Tata's 1 Lakh Gamble

A recent survey mentioned that the 1-lakh car could capture up to 25% of the two wheeler market. Tata clearly is hoping to replicate the success of the Ace. Though the prospects look good, I am sceptical on the success of the 1-lakh car.

The 1-lakh car will be sent to dealers as completely knocked down pieces and assembled by the dealers. To cut costs, the car will not have a metal body but one made of composite material like the Ace. Two engine variants will be on offer, 660cc two cylinder petrol and a 700cc diesel engine. In tests, the petrol version has offered 26kmpl, while the company aims for 30kmpl, which means on road the petrol will offer roughly 24kmpl. This is similar to the fuel efficiency of autos, but significantly better than the Maruti 800. The on road price of the car will be between 1.10 lakh to 1.25 lakh. This significantly lower than the base version of the Maruti 800 which costs Rs 200,000 on road.

The most important issue is will Indians take a liking to the design and lap up the car in large numbers? The likely target audience for this car will be in tier 2 cities especially those buying the commuter class bikes. For them fuel efficiency is of utmost importance for this segment. Apart from that, this segment will also like the car to have a sturdy feel, while also offering the prestige of owning a car.

The composite body of the 1-lakh car will not give the car a sturdy feel. Indians have an inherent liking for metal bodies, even if the vehicle is slower on this count. While the Ace has been tremendously successful, its biggest drawback is its composite driver’s cabin. On Indian driving conditions, even small accidents can lead to the material cracking, and therefore it has to be replaced. If the driver’s cabin had a metal body, then it would only have dents which need not be repaired. This is largely why the large three wheelers from Piaggio, Force and Bajaj are still selling, despite their drawbacks. The car will have a low height clearance, and being a composite body, large potholes on Indian roads can damage the body. The engine is likely to have an output between 20-30 Bhp. This on a 4 seater is miniscule power, and the car is unlikely to be faster than 3-wheelers. The car can seat 2 adults comfortably in the front and two small built adults/children in the rear seats. This design might make the car look like an auto with 4 wheels, which could be a significant drawback for the car.

Buying a car in tier-2 cities is often a status symbol. The 1-lakh car might not exactly fit the bill, as it is might be perceived as a auto with 4 wheels rather than a full fledged car. With Maruti launching its used car dealership, it can give the 1 lakh car a run for its money. An 800 with Maruti warranty might be a better option than an auto on 4 wheels. A used 800 would cost between 80,000-1.25 lakh depending on the car, so it as expensive as the Tata car, but with the Maruti warranty and being a proper car, it might just beat the 1 lakh car.

I thought predict the one lakh car will have limited success in India, but I might be wrong as Tata might be able to make changes to the car and then it can have wider acceptance, similar to the Indica. But I don’t expect it to eat into the commuter class bike market.

Morning Brief- 13/August/2007

Market News

The global markets continued their downward tumble. Both the European and American market are facing a liquidity crunch. The European Central Bank has pumped in a little over USD 200 billion over the last week to assuage the liquidity crises. Despite this European Stocks fell on Friday. The Dow also fell on Friday, despite the Fed pumping in money to reduce the liquidity crunch.

Meanwhile, the Japanese growth is slower than expected, which means rates will either remain unchanged or be reduced.

Liquidity pressures back home has lead to the Sensex losing almost 2% in the past week.

How does this affect the SENSEX? More liquidity in the global system leads to a higher risk appetite and with a positive growth story from India; it means that the FIIs will invest more in Indian equities. They certainly seem to be having a high risk appetite, with massive investments in the realty stocks, despite concerns over their valuations.

The global liquidity crises seem to have raised concerns about some leveraged buy-outs. This might increase the cost of funds for numerous Indian acquisitions, like the TATA-Corus deal, or the Aban-Sinvest buy out.

The current mortgage market crises, has lead to some grim outlook for global growth by economists. India might be affected, but if its domestic consumers might be able to limit the damage to just export-oriented sectors.

Corporate Watch

Bajaj Auto is now focussing its energy on the premium motorcycle segment, the 150cc or higher capacity and expects higher margins from this segment. Hero Honda, the undisputed leader in the commuter class bikes is facing a pressure on margins due to higher interest rates.

