Fuel prices in India have declined significantly over the last few months; yet not as much as the reduction in global crude oil prices:
Although fuel prices globally have witnessed a downward trend, retail prices in India do not reflect a similar correction. However, due to increase in excise duty and impact of rupee depreciation they are still much lower than the peak levels seen in the recent past.
Reduction in fuel prices, if sustained, will lead to meaningful cost savings for a car owner:
In terms of cost structure for owning a typical compact segment petrol car, which includes costs such as EMI, fuel costs, maintenance costs and insurance charges, fuel cost forms the second biggest component after EMI. Following the rise in petrol prices by around 40% in the last five years, the share of fuel (petrol) costs for a consumer in the ownership cost pie went up to 27% in 2014 from 21% in 2009. Likewise, partial deregulation of diesel prices since January 2013 has resulted in regular increase in diesel costs, such that their contribution to the annual cost pie of a diesel car owner increased to 21% in 2014 from 15% in 2009. Now, with reduced fuel costs, which are expected to stay low at least over the near term, a petrol car owner could expect a 10% reduction and a diesel car owner could expect an 8% reduction in the fuel bill.
Fuel cost saving benefit has got somewhat neutralized by reversal of the excise duty sop from January 2015 onwards:
In the Interim Budget presented in February 2014, the Centre had cut excise duty across various segments of the Indian automobile industry by 3-6%. The reduced excise duty rates were initially made applicable from February 17, 2014 up till June 30, 2014; with the applicable period of excise duty cut subsequently extended till December 31, 2014. Now with the roll-back of this fiscal incentive with effect from January 1, 2015, Passenger Vehicle Original Equipment Manufacturers (PV OEMs) have announced increase in vehicle prices to cover for the increase in excise duty rates. With this, the on-road price of a typical compact segment car has increased by Rs. 17,000-20,000 pushing up the annualized EMI of the petrol variant by ~Rs. 2,400 and that of a diesel variant by ~Rs. 2,800. Thus, despite substantial savings on fuel costs, the net annualized saving for a new compact segment car buyer would be somewhat neutralized due to restoration of excise duty rates at earlier levels.
Preference for diesel cars is expected to reduce, going forward:
As per ICRA’s analysis, the break-even period to recover the upfront cost premium on a diesel car (of around Rs. 100,000) had reduced to 3.5 years in 2011-12 from 5.1 years in 2008-09 (for a car which runs 10,000 kms per year) due to widening price gap between the two fuels. This had been the key driving force behind the brisk shift in consumer preference in favour of diesel cars. However, since January 2013, when the Government of India (GoI) partially deregulated diesel prices, the retail price gap between petrol and diesel has consistently reduced. With diesel prices in India fully deregulated (as of now), the relative retail price gap between petrol and diesel currently stands at 21% versus the peak gap of 72% observed in June 2012. With this, the break-even period to recover the upfront cost premium on a diesel car has increased to 5.3 years as of January 2015. Although this is still lower than the highs of 7.1 years observed in 2009-10, it is likely to make petrol-powered cars relatively more economical for a large section of car buyers. Thus, we expect the share of diesel PVs in annual PV sales to reduce to around 30-35% in the next two years (~50% currently). This is on the assumption that India’s vehicle taxation policy will remain fuel neutral as also the current rate of excise duty and VAT imposed on petrol and diesel (as fuels) will remain unchanged.
Outlook:
Sustained weakness in new PV sales growth over the last nine months, despite the fiscal sop in the form of lower excise duties, suggests that unless there is a fundamental improvement in the economic environment, reduction in vehicle prices alone could act only as a feeble palliative. For FY 2015, we expect the Indian PV industry’s domestic volumes to grow by 2-3% supported largely by customers who are looking to replace their existing vehicle(s) as we expect demand generation from first-time buyers to remain weak. Moreover, the various policy issues currently impeding India’s GDP growth, even if redressed by the new government at the Centre quickly, will only show-up their positive impact on the investment and consumption cycle with a lag.
The PV industry’s profitability metrics are also unlikely to see much improvement in the near term despite relatively improved prospects of sales volume growth in view of (a) need for recurring expenses towards new product development, (b) likely sustenance of discounts-led sales push, (e) restricted pricing power in the wake of intense competition and (f) currency volatility. However, as many of the cyclical variables become less spiteful, the PV industry is expected to revert to a volume CAGR of 9-10% (domestic + exports) over the medium term. In FY 2015, we expect the credit profile of bigger players to stabilize, notwithstanding rising competition and investments on new product development. However, profitability pressures on the relatively low volume players may remain and meet capital expenditure requirements.
Motoroids.com - Auto news india, car and bike reviews, launch reports, images, prices and scoops