Small Car, Big Profits

On January 23, the Tata Indica passenger car created history in more ways than one. In a mere seven days, Ratan Tata's prize product had attracted 1,15,238 individual bookings. That was a first. On January 24, Telco was sitting on more than Rs 3,000 crore. That, according to a financial analyst, was 'cash history'. Never before had Telco accumulated so much cash in the space of one week.

But the most decisive history was created by Telco itself. For the first time in India's corporate history, a company asked for complete faith - the full price of the car as booking amount for vehicles that could take anywhere between two months and two years to be delivered. And the trust was given. Says Rajiv Dube, Telco's general manager (commercial): 'The response is all the more encouraging as it comes in the midst of possibly the worst recession for the auto industry. More, just before our booking started, the competition slashed prices.'

True, even the Fiat Uno had managed to run up 2.9 lakh bookings. However, that was at only Rs 25,000 per car. Telco had also declared that the priority letters it issued would be non-transferable, thus circumventing the problem of illegal premia shooting up on the cars. Adds Dube: 'Another distinctive feature of the bookings is the high number of direct payments received, as opposed to financed bookings.'

Optimistic that the market would pick up with the Indica, car finance companies were aggressive in their bookings. Says Arvind Vakil, head (auto finance), hdfc, which has kicked off its car finance business with the Indica: 'Our direct-selling agents have been able to generate huge bookings. Finance companies are basically looking at converting the booking amounts into long-term loans.'

The financiers also cashed in on the hype, Indica being the last launch in the small-car segment. 'There is practically no need to advertise,' points out Deepak Gupta, ceo of Kotak Mahindra Primus. Instead, the company chose to spend that money on dealer discounts. Kotak offered interest rates of 16 to 18 per cent and a booking amount of Rs 5,299 plus an offer to refund Rs 1,000 if the customer didn't make it to the priority list. Tata Finance, which offered 15.5 per cent, and anz Grindlays emerged as the most preferred financiers.

But not all of the cash collected is going to remain with Telco. For a company which promises to deliver 10,000 cars by March 1999 and another 50,000 by March 2000, almost half the bookings have to be turned down and the money returned to the unlucky 55,238 customers. Says Dube: 'Between the last week of February and the first week of March, all the refunds would be posted along with a 10 per cent interest applicable from February 1, 1999.'

Telco had initially decided to refund all excess bookings, but increasing requests from customers, financiers and dealers have forced it to retain the payments for consideration in the second phase of bookings, earlier slated for March. Of the current lot, 50,000 bookings will be considered for the second round. It is also offering the customers an option of accepting or cancelling bookings. 'By February 20, we should know. Priority numbers for the next 50,000 cars will be generated in the last week of February for deliveries starting from April 1999 onwards,' says Dube. The lucky customers will earn 11 per cent interest from February 1 till the date of delivery.

According to Dube, the preference ratio for the diesel and petrol versions is 70:30. 'Which is in tune with our production plans of three diesel cars for one petrol version.' Considering the average booking amount of Rs 2.75 lakh per car, Telco would still have Rs 1,650 crore for a year. Says Narendra Nagpal, research head at uti Securities Exchange Ltd, 'At first glance, Telco would appear to have a windfall gain of almost Rs 200 crore on interest alone. But remember, it is also paying an interest of 11 per cent on this amount. Also, throughout the year, cars will have to delivered. Yet, Telco would have a spread of between 2 and 2.5 per cent for almost half a year or Rs 15 crore to Rs 18 crore.'

The amount may seem measly for a company of Telco's size, but the intangibles of the windfall are valuable. After all, Telco posted a net loss of Rs 76.05 crore for the nine months to December 31, 1998. To start with, Telco can immediately reduce its debt burden of Rs 3,500 crore, on which interest payment alone comes to Rs 300 crore. Cash credit in the last fiscal year was around Rs 750 crore at an average interest of 13.5 to 14 per cent. Says Nagpal: 'I think they will wipe the cash credit and some unsecured short-term loans off their books. This alone would give them an arbitrage gain of 2 to 2.5 per cent on the entire amount.'

The Indica plant has an installed annual capacity of 1.5 lakh cars and a total cost outlay of Rs 1,700 crore, although the company is not geared to utilise its capacity fully. Says Dube: 'Telco has already made an investment of Rs 1,500 crore for the plant. We'll increase capacity use depending on the demand for the Indica.' Which translates into another advantage for Telco: no further capital expenses. Telco is also planning to get out of non-core areas to generate some cash. According to company watchers, it's selling off its construction equipment business, probably to Hitachi at a price of Rs 400 crore. The grapevine also has it that the company is planning to hive off its axle and gearbox units to a joint venture with Taco Engineering, Japan.

Right now, however, Indica just woud not be enough to wipe out Telco's losses in the last quarter. Says an analyst: 'Truck sales will be higher in the last quarter, but thanks to the new depreciation rule, the future does not appear too rosy. The car business will only break even when it reaches a sales figure of one lakh cars a year. It is losing money.' Adds Bijoy Kumar Y., editor of The Motoring Monthly: 'While the petrol version of Indica is very impressive, the diesel version leaves a lot to be desired.' As Nagpal says, Telco has to make a car that will work fine on Indian roads. Only then can it achieve a viable economy of scale in sales. The verdict is with the customer on that one.