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Why diesel price hikes are good for Maruti

Shares in Maruti are up more than 4 per cent over the last month as compared to a 6.6 per cent drop in utility vehicles maker M&M. The broader BSE Auto index has been flat over the corresponding period. Traders are bullish on Maruti despite India's biggest auto maker announcing its second price hike in four months and a "partial decontrol" of diesel prices, which will adversely affect the entire auto industry. Maruti Suzuki shares are trading at a three-year high.
Here are the reasons:
  1. RC Bhargava, chairman of Maruti Suzuki told NDTV Profit on Monday that if the pattern of small increase in diesel prices continues for a year, there might be a change in the mix between petrol and diesel cars. "Another Rs 6 hike in diesel prices will narrow the gap with petrol by Rs 11...the same what it used to be a couple of years back. When that happens, the sale of diesel cars in the market will come down significantly," he said.

  2. A series of hikes in diesel prices may lead to a decline in the overall car sales, but Maruti may be less impacted than other car makers, Mr Bhargava said. There's a wait list for most of Maruti's diesel cars so a softening of sales will not affect Maruti as much as others. "We are constrained by a production capacity and not by the demand pattern for diesel cars," Mr Bhargava said.

  3. A move away from dieselization will be a big positive for Maruti because petrol cars account for 75 per cent of its total capacity. "2013-14 will be a better year partly because our ability to produce diesel cars will increase and this waiting list will be wiped out and partly because there will be a shift towards petrol cars," Mr Bhargava said.

  4. Periodic hike in diesel prices will eliminate the chances of new duties on diesel vehicles in the Union Budget, due for next month. The possibility of a duty hike in the Budget caps gains in auto stocks, but this year may turn out to be different.

  5. Maruti has other reasons to cheer too. A sharp depreciation in the value of yen is likely to boost Maruti's margins. The cost of imports (from Japan) will come down and payment towards royalty (to Suzuki) will also go down leading to an improvement in margins, analysts said.

Story first published on: January 21, 2013 12:00 (IST)

Tags: Maruti Suzuki, diesel price hike, yen

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