Petrol Price Hike Effect on Business

http://www. youtube. com/watch? v=AEjXDCNww9c&feature=related 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. They continue to be a worried bunch and their fears are not unfounded, for petrol getting out of reach for many people means there will be more diesel vehicles on the road in the years to come. This will have an adverse impact on the environment as diesel engine emissions are over three times more toxic than petrol. This has been collated by Centre for Science and Environment's analysis of the 2010-11 car sales data, which revealed that the demand for diesel-run SUVs has gone up.Also, 85% of petrol cars sold during the period had engine sizes smaller than 1200 cc. â€Å"We are extremely concerned about the huge petrol price hike. While fuel price reforms can help, in this case there is partial reform which is dangerous. There is already a dieselization of the car segment. â€Å"WHO and many other public health organizations have already that diesel emissions are carcinogenic. There is a really high public health risk,† said executive director, research and policy, CSE, Anumita Roychowdhury. People are buying big diesel cars, of engine size above 1500cc. They are not feeling the pinch because diesel is cheap. The subsidy on diesel is absolutely unacceptable,† she added. As of now 13 cities in the country comply w ith Bharat stage IV norms and  the rest  follow Bharat stage III norms. â€Å"The pollutants that are of major concern are particulate matter and nitrous oxide (NO2). Diesel cars are legally allowed to emit these pollutants more than petrol. In fact the legal limit NO2 for diesel cars is three times higher than for petrol cars,† explained Anumita.But the fact that diesel is more fuel efficient and gives better mileage masks the down side of increase in diesel cars. Professor L M Das of the Centre for Energy Studies, IIT Delhi says â€Å"Diesel contains more energy than petrol and the vehicle's engine combustion process is more efficient, adding up to higher fuel efficiency and lower  CO2 emissions  when using diesel. But the pollutants emitted from diesel and petrol are characteristically different. While petrol emits more carbon monoxide (CO) and hydrocarbons, diesel emits more smoke and particulate matter that have worse health impacts. Diesel is also more fuel eff icient giving out a mileage that is nearly 50% more than petrol. Dealers also agree that the demand for diesel cars has soared. â€Å"The demand for diesel cars in every segment has gone up. While demand for diesel cars has gone up by 15%, petrol car demand has dropped by 20%. Even people who are buying cars worth Rs 50 to Rs 60 lakh are opting for diesel cars. â€Å"Todsay we got many calls enquiring about diesel cars. Only people who want to buy small cars are opting for petrol cars,† said Ravinder, owner of Motosyics in Karol Bagh.Another car dealer, Sanjeev Nath Bhel owner of Rajnath automobiles in Vasant Kunj said that he has started getting calls almost every second enquiring about models of diesel cars. â€Å"There is a huge surge in the demand for diesel cars. It's also because diesel gives better mileage. People are mostly opting for middle segment diesel cars ,† he said. The negative sentiment is echoed by auto industry officials who feel the rollback notwit hstanding the current high petrol prices will have a serious impact on the auto industry and petrol car sales. Around 75 per cent of  Maruti Suzuki  sales come from petrol cars,† said Mayank Pareek, Head-Marketing, Maruti Suzuki. â€Å"Last year, due to petrol price increase, there was a drop of 15 per cent in the sale of our petrol cars. At the same time, diesel sales for the industry are growing. While diesel capacity is being over utilised, petrol car capacity remains under utilised,† he added. While companies like  Hyundai and Tata are offering discounts and special schemes  on its petrol models to stimulate demand, Maruti plans to make up for the decline in petrol car sales by increasing its diesel volumes. Last year, we sold around 2. 43 lakh units of diesel cars. This year will sell 4 lakh diesel cars, said Pareek. However, even that plan stands in jeopardy with the Finance ministry mulling an increase in the excise duty on diesel vehicles. According to f igures compiled by the government, passenger cars and SUVs account for 15 per cent of diesel consumption – a claim that has been rejected by Society of Indian Automobile Manufacturers (SIAM). The industry body says that personal cars make up for only 1 per cent of the total diesel consumption in the country while SUVs and taxis account for 5 per cent.Currently, diesel cars attract excise duty ranging from 12 per cent to 27 per cent based on their size and engine capacity. With diesel cars already commanding a higher price than petrol models (which in turn amounts to higher revenues for the state), a hike