Diesel price hike wipes festival season joy off Motown

Although auto industry at large welcomed Thursday’s Rs5/litre diesel price hike, a section of it felt that the move was ill-timed.

For, demand for diesel vehicles has been driving the industry of late even as the overall sales figures across all segments of vehicles have been plummeting due to a host of factors, including the macro slowdown.

The huge difference between the prices of petrol and diesel was a factor as far as the demand for diesel diesel vehicles was concerned. Now, post-hike, auto companies feel market sentiment risks further dampening in the long run.

Not long ago, the industry actually sought a hike in diesel price and lobbied against a feared tax on diesel vehicles. But the unexpectedly steep hike in diesel prices has caught the industry by surprise.

According to a major auto company’s official, the industry is in the “negative zone” currently. The demand for diesel vehicles, he said, is likely to “get affected” as buyers are price-sensitive. Given that the running cost of a diesel vehicle will increase now, there might be some “positive push” for CNG vehicles.

“Whatever traction we were expecting during the festival season, might also get washed away,” he said.

Agreed  Pravin Shah, CEO of Mahindra and Mahindra’s (M&M’s) automotive division. “We were expecting the (price hike) decision to come as the gap between diesel and petrol was huge. Correction had to take place some day. However, the announcement came at a wrong time as the sentiment is already negative within the industry.”

Incidentally, M&M is the biggest utility vehicle maker with a 100% diesel portfolio. Although companies having higher exposure to the diesel portfolio are expected to suffer the most due to the diesel price hike, M&M expects to remain unscathed.

“We at Mahindra are still very positive because the segment that we operate in is growing. The utility vehicle segment has grown 57% this year. We see good demand coming in during the festival season,” said Shah.

The passenger vehicle industry saw only a moderate demand during the year due to factors like rising interest rates and growing fuel prices. According to the Society of Indian Automobile Manufacturers, passenger car sales in August declined by over 18.5% on-year, while the larger passenger vehicles segment grew at 7.42% on-year during April-August 2012.

Experts say the diesel hike will likely affect the commercial vehicle (CV) segment  more than other segments. Sales of medium and heavy CVs remained negative this year so far as the segment registered negative growth of -11.94%.

A BRICS Research report noted recently that barring light commercial vehicles, CVs have been posting negative growth. Freight rates have been declining and a rise in diesel price now will affect fleet operators significantly as fuel constitutes a major part of running operations. “We expect fleet operators to eventually pass this increase on to customers, even though they may currently be playing the discounting game due to lack of cargo,” the report stated.

Tata Motors, India’s biggest CV manufacturer, is still optimistic. “The decision to hike diesel prices is good for the economy. If the economy improves, then it will give a push to the transport industry too,” said a company spokesperson.