In its research report, the FII says the car market would be hit by intense competition over the next five years. ``Unless demand picks up significantly, supply will exceed demand, turning the Indian car market from a sellers to a buyers market. Returns in the medium term is likely to be sub-optimal and a shake-out can be expected eventually,'' it said.

Telco, which will launch its diesel engine version of the Mint first, may face quality related problems as most of its models have faced in the past, says Morgan Stanley.

``Historically, there havetypically been teething troubles with Telco's new products. Most recently, a small batch of Safaris encountered gear slippage problems. While technically it may not be difficult to set this right, the adverse impact on image could have a disproportionate effect on sales,'' Morgan Stanley said.

It says that Telco still has some way to go to achieve consistent product quality. A recent survey on initial quality rated, Telco's Sierra, Estate and Sumo were rated as being below the industry average. Importantly, the Maruti's Zen was ranked third in initial quality, and the Maruti 800 and Daewoo's Cielo too were above the industry average. ``Until now, Telco has had the luxury of rectifying defects after the launch of the vehicle. The car market may not be so forgiving,'' it said. ``We reckon that the risk on the initial quality front is higher for Telco than it is for Hyundai and Daewoo,'' it added.

Giving its earnings forecast, it said that Telco will sell 10,000 small cars in the last quarter of fiscal 1999and aims to sell 50,000 units in the first year of launch. ``Based on our analysis, we are less optimistic. We forecast total volume of 156,000 units in FY 1999, representing a growth of 2.2 %. Volume growth is expected to perk up to 40.1 % in FY 2000, on the back of a modest recovery in CV sales, and with the small car coming on board,'' the report said.

After a dismal drop of 61.3 % in earnings in FY 1998, we expect a further decline of 2.4 % in FY 1999 before a 39.9 % rebound in FY 2000.Telco management estimates the car project to break even at an annual unit sales of 60,000. ``As per our earnings model, the car project will break even only in FY 2003, when volumes cross 90,000 units,'' Morgan added.

All the three car makers are targeting the small car segment which is expected to revive the entire recession-hit Indian auto industry.