in duty will only end up reducing demand for passengers cars overall. Read more:  Duty on diesel cars may go up The negative sentiment is echoed by auto industry officials who feel the rollback notwithstanding the current high petrol prices will have a serious impact on the auto industry and petrol car sales. Around 75 per cent of  Maruti Suzuki  sales come from petrol cars,† said Mayank Pareek, Head-Marketing, Maruti Suzuki. â€Å"Last year, due to petrol price increase, there was a drop of 15 per cent in the sale of our petrol cars. At the same time, diesel sales for the industry are growing. While diesel capacity is being over utilised, petrol car capacity remains under utilised,† he added. While companies like  Hyundai and Tata are offering discounts and special schemes  on its petrol models to stimulate demand, Maruti plans to make up for the decline in petrol car sales by increasing its diesel volumes. Last year, we sold around 2. 43 lakh units of diesel cars. This year will sell 4 lakh diesel cars, said Pareek. However, even that plan stands in jeopardy with the Finance ministry mulling an increase in the excise duty on diesel vehicles. According to figures compiled by the government, passenger cars and SUVs account for 15 per cent of diesel consumption – a claim that has been rejected by Society of Indian Automobile Manufacturers (SIAM). The industry body says that personal cars make up for only 1 per cent of the total diesel consumption in the country hile SUVs and taxis account for 5 per cent. Currently, diesel cars attract excise duty ranging from 12 per cent to 27 per cent based on their size and engine capacity. With diesel cars already commanding a higher price than petrol models (which in turn amounts to higher revenues for the state), a hike in duty will only end up reducing demand for passengers cars overall. Read more:  Duty on diesel cars may go up In the short-term, sales will be further impacted while in the long term a negative consumer sentiment will be created which can hurt the growth of the industry, he added.Expressing similar sentiments, General Motors India Vice President P Balendran said: â€Å"Earlier, the industry was expecting a growth of 8-10 per cent this fiscal but I will not be surprised if we are in the negative territory due to fuel price hike and high interes t rates as the market continues to be sluggish. † This will result in inventory pile up of  petrol  vehicles as more and more consumers will opt for diesel vehicles, he added.Describing the latest price hike as a â€Å"disaster†,  Maruti Suzuki  India Managing Executive Officer, Marketing and Sales Mayank Pareek said: â€Å"This will further increase the skew between petrol and diesel vehicle demand, which is already very wide. This will severely affect the sales of entry level cars, which are mainly petrol driven. † Last year, the petrol segment declined by 16. 2 per cent as the demand shifted to diesel vehicles. Now there will be more demand for diesel cars after the price hike but most of the manufacturers are running on full capacity for diesel vehicles, he added.Pareek said the overall impact of the price hike would further dent growth of the automobile industry. Hyundai Motor  India Ltd Director Marketing and Sales Arvind Saxena said: â€Å"Deman d is already under pressure on account of inflation and high interest rates. A hike of such magnitude is neither good for the customer nor for industry. † Passenger car sales in India witnessed the slowest growth during April in 10 years at 3. 4 per cent as customer sentiment remained low due to post-Budget price hikes and high interest rates, affecting the entry-level segment most.As per  SIAM  figures, domestic passenger car sales stood at 1, 68,351 units in April 2012 compared to 1,62,813 units in the same month last year. In the fiscal 2011-12, car sales in India grew by just 2. 19 per cent which was the slowest since 2008-09. â€Å"The company has already asked the R& D department to speed up the work, and if required, it may also go for a third party arrangement,† the source said. In the last one year, the price of petrol has gone up considerably fuelling the demand for diesel cars, which account for more than 60 per cent sales at present.Honda has no diesel v ariant in its stable, which is becoming a big disadvantage for the company. Honda Brio will become the first car to have the diesel engine followed by City and Jazz. â€Å"With the  huge surge in the price of petrol, there is a massive demand for the diesel model. We are already giving discount on our cars but it is not possible beyond a point,† a marketing official from Honda said. Honda is not the only company to advance launch of diesel cars . Renault has also advanced the unveiling of its diesel model. Even Volkswagen is looking for models that run on other fuels like CNG.Others are trying to sweeten the deal with various discounts and offers. Sale of diesel vehicles in the country jumped by 35 per cent last fiscal while that of petrol variants dropped by 15 per cent. The sale of petrol cars will see further decline with the latest hike of ` 7. 