ICICI bank has decided to raise USD 1.5 billion via External commercial borrowings.

WIPRO has decided to launch operations in China to tap into east Asian markets of Japan, South Korea and Hong Kong.

Financial Service provider, Motilal Oswal fixes IPO price band at Rs 725-825 per share, whose face value is Rs 5. the promoters are expected to reap in Rs 800 crs via the IPO.

Infosys seems to have taken a long to medium term outlook on the rupee appreciation. The srupee is likely to further appreciate against the dollar and hedging against an appreciating rupee in the medium to long term is the right strategy.

General Motors is selling a form of maintenance insurance for its Chevrolet brand of cars. Customers can now buy maintenance packages for their cars for a period of three years. This is a first of its kind for cars, but is not new to the Indian consumer, who have experienced this through the Annual Maintenance Package offered by various companies in India.

Economy

The cabinet has approved converting the existing 4 lane highways to 6 lanes.

Industrial growth for Q1 stands at 11%

The IRDA is now checking the mis-selling of ULIPs. Often agents sell ULIPs as mutual fund-cum-insurance products, with customers unaware of the details.

India has just 31.5 million or 3.15 crore tax payers, that’s optimistically 3.15% of the total population, and the government has decided to squeeze them further to fund its socialist policies.

Fallout of Realestate Boom

A few days ago I wrote this post on homeowners in the USA being unhappy with quality of their homes. I also added that this is not an isolated incident and should be widespread in India. The following video is of an UNITECH construction in India.

Morning Brief: 10/August/2007

I’ve been busy over the past few days, therefore have not been posting my usual round up of news.

One more subprime lender has gone bust, this time its BNP Paribas which has thrown in the towel. Now, Goldman Sachs has also joined BNP Paribas, while AIG is now predicting doom. Damodaran believes that linking the Indian stockmarkets volatility to subprime woes is an oversimplification. I wish he was right, then it would me more interesting for investors. But this statistic from Businessworld, does not support Damodaran’s views. Everyone knows Damodaran is just trying to assuage the sentiments of the market, it seems no one is willing to admit the emperor is naked!!!

Meanwhile, its still unclear if ICICI is exposed to the US subprime housing mortgage market. Apart from this FIPB now wants to look into ICICI’s holding pattern, while the Government is set to raise FBI Cap on banks

SEBI, meanwhile is considering reducing the number of independent directors. Looks like India does not have enough Independent directors

IT and ITES firms whining to the government about the rising rupee seems to have spurred the government into action.

While Novartis has magnamiously decided not to challenge the Madras High Court verdict, it has gone to its big brother (the Swiss Government) which is now trying to forge closer cooperation with the Indian Govt on IP protection. This no doubt is to swing a deal in Novartis’s favour.

The government has lifted the freeze on SEZ applications, granted the Maha Mumbai SEZ another year, while also cleared 6 more projects.

India and Israel have agreed to form closer economic cooperation. This is a step in the right direction as India needs to look beyond traditional markets of US and EU.

FinMin is desperate for money, especially to fund populist policy largesse, and is now pushing for revised pricing of 2G spectrum pricing.

14 days, that’s the time given to a GoM lead by Pranab Mukarjee to fix the KG basin gas price.

Reliance Communication has sold a stake in its telecom tower business. This follows Barathi’s outsourcing deal of its infrastructure. Operators are now moving towards leasing the infrastructure rather than buying it outright.

Only in AI: they buy stimulators, but cant find the space to house them.

ADB has once said that income inequality is on the rise and it is a worrying trend. Is anyone even listening to them? Sigh, they attach too much importance to themselves.

Tata Sky targets 8 million users by 2010, if they follow a scheme of renting the equipment, they can meet this target much faster.

Telecom operators are now working to establish a Do Not Call registry. Does this include intrusive SMS from one’s own operator? I get one such spam SMS every day.

Essar and GSPC have decided to bid for an oil block in Syria.

