Diesel cars to push sales in March 2012

Saving the best for last, March is likely to be the strongest month in financial year 2011-12, that closes at the end of this month, for domestic car sales, according to a report by Kotak Institutional Equities.

“The domestic passenger-car segment is likely to report 13-15 per cent year-on-year (YoY) volume growth in March 2012, driven by an increase in diesel-engine capacity by manufacturers and pick-up in sales of petrol models,” the report said, on the basis of interactions with dealers and financiers.

DIESEL PUSHES UP MARCH SALES

Strong demand for diesel cars is likely to lead the pickup in March car demand. This will continue the trend from February, which saw increased demand for diesel cars along with an increase in diesel-engine capacity.

Auto makers are also noticing the rising demand for diesel vehicle. Most automakers are looking at increasing diesel engine capacities to meet strong demand for such models.

Maruti Suzuki has announced it will spend up to Rs 1700 crore to set up a new diesel engine facility in Gurgaon and spend another Rs 900 crore in its research and development facility in Rohtak, Haryana.

According to RC Bhargava, chairman of Maruti Suzuki, the decision has been prompted by the shift in demand for diesel vehicles. “The outlook of (financial year) 2012-13 is better than (financial year) 2011-12 because we will have availability of extra 150,000 diesel engines and today the market is such you can sell as many diesel cars you make,” he told NDTV Profit.

The auto major is looking at expanding its capacity from 240,000 diesel cars a year in fiscal 2012 to 300,000 next year, and is sourcing 100,000 additional diesel engines from Fiat, according to Kotak.

Maruti expects to sell 150,000 diesel cars next year.

Other auto companies are also following the trend. Hyundai Motor India announced plans to set up diesel-engine capacities of about 150,000 each by the end of the current fiscal year, according to the report.

“Ford Motors is expanding diesel engine capacity from 250,000 units/year to 330,000 units/year by mid-2012,” the report added.

PETROL LOSES SHEEN

Not surprisingly, things are looking bleak for the petrol car segment.

While diesel car volumes have grown by 35 per cent annually over April 2011-February 2012, petrol model volumes declined by 15 per cent in the same period.

“Diesel cars now form about 30 per cent of domestic passenger car volumes according to Crisil estimates,” the Kotak report states.

Further, petrol volumes are expected to remain flat on a year-on-year basis, while diesel volumes are likely to increase by 40 per cent in fiscal 2013. “This will result in 12 per cent YoY volume growth for the domestic car Industry,” the Kotak report said.

The rise in crude prices too does not bode well for petrol cars since the fuel has been deregulated and any increase in oil prices could potentially hurt sales.

“I think petrol [segment] sales will decline in 2012-13 because all indications are that crude prices are growing up and the only option for the oil marketing companies is to further increase the price of petrol,” Bhargava told NDTV Profit.

He further expects the segment to be impacted negatively by the proposed hike in excise duty in the Union Budget 2012.

The price anomaly between petrol and diesel -- which is still administered and subsidized by government given its political sensitivity – has meant that even affluent buyers are opting for diesel cars.

The government has occasionally floated the idea of a diesel price hike, as well as hiking excise on diesel cars, which the industry has been resisting.

“I don't see any impact on diesel cars; but I do see impact on petrol cars and that is the one of the reasons I don't think petrol cars will enter positive territory even in 2012-13,” Bhargava added.

TRUCK DEMAND RESILIENT

According to Kotak, the demand for trucks – which run on diesel – is also expected to pick up in the last quarter of fiscal 2012, despite slowing industrial production.

“The key reasons for the pickup are an increase in cement volume growth, reasonably buoyant automobile growth and good agricultural production,” the Kotak report said.

However, with the mining and capital goods segments remaining weak, dealers indicated that heavy truck manufacturers were offering 3-4 per cent discount on vehicle prices to clear excess dealer inventories.