50 per litre. A day after the increase, Hyundai announced a â€Å"petrol price lock assurance programme† that will insul ate its customers from the new fuel price rise for the next seven months. The programme covers people who will buy petrol models of Eon, Santro, i10, i20, Accent and Verna till May 31. The hike of this magnitude is neither good for the industry nor customers,† Arvind Saxena, director, marketing and sales, Hyundai Motor India, said. Other automobile manufacturers have already started giving discounts and freebies on petrol models and could introduce more such offers following the hike of petrol . According to automobile body Society of Indian Automobile Manufacturers (SIAM), there is a need for the government to reconsider its proposal for such a steep increase in the price of petrol. There is a need to seriously consider the option of a moderate increase in the price of diesel before it impacts the growth of the industry,† SIAM said. In a statement, Siam said that there is a requirement to look at the petroleum product pricing policy in a comprehensive manner and remove distortions so that downstream products market do not get disturbed. â€Å"The need of the hour is to bite the bullet by reducing the price hike on petrol and revising the price of diesel, which will bring in more revenue for the government as well as some level of parity between the two competing fuels for the industry,† SIAM said.However, manufacturers lament that they are not in a position to absorb the currency changes and mounting import bill, and have no other option but to pass on the impact to the customers. While  Toyota Kirloskar Motors  and  General Motors India  are expected to announce price hikes soon, others such as Maruti  SuzukiIndia and  Hyundai Motor  are likely to follow suit. â€Å"We have been facing cost pressures over the last few months and have decided to hike the prices. The quantum is yet to be finalised, but the hike should come into effect from June,† said Toyota Kirloskar Motors deputy MD (marketing) Sandeep Singh.General Mo tors has decided to increase prices from June 1, but is temporarily revisiting decision in the light of massive increase in petrol prices. â€Å"We are re-considering plans to increase prices from June as customers are hit by the massive increase in the prices of petrol. We do not want to create a double whammy for customers and are planning to postpone the hike till the conditions improve in the domestic market,† says General Motors vice-president (corporate affairs) P Balendran. Car companies had increased prices by up to 1. 5% to 3 in January this year, but the real impact came after 2%-5% increase in excise in the Union Budget. While most cars, including small hatchbacks, became expensive by Rs 6,000, the hike was up to Rs 5 lakh for top-end luxury segment. This resulted in overall sales falling to 168,351 units in April. Carmakers remain skeptical on market prospects with customers postponing new purchases. Country's largest carmaker, Maruti Suzuki, is too weighing its o ptions. â€Å"There are intense cost pressures with regard to import of important commodities like steel due to currency and other reasons,† said a senior Maruti executive.An analyst tracking the sector says another hike will badly hit the auto market, which is already crawling. â€Å"The market is already reeling under the price of petrol price hike, which has further dampened the sentiment after the Budget hike. Now another hike will hit the industry hard,† said a Mumbai-based analyst with a Brokerage firm. High petrol prices and weak consumer sentiment in the face of slowing economic growth dragged auto sales down in May. Car market leader Maruti Suzuki India Ltd led the decline with a 4. 3% drop in domestic sales to 89,478 units from a year earlier.Sales of Maruti’s petrol models such as WagonR, Alto and the 800, which make up a third of overall sales at the Indian subsidiary of Suzuki Motor Corp. , shrank by 29%. India’s economy grew 5. 3% in January -March, the slowest pace in nine years, data released on Thursday showed. Slowing growth has dampened consumer sentiment; high petrol prices and interest rates have deterred car buyers, who are increasingly preferring diesel models. Analysts say car sales will take a further hit in the months ahead after oil marketing companies increased the price of petrol by as much as  Rs. 7. 