After Wednesday’s petrol price hike, the auto industry has reacted strongly because this will likely drive down demand for petrol–driven vehicles, including two-wheelers. Already, demand for diesel engines has been rising, and the petrol price hike is expected to only accelerate that rush. Here are five ways in which the price increase will affect the auto industry.
Capacity ramp-up: The industry will have to quickly ramp up capacity. Maruti Suzuki, India’s largest carmaker, is looking to expanding its capacity from 240,000 diesel cars a year in fiscal 2012 to 300,000 in the current one. It is also sourcing 100,000 additional diesel engines from Fiat, according to an earlier report from Kotak Institutional Equities. Hyundai Motor India is setting up diesel-engine capacity of about 150,000, while Ford Motors is growing capacity from 250,000 units to 330,000 units a year by mid-2012. This will, however, take some time. In the meantime, delivery of diesel cars is only expected to be delayed. R C Bhargava, chairman of Maruti Suzuki said on Wednesday that waiting lines for diesel cars will grow longer.
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Operating margins: Ramping up diesel capacity will also require large capital expenditure. This will mean a large capital expenditure outlay, putting pressure on operating margins in the short-term. Given the tight liquidity and high interest rates in the domestic market, and a falling rupee, borrowing costs will also likely be higher whether it is in domestic or foreign currency.
Unit sales: Most Indian automakers rely heavily on petrol driven vehicles. This is particularly true of two-wheeler makers, whose entire portfolio is based on petrol engines. The new price hike could deter buyers from opting for petrol cars and two-wheelers. This will directly impact revenues and profits for automakers that have a petrol-heavy portfolio.
Segment growth: The petrol segment has already retreated by 14 per cent in fiscal 2012, while diesel car sales have grown 37 per cent. With the petrol price hike, the growth in the diesel segment is only expected to grow. Even a hike in diesel prices, which some experts are saying is likely as early as Friday, will still keep diesel cheaper than petrol. Too steep a hike in diesel will push up inflation, which the government is keen to avoid.
Small car demand: This is the only bright spot for automakers. In a situation where petrol prices are in the vicinity of Rs 80, demand for small cars will likely increase, since fuel typically accounts for about 50 per cent of running costs. Apart from space and environmental concerns, especially in urban centres, small cars are highly fuel efficient, which appeals to the highly value- and budge-conscious Indian buyer. Small cars with diesel engines will be in even higher demand.