Puravankara IPO gets oversubscribed a paltry 1.91 times. At an issue price of Rs 400, its overvalued is my guess. Retail investors would have stayed away and Institutional investors would have mopped up the shares.

Government launches a new airline license called regional airline, interesting times ahead for the aviation industry, especially in the low cost carrier segment.

Sports Marketing in India: Set for a Sea Change?

While many question the rationality of hosting the Commonwealth Games in Delhi, considering the enormous expenditure involved, sports marketing is set to benefit from the games. Up until recently, the only sport which has any selling power was cricketers, and likewise cricketers were in demand. Almost every brand worth its salt signed up cricketers. With the exception of few like Paes, Bhupati and V. Anand, cricketers have dominated the sports marketing business in India.

After India lost the cricket world cup, companies have realised that signing cricketers is a risky gamble, as their appeal is directly linked to their performance on field and the visibility they have among the others playing. This has lead to companies looking at other sports to diversify their risk. This has lead to the growth in the popularity of people like Pankaj Advani, the slew of chess players, Narain Kartikeyan and others. Along with this television channels have also started actively promoting various other spots like football, tennis and formula 1.

The future definitely look as the hold cricket has over the Indian sports fan is set to decrease as more options are available to him. Companies will look to have a diversified portfolio of sportspersons as ambassadors rather than hinging their fortunes on one sport or the film industry alone.

On Innovation and Leadership

In this week’s Businessworld, Sangeeth Vargheese writes on the importance of India moving to a knowledge economy from merely being a low cost production destination.

"For now, everything seems to be hunky-dory. Yet, one point being missed is that most of India’s present growth is a result of our lower cost services when compared to other countries. But cost competency is never a sustainable proposition. In the long term, it holds no competitive advantage, since it can be easily replicated. Today it is India; tomorrow it could be any other country. If Pakistan or Ethiopia offer the same services at lesser cost, all these multinational companies that are currently swearing by India will pack their bags and move there. The solution is to differentiate India in ways other than just cost competency, before we can hope to consolidate India’s leadership.

However, our present systems — be it education or culture — focus on creating a bunch who are more doers (managers, engineers and analysts) than dreamers (change architects, innovators and entrepreneurs). This further reinforces our excessive reliance on cost competency. We are adept at replicating ideas and reverse engineering but are yet to be taken seriously as innovators.” (Link)

Vargheese has an important point, growth lead merely by low cost is replicable and not sustainable in the long run. With the appreciating Rupee, exporters are already lining up at the government’s doorstep asking them to offset the rupee appreciation.

India, henceforth needs to focus on innovation and leadership. Low cost can only grow the economy to a certain extent, for it to leapfrog into the next level, innovation is required. Indian companies have to consistently invest in research and development to innovate for them to survive.

Structurally Deficient Homes?

Puravankara has just launched its IPO, DFL has done so. The real estate sector is on fire, prices are skyrocketing. Just like in India, there is a housing boom in the USA. Currently, the market is experiencing a slow down.

Angry homeowners in the US who bought homes, and found them to be structurally problematic have taken to the internet.

The Internet has rapidly become an outlet for frustrated homeowners to chronicle their bad experiences with new homes they have found to be structurally defective. Homeowners can now post complaints, discuss legal options, and warn future buyers on at least a dozen builder-directed "gripe sites," with names such as www.crapconstruction.com and www.khovsucks.com. (Link)

This is the expected fall out of a boom in the housing market, more so if customers are not patient and demand quick delivery of homes. In the construction business, the level of technology determines the shortest time span required to build a house/flat. In a market where the buyers are impatient, there will be some sellers who will be willing to deliver houses quicker than the minimum time as determined by the level of technology, therefore they will have to cut costs.

Secondly, if there is a boom in the housing market, the cost of raw materials will increase. If the seller does not have adequate clauses to pass this onto the buyer, then the seller will cut corners to reduce his losses from increasing prices.

I reckon that either of these two factors led to faulty constructions in the USA. If this is the case in the US, where builders give some form of guarantee for the houses, I wonder what is the case in India. after a few years, the number of dissatisfied home owners might increase. This will become evident once the real estate boom slows down and the value of their property drops.