UPDATE 1-Tata Motors sees Nano demand outpacing supply

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MUMBAI, July 24 (Reuters) - Tata Motors TAMO.BOTTM.N, India's top vehicle maker, sees initial demand for its ultra-cheap Nano topping supply, but expects the full year to March to be tough because of high input costs, the chairman said.

Tata Motors, which recently purchased the Jaguar and Land Rover luxury brands for $2.3 billion, is scheduled to roll out the Nano, the world’s cheapest car, around October.

It is expected to be priced at just above $2,500, but will yield sufficient margins from the different models, Tata said.

“We expect demand to exceed supply and we will have to figure out an appropriate system of deliveries,” Chairman Ratan Tata said at the annual shareholders’ meeting on Thursday.

A plant in Singur in the eastern state of West Bengal will have an initial capacity to make 250,000 units, which can be scaled up to 350,000 units.

The Nano, which is likely to grab share from other car makers and shift motorbike users more quickly to cars, will have a gasoline engine at first and will then come in a diesel variant.

Tata Motors will make a more fuel-efficient variant of the Nano at the eco-car project in Thailand, he said, adding the company is also looking at building an electric car as well as a model that uses compressed air, in alliance with a French firm.

“It’s a technology we think could have some promise. It’s an investment we’ve made ... it may happen, it may not happen,” he said of the alliance with Motor Development International.

Tata Motors had said earlier in the year it was in exploratory talks with Chrysler on electric vehicles.

Tata Motors plans to raise $1.7 billion from three rights issues to help fund its acquisition of Jaguar and Land Rover, and these would not be delayed by a volatile market, Tata said.

“We are going through the process ... there is no delay.”

High prices of raw materials such as steel, as well as higher fuel prices, rising interest rates and double-digit inflation have dented demand, particularly for commercial vehicles, in India.

While vehicle makers have raised prices by up to 3.5 percent recently, it was not possible to pass on the full extent of higher input costs to consumers, Tata said.

“It is not possible to pass them all on ... if we passed on all costs to the consumer, it will affect demand, and if we don’t it will affect margins,” he said.

“The auto industry is under pressure, and the pressure is only going to increase. We have a difficult year ahead of us.”

Cost overruns on the production of the Nano and the hefty fundraising plan have also rattled investors and had dragged Tata Motors’ shares to their lowest in more than three years.

They have lost about 40 percent so far this year, compared to a 27 percent decline for the benchmark index .BSESN. They ended up 0.5 percent at 439.60 rupees in a weaker Mumbai market Thursday.

Tata Motors, which has manufacturing and distribution ventures with Fiat FIA.MI, is forecast to report next week a 31 percent fall in quarterly net profit to 3.2 billion rupees ($76 million).

For a preview on June quarter results, see [ID:nBOM129372] ($1=42.1 rupees) (Editing by Charlotte Cooper)