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Wednesday, January 16, 2013

An update on the Auto Sector – a guest post

The continuing slow down in the Indian economy, coupled with high interest rates, has finally started telling on monthly auto sales numbers. The recent hike in diesel price has taken away some of the advantage of diesel models over petrol models of vehicles.

In a guest post back in Nov ‘12, Nishit had analysed the 4-wheeler auto segment and its three principal listed players. In an update this month, he examines the likely changes in fortune of Maruti, M&M and Tata Motors.

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We had explored the auto sector in India in last November’s post. We are in the New Year and let us see if things have changed. The month of December was pretty poor with Sales down about 3% year on year. The auto industry is under duress. Earlier, when Petrol price was deregulated in June 2010, it galloped from about Rs 55/litre to Rs 78/litre at the peak.

The rising petrol prices put a break on the sale of Petrol models and this led to a ‘dieselification’ of the Indian auto segment. The market leader Maruti didn’t have too much Diesel engine capacity and hence took a back seat which led to Mahindra and Tata coming to the fore.

While Petrol prices galloped, Diesel prices were not changed for a long time. Typically, Diesel used to be priced Rs 10 cheaper than Petrol. In September 2012, the government went ahead with a hike in Diesel price and the price has gone up to Rs 52/litre. At the same time petrol prices came down to Rs 73/litre. Thus, the price differential between the two fuels, which used to be Rs 10 but had increased to almost Rs 32, was brought down to Rs 21.

Another development which took place was that manufacturers took advantage of the fuel price differential and increased prices of Diesel car models - so their price differential with petrol models of the same vehicle rose to about Rs 1.5 lakhs from the earlier Rs 1 lakh.

Typically, a petrol car, if it gives a mileage of 10 km/litre will cost the owner about Rs 7.30 per km as fuel cost. The diesel version of the same model will cost about Rs 4.30. The breakeven for buyers, which was about 33,000 kilometers has now gone up to above 50,000 kilometers. Typically, most car buyers do not drive more than 10,000 kilometers a year and after 5 years, they replace the vehicle.

The demand and the wait-list for Diesel cars have vanished and they are pretty much available off the shelf. Maintenance expenses of Diesel vehicles also tend to be on the higher side.

The Government is coming up with a plan to hike Diesel prices by up to Rs 10 more this year, with a hike of Re 1 per month. If this happens then price differential between Petrol and Diesel will be back to Rs 10. The breakeven for buyers will go even higher to 75,000 kilometer running.

Petrol cars will make a comeback and the biggest beneficiary of this will be Maruti, which has a strong portfolio of Petrol cars. Mahindra will be the biggest loser as it has a line-up mainly focused on Diesel variants. Tata Motors has a mix of both, but tilted towards Diesel.

As and when the government starts hiking Diesel’s price, it would be time to switch to Maruti from Mahindra. Another key point to watch out for would be any additional excise duties on Diesel vehicles - if they are imposed in the budget. This seems like a remote possibility but anything is possible for a cash-strapped government.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan).

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