Maruti plans diesel engine unit in Gujarat; earnings estimates down

New Delhi: Maruti Suzuki India Ltd, the nation’s largest car maker, plans to build its third diesel engine plant in Gujarat as the fuel’s widening price difference with petrol has led to soaring demand for diesel-run vehicles.

Chairman R.C. Bhargava said that if the so-called dieselization of the local car market continues, the company will have to expand its capacity for diesel engines to achieve Maruti’s sales target of two million cars by 2015-16.

Maruti will look to build the next diesel plant in Gujarat, where it is expected to develop its next car manufacturing hub with a cumulative investment of Rs 18,000 crore, Bhargava said in a telephone interview.

It already has two car factories in Gurgaon and Manesar, both in Haryana, which will reach their peak production level of 1.7 million vehicles by the next fiscal.

Diesel prices in India are at least 40% cheaper than petrol, considered a rich man’s fuel, as the government has shunned increasing the price of diesel fearing a political backlash even as the cost of importing crude oil rose because of higher global prices and a depreciating Indian currency against the dollar.

As a result, 60% of cars sold in the year ended 31 March were diesel-run, according to industry lobby Society of Indian Automobile Manufacturers, or Siam. It compares with just 21.4% in 2007-08.

“The latest price hike of Rs 7.50, the steepest in last four years, would result in 5% increase in total cost of ownership,” Jinesh Gandhi and Mansi Verma of Motilal Oswal Securities Ltd wrote in a report released on 24 May. “Also, the differential between petrol and diesel has further widened to Rs 32 per litre. Because of the further widening in differential, pay-back period on diesel vehicle has further reduced from three years to 2.5 years.”

Maruti Suzuki has five models—Ritz, Swift, DZire, Ertiga and SX4—with diesel and petrol variants. Of these, the diesel versions accounted for 90% of Maruti’s sales for these models in the last fiscal. The demand for petrol vehicles has been weak since the past 12 months because of the significant price difference between the two fuels.

Petrol prices were raised by Rs 7.54 a litre, or 11.5%, to Rs 73.18 in New Delhi on 25 May. Prices of the fuel vary across the country, depending on local taxes.

“Building an engine plant in Gujarat makes sense as that will cater to our next phase of manufacturing, and it doesn’t make sense to make engines in Gurgaon and send it to Gujarat,” Bhargava said. “Our internal sales target is 2 million cars by 2015-16, and if there is no policy clarity on diesel pricing, the demand for diesel cars will rise further.”

The company is expected to initiate the process of construction of its hub in Gujarat on 2 June.

“It takes at least three years to build a greenfield plant. So we have to get started at the earliest. An announcement to this effect will be made shortly,” Bhargava said.

In March, the company had announced that it would invest Rs 1,700 crore for its first diesel engine plant in Gurgaon.

The plant, which will come up by the middle of 2013, will have an initial capacity of 150,000 units, which will be doubled to 300,000 by the following year.

Currently, Suzuki Powertrain India Ltd produces 300,000 diesel engines for Maruti. Suzuki Powertrain is a 70:30 joint venture between parent Suzuki Motor and Maruti.

In addition to this, Maruti has entered into a three-year agreement with Fiat Powertrain Technologies