considered by many and Tata Motors would probably not be happy to see this happen. This is a not a huge market and may lead to brand dilution.

Whatever strategy Tata Motors adopt, they will need to ensure that Nano sells in huge volumes. That seems to me as the only way they may be able to make this venture successful. The on road price, the customer ultimately ends up paying along with the ability of TM to maintain this price at their initial promised level is going to be a crucial factor. Ratan Tata has already announced that the promise made on pricing will be kept. If price is maintained in spite of growing raw material cost, inflation, credit rates etc, whether this is sustainable and whether Tata Motors will go short on profitability for volumes needs to be seen. Happy customers lead to happy shareholders in most cases; it may not be the same here. The prototype of Nano represents one mountain half scaled in the journey towards creation of Nano. Now Ratan Tata and Tata Motors have another bigger one left to scale, and they have competition to tackle. JRD Tata named it ‘Beyond the last blue mountain’; on a lighter note Ratan Tata may want to title it ‘Beyond the two Mountains’,

- Suresh
The author works for a Global IT consulting organisation as a IT consultant. He is currently based out of London. The views expressed in this article are his own. All copyrights and Trade Marks are duly acknowledged. He can be reached via the link on the right tab on this page.

Nano - Dream car or Dream

Will Nano be the dream car that the common man wants? Tata's credentials and ability to deliver this car has never been in question, the moot point though is the price tag that the car carries. With a tag of Rs 1 lakh Plus vat and ..., this car is roughly about twice as costly as the best selling motor bike in India. Will Price alone be good enough to woo these customers to buy Nano? Many questions remain unanswered, but the dream lives on. While it is true, these questions will only be answered when Nano actually comes for sale. What strategies Tata Motors would adopt going forward in the run up to the launch of Nano, promises to be exciting and defining.

The concept of Nano comes at an interesting stage in life of Tata Motors. Their first production Indica came out tagged as the first ever car to be designed and developed by an Indian company, and it was a runaway success going on to become the best selling car in it's market. Complaints from early adopters raised questions on the reliability of the car and on the credibility of TATA motors themselves. This was the first crucial test that Tata motors faced and they did handle that with aplomb, handling complaints efficiently and coming out with an improved version of Indica. Indica V2 resolved many of these initial problems that surfaced, and at the same time silenced the critics who questioned the indigenous technology..

On one side TATA Motors are trying to establish themselves as a Global company by pushing to acquire revered brands such as Jaguar and Rover. On the other side they are making waves attempting to create the Nano. There are no points for guessing what Tata Motors is heavily betting on at the moment. Indica has been the most successful car that Tata Motors have launched so far. Indigo has been a moderate success and Sumo seems to be losing its own battle in the Utility vehicles segment. With ever increasing competition and no significant factors for differentiation in a segment, Tata Motors realise that they need a winner; they need a star to emerge sooner than later that eventually turns into a cash cow to fund their global ambitions.

To be continued...

Suresh
The author works for a Global IT consulting organisation as a IT consultant. He is currently based out of London.

FII Trends: Net investments Surge in India

Summary

*FIIs were net buyers in 2007

*Inflows have surged multifolds since Sep 2007; surge in inflows coincides with the reduction in short-term rates by the Fed

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Foreign Institutional Investors (FIIs) were net buyers in Indian markets in 2007. According to the data published by Securities Exchange Board of India, FIIs have made a net investment (in both Equity and Debt) to the tune of $36.2 billion ($33.1 billion in Equity and $3.1 billion in debt), for the first 11 months ending November 2007. This is substantially higher in comparison to the $8.9 billion invested in 2006.

Though net investments were positive over the past three years, a closer observation at the trend indicates a different picture. During the first 8 months of the current year, only a fourth of the $36.2 billion was invested, while the remaining was invested in the last three months (see chart). FIIs invested in both Equity and Debt markets during this period. Interestingly, this coincides with the reduction of short term interest rates by the Federal Reserve. Since September 2007, Fed has pared interest rates by one percentage point in order to protect the economy from falling into recession. Reduction in interest rate, appears to have induced investors to move money into the Indian markets.

