While there is huge demand for diesel cars, Maruti Suzuki cannot produce enough and what it is producing (petrol cars) in bulk, it cannot sell without discounts

Moneylife Digital Team

Maruti Suzuki India Ltd, the country largest carmaker, reported 29% drop in its full year net profit due to adverse currency movement, higher discounts offered on its vehicles and increased commodity prices. The overall slowdown in the car market, including the skew towards diesel cars, also affected performance, the company said.
 
Rising fuel costs, especially increasing petrol prices are making it difficult for buyers to opt for cars that run of petrol. Despite the new found success with diesel engines, Maruti Suzuki is still known as petrol carmaker. The company produces about 16 lakh vehicles every year, out of which diesel cars are around 29% with the rest being petrol cars. And this is the cost the company had to pay during FY2011-12. There is a waiting period of over 4-5 months for Maruti Suzuki's diesel cars like Dzire and Swift. Even its newly launched multi-utility vehicle (MUV) Ertiga has witnessed an overwhelming response for diesel based engine (about 80%) from the total bookings of 22,000.



During the year, Maruti Suzuki's petrol car sales fell 14% while diesel car sales increased by 37%. Falling sales in petrol cars is making the carmaker to spend more money by way of huge discounts and advertisements. During the fourth quarter of FY11-12, Maruti Suzuki offered an average discount of Rs13,439 per vehicle compared with Rs12,000 in third quarter.



Looking at the auto market, there is no doubt that this trend is likely to remain through next few years, unless the government decides to completely do away with the subsidy on diesel for cars. But this also could pose problems for the carmaker as the removal of the subsidy may affect diesel car sales.

In a research note, Emkay Global Financial Services said, “Outlook for FY12-13 continues to remain subdued for petrol vehicles driven by rising cost of ownership and increase in fuel prices. Maruti Suzuki is taking steps to lower cost of ownership by offering exchange bonuses, targeting customers with lower usage and considering interest subventions."

The company, a unit of Japanese Suzuki Motor Corp, has been trying to focus on diesel cars, but due to production constraints could not do so. Maruti Suzuki has already invested around Rs1,700 crore to increase its diesel engine capacity, however, the additions would be coming on stream only during first half of next financial year (FY13-14). At present, Maruti Suzuki's diesel engine capacity is 2.5 lakh units per year, which will go up to 4 lakh units in FY13, including 3 lakh from Suzuki Powertrain India and 1 lakh from Fiat. It plans to add another 3 lakh units per year from its Gurgaon plant. However, the new diesel engine plant in Gurgaon is expected to come on stream in first half of FY13-14 with a capacity of 1.5 lakh units and rest 1.5 lakh units by FY14-15.

While the capacity expansion looks good for future use, one fails to understand why the carmaker could not take a call on increasing diesel engine capacity earlier. In current scenario, where there is huge demand for diesel cars, there is a downside risk as well. Last week, the union government had agreed in principle to deregulate diesel prices. If the proposal goes through, then both petrol and diesel prices would be linked with the market and oil marketing companies (OMCs) would be able to decide the prices. Based on the current prices of crude oil, OMCs require the prices of petrol and diesel to be increased by Rs8 per litre and Rs15 a litre, respectively.

If at all the diesel prices are deregulated then the cost of ownership of a vehicle would be more or less on par with petrol cars. In such case, it would be difficult for any automaker to take firm call on whether to focus on petrol vehicles or diesel ones. This also is the dilemma, Maruti Suzuki must be facing. However, it should be noted that the company is paying big price for not thinking about future. While there is huge demand for diesel cars, the company cannot produce enough and what it is producing (petrol cars), it cannot sell without discounts.

"We expect demand for petrol vehicles to remain subdued in FY12-13 thus leading to higher overall discounts compared with last year and additional promotional and incentive schemes to drive sales. We continue to have concerns with un-hedged currency exposure beyond first half of FY13 and demand polarity towards diesel vehicles," added Emkay Global.

Maruti Suzuki closed Monday 2% down to Rs1,369 on the Bombay Stock Exchange, while the benchmark Sensex ended marginally up at 17,318.