In the middle of a massive Rs 10,000 crore (Rs 100 billion) expansion plan, a Rs 9,500 crore (Rs 95 billion) buyout of Jaguar Land Rover and a slew of product launches including the much awaited Nano, the automaker has a mountain to climb.

While the JLR acquisition and launch of new products in the domestic market (expected in the second half of this fiscal) have de-risked its product portfolio and will help it to expand its reach over the long term, the short term outlook is rather unappetising.

Cost dampener

With steel prices moving up nearly 30 per cent from January 2008 to about Rs 40,000 per tonne, there is pressure on suppliers to raise prices of steel that accounts for a majority of input cost of automobiles. Higher prices have meant that the company has had to increase prices in the range of 3-4 per cent on some of its products.

With further hikes in the prices of steel imminent over the next couple of weeks, the company will have to look at increasing its prices by about five per cent or absorb part of the costs.

With slowing down of industrial growth and high interest rates, a likely drop in sales in the monsoon months, the company will have to balance the need for improving volumes, but at the same time protect its margins. Its success, however, depends on the profitability of its customers.

Says Rishab Bagaria, analyst, Pioneer Intermediaries, "With availability of freight robust and freight rates stabilising, higher operational costs have not affected truckers yet."

The Tata Motors management believes that demand in the near term could be under pressure due to restrained vehicle finance availability, lower industrial and economic activity and high interest rates.

To crank up volumes, the company is likely to give discounts and increase its vehicle finance portfolio, which it manages through its subsidiary, Tata Motors Finance, Tata Finance and on its own books. While the last five months of the FY09 could see a recovery, the near term outlook does not seem too bright.

Says Vaishali Jajoo, analyst at Angel Broking, "Rising steel prices means that the company may see a 100-150 bps pressure on its margins over the coming two quarters."

While the company may not be able to pass on the entire hike in input costs, increasing volumes on the back on new product launches and discounts will help it to absorb part of the increasing costs.

Text: Ram Prasad Sahu

Image: A Jaguar sits in front of an outlet in Utica, Michigan. | Photograph: Bill Pugliano/Getty Images.