Madhan Gopalan

The author, currently based at Louisville, Kentucky, is a Global Equity Research Manager with Ness, USA. The views expressed in this article are his and not necessarily of his employer. He can be reached at gmadhan72@yahoo.com

Federal Reserve's Juggling Act

In my post dated April 4th (American New Home buyers can wait), I had indicated that the Federal Reserve will be forced to ease the interest rates if the housing market crisis continues. This is what appears to be happening in the US economy. Between September and now, driven by an economic slowdown in the wake of housing market crisis coupled with rising oil prices, Fed has lowered the short-term interest rates by 100 basis points (one percentage point).

The Outcome

When Fed lowers its interest rates, a string of things starts to unfold.

1) Investment and consumption expenditure increases – Propelled by lower lending rates offered by commercial banks, businesses get into the expansion mode by making sizeable investments. In addition, big ticket consumer items that are generally purchased through financing also surge, as retail loans (e.g. auto loans) becomes relatively cheaper

2) Dollar falls – When interest rate plummets (relative to other countries), Investors preferring higher returns move their funds to countries with a higher interest rate. When money moves out of the US, people sell dollars and buy other currencies say the Indian Rupee or the Chinese Yuan. With less dollars demanded, the value (price) of the dollar drops in the Forex market

3) Exports surge – A decline in the price of dollar means that foreigners only have to pay less (than before) to buy US made goods and services. Consequently, foreigners buy more goods produced in the US.

4) A multiplier process unfolds – Increase in expenditure results in an increase in income, which in turn augments the consumption expenditure. This enhances the aggregate demand, resulting in higher Real GDP and inflation rate.

The Juggling Act

Fed’s decision to increase the money supply (by paring the interest rates) to avoid an economic slowdown has a trade off, in the form of inflation. A cursory look at the CPI, an index that tracks the price level of key commodities, stands testimony to this. Inflation, since September 2007 has steadily increased both on a sequential basis and on a year-over-year basis (see table).

Now, Fed’s choices are caught between a rock and a hard place. Fed has limited incentives to pare the interest rates further, given the surge in inflation rate. Why? If Fed lowers the interest rate further, the rising inflation would pose a huge risk to growth. For instance, between 1975 to 1977, Fed continued to increase the quantity of money supply to accommodate increasing oil prices. This pushed the inflation stratospheric levels. However, when the OPEC cartels pegged up the price of Oil again in 1979, Fed didn’t react. Though this action curbed the inflation rate, the US economy went into a deep recession.

On the other hand, Fed will also find it hard to increase the interest rates, given the state of economy. Why? An increase in interest rate, at the current juncture, will prolong the economy’s recovery. Fed must be closely monitoring the supply-demand situation in the economy. It would be interesting to see how Fed nudges the economy into the growth path, concurrently keeping the inflation under control.

Madhan Gopalan

The author, currently based at Louisville, Kentucky, is a Global Equity Research Manager with Ness, USA. The views expressed in this article are his and not necessarily of his employer. He can be reached at gmadhan72@yahoo.com

Where are the Markets going?

Indian equity market has been on fire for the last couple of weeks.From the moment Big Ben had made his decision, there has been a unbound optimism on part of Equity investors. It was no wonder that the sensex made it's quickest 1000 points recently and looking at the way it is going, it might as well break that record. Is this optimism based just on faith or is there a sound foundation behind it? Only speculative reasoning can give the answer.

The way Energy and Power sector companies like Reliance Energy and Tata Power have moved is just amazing. If you had invested in one of those companies about 20 days back, you would be sitting with handsome profits by now. The Entire pack of reliance group companies have led the way followed by traditional banking and Financial sectors. To an extent this move has been based on fundamentals, Indian banking and Power sector has tremendous scope for growth and a part of that is being reflected in the way these stocks have moved. The Foreign fund houses have also helped by bringing in quite a lot of money into the market.

What do we do now is a pertinent question every investor would have to ask himself.It is a difficult and futile exercise to predict the market, hence it is always better to stay safe. The question of concern is short term rather than long term. Long term investor can rest in peace, it is the investors who are looking at shorter horizons that need to make decisions. Have you invested in a company or in a stock, answer to that question will help in making your decision. Investors who have invested in a company based on it's strong fundamentals and the management are in a relatively better position than those who have placed bets just based on market movements. It will be an exciting month going forward, no doubt about that.