50 per litre on 23 May.The steep increase in fuel cost, combined with a recent increase in vehicle prices (due to rising input costs and an excise duty increase), has resulted in a 6% increase in the total cost of ownership of petrol cars over the past four-to-five months, wrote Joseph George, an analyst at IIFL Institutional Equities. â€Å"We cut our volume growth estimate for the car industry (excluding utility vehicles) from 16% to 12%. We also expect demand to further shift from petrol to diesel vehicles. † Sales at Hyundai Motor India Ltd, the second largest car maker by unit sales, rose 3% to 32,010 units in May compared with a year ago.Arvind Saxena, director of marketing and sales at Hyundai Motor India, said: â€Å"The recent hike in petrol prices has depressed market sentiment, with the macroeconomic indicators providing no cause for cheer. The demand outlook doesn’t look very bright. † Meanwhile, driven by sales of the Nano small car, passenger vehicle sales at Tata Motors Ltd rose 6% to 20,503 units compared to May 2011. The fuel efficient car billed as the world’s cheapest, contributed 41% of Tata Motors’ total sales in May. Nano sales rose 31% to 8,507 units.Utility vehicle market leader Mahindra and Mahindra Ltd kept up its strong sales momentum, posting an increase of 27% to 21,154 units in the month from a year ago. The company’s portfolio of models is predominantly diesel-fuelled, shielding it from the effect of the hike in petrol prices. Sales at General Motors India Pvt. Ltd and Ford India Pvt. Ltd dropped 27% and 14%, re spectively, to 6,079 and 6,036 units. At Toyota Kirloskar Motor Pvt. Ltd, sales doubled to 15,051 units, buoyed by the company’s Innova and Fortuner models and partly because of a relatively low base last year. To stave off the impact of the weakening rupee, Toyota has undertaken a 1% increase in the prices of Etios diesel and Innova and a 0. 5% increase in Fortuner and Etios Liva, diesel, with effect from 1 June. † said Sandeep Singh, deputy managing director-marketing. Albeit on a low base, sales at Nissan Motor India Pvt. Ltd, too, increased 98% to 3,138 units in May. Meanwhile, notwithstanding the sluggish sales in the overall two-wheeler market, Hero MotoCorp Ltd continued its strong sales trajectory, despatching 556,644 motorcycles and scooters—an expansion of 11. 3% over the corresponding month last year. TVS Motor Co. eported a decline of 4. 3% to 176,012 units while Suzuki Motorcycle India Pvt. Ltd, on a small base of 36,746 units, saw an increase of 21% compared to a year ago. Bajaj Auto Ltd will report its sales figures next week. The 10-company auto index on  BSE Ltd  has dropped 18. 46% in the last one month, compared to a 7. 82% drop in the benchmark Sensex. Car firms are looking at raising the  prices of their diesel variantsas rupee depreciation has led to a hike in imported input costs and they have to make up for the discounts being offered on their petrol variants, which are not selling due to high fuels costs.While Toyota has announced that it will  hike the prices of its diesel models  from one to two per cent from June 1, other companies are expected to follow suit. This will be the third price hike since January this year. Diesel cars to drive industry growth: Ford â€Å"There is tremendous pressure on auto companies and a price hike is certain. The one-two per cent hike will be effective from June. However, we have not decided the exact amount by which prices will be raised across models,† Sandeep Si ngh, deputy managing director (marketing), Toyota Kirloskar Motors, said. There are rising input costs and then the depreciating rupee also adds to import bills for parts being sourced from abroad. Auto firms can't absorb cost beyond a point,† Singh explained. However, Singh has hinted that the hike will be more on the diesel variants than the petrol models. Prices of petrol models which are still selling well may also be increased. Others such as General Motors, Maruti Suzuki, Hyundai Motors had also hinted at hike in car prices from June onwards.Most car companies are loading their petrol variants with freebies and offering discounts ranging from Rs 3,000-Rs 50,000 depending on the demand for the model. Earlier in January, car manufacturers increased prices to the tune of 1. 5 to three per cent. It was followed by a second hike of two to five per cent to compensate for the excise duty hike proposed in the Budget. However car dealers are worried. â€Å"Another round of price hike is not going to help the sector in any way. Petrol car sales are at an all-time low and only diesel models are bringing in revenue.Any further price hike will dent the prospect of sale of diesel vehicles as well,† a General Motors showroom owner in south Delhi said. Even experts say that a price hike will further dampen the sentiment and sales prospects of the auto companies. â€Å"The significant hike in petrol price has already dampened the sentiment and increasing prices of vehicles will hit demand,† said Yaresh Kothari, auto analyst, Angel Broking. The hike in petrol rate and the proposed increase in diesel vehicles will make it difficult for the industry to achieve their sales growth target of 10-12