Tata Motors: Passenger car segment becoming cause of concern

While its stock is still going strong, near an all-time high, with falling sales in the passenger car segment, Tata Motors faces an uphill task to become a complete automaker

Tata Motors Ltd, the country's largest vehicle manufacturer, faces a daunting task to revive sales in the passenger car segment. With sales of its flagship Indica and much-talked-about small car Nano falling, the company needs to seriously initiate steps to overhaul its passenger car operations. Analysts say that the company will have to come out with better products and variants at aggressive prices, if it is to turn things around.

"Tata Motors' passenger vehicle products are not the best in their segments," said Kaushal Maroo, auto analyst, Religare Capital Markets Ltd. "Indica sales have been poor because of intense competition in the segment, where others have launched better products at aggressive prices; besides the high usage of the Indica as private taxis does not augur well for the brand image of the product."
Since the launch of the Indica in 1998, the company brought out variants like Indica V2, Indica V2 Turbo Diesel, Indica V2 Xeta and Indica Vista, but all these models have failed to maintain steady sales.

"Passenger car sales-excluding the Nano-have been lacklustre primarily due to softening of euphoria, as products like Indigo Manza and Vista are getting older. The company has yet not announced any new variant for the Indigo Manza, which was launched in October 2009, whereas the Indica Vista, though a low-cost car, is facing stiff competition from players like General Motors (which has its Beat), Ford (Figo), Hyundai (i10) and Maruti Suzuki (Wagon R)," said Chaitanya Adesara, research analyst, Sharekhan Ltd.

During the period between April 2010 and November 2010, Tata Motors sold 64,350 units of the Indica in the A2 or compact car segment, compared with 75,519 units in the corresponding period last year. During this period, Maruti Suzuki, the country's largest carmaker and a unit of Japanese Suzuki Motor Corp, sold 5.21 lakh units, up from 4.07 lakh units. But what's the reason for such a difference? While Tata Motors offers only Indica in this segment, Maruti Suzuki on the other hand sells Alto, Wagon R, Zen-Estillo, Swift, Ritz and A-Star models at attractive prices. Even, Hyundai Motor India Ltd, the second largest carmaker, offers four variants-the Santro, Getz, i10 and i20, in the compact car segment.

Brokerage Kisan Ratilal Choksey Shares and Securities Pvt Ltd, said in a research note , "The decline in sales (for Tata Motors) is primarily on the back of a drop in passenger car volumes by 42% month-on-month and 34% year-on-year, due to increase in competition from global players and a decline in sales of Indica and Nano."

While other carmakers are going in for more experiments, while offering different models, Tata Motors has stuck with the Indica. Not only this, while other carmakers are coming with more goodies and different shapes, Tata Motors is not ready to leave the 'bean shape' of the Indica. In fact, the company is so smitten by the 'bean theme' that it has expanded the bean shape in its other high-end models as well, including the recently launched sports utility vehicle (SUV) Aria. After sticking to the bean shape for over 12 years, it is high time for the Tata group company to move to other designs, before someone starts comparing Indica to the everlasting (and unchanging) Ambassador from Hindustan Motors.

Tata Nano, the much-talked about 'people's car', is also not keeping pace with other cars in the market. Although on the price level there is no competition for the Nano, stray incidents of fire have been a deterrent to sales. In fact, over the past few months, Nano sales have fallen continuously. In November 2010, sales of the Nano tumbled 85% to 509 units from 3,406 units, in the month a year ago.

"While free sales (of Tata Nano) are yet to begin in certain states, channel checks suggest that the demand for the Nano is yet to pick up, indicating that customers aspire for luxury more than economy when buying a car. However, volumes post the pan-India launch would be a true indicator," Mr Maroo said.

In order to boost sales, Tata Motors has come introduced offers like an extended warranty of four years or 60,000 km, at no extra cost, with financing for up to 90% of the vehicle cost. In addition, the company's unit Tata Motors Finance, has launched a special Tata Nano finance scheme through which customers can get a loan for the vehicle in just 48 hours on producing select documents.

Mr Adesara of Sharekhan said, "We are surprised at the hard-sell by the company on a globally-acclaimed product like the Nano. Like when the Indica and Tata Motors had to take corrective measures to upgrade product quality, the company is now preparing for a second innings with Nano, though comprehensive maintenance may cost it a bit more."

The company needs to make the Nano available across the country, rather than only in certain states, as this would help it to reach tier-II and tier-III cities, analysts feel.

Mr Maroo of Religare Capital said, "The extended warranty and 90% finance option would definitely help boost demand from marginal customers and allay the concerns of potential customers over the stray fire incidents. We believe that the pan-India launch and better availability in tier-II and tier-III cities would also help boost sales from current levels."

Tata Motors also faces production constraints at its Sanand plant. The plant, which started operations in June 2010, has a capacity to produce 2.5 lakh Nanos a year. However, till date, Tata Motors has not been able to produce more that 5,000 Nanos a month from the Sanand and Pantnagar plants. In fact, during November, it produced only 1,320 units of Nano compared with 3,426 units in the corresponding month last year.

"The company has indicated that vendors are taking time to set up facilities and some of them should be done in the next few months. However, if Nano demand does not pick up, it could be a deterrent as vendors would be skeptical over volumes and might just not go ahead to set up their facilities," Mr Maroo said.

Mr Adesara of Sharekhan echoed the same: "Production at the Sanand plant is facing constraints due to the supply shortage from vendors. Moreover, the migration of manufacturing from Pantnagar to Sanand is also taking time as vendors have been cautious to move to Sanand after making huge investments in Singur."

Following widespread protests that led to a suspension of work at Singur for over a month, the company decided to exit from West Bengal in October 2008 and shifted to Sanand in Gujarat. In March this year, Tata Motors also decided to compensate its vendors who were forced to relocate their units to Sanand from Singur.

Coming back to passenger car sales, the saving grace for Tata Motors has been the mid-size or A3 segment, where it sells the Indigo and Indigo Marina variants. In November, sales were up marginally, and on a cumulative basis for the period from April to November 2010, sales nearly doubled to 58,072 units from 29,360 units in the corresponding period last year. Nevertheless, the competition in this segment is heating up with the arrival of Toyota's features-rich Etios variant, which is priced between Rs4.9 lakh and Rs6.9 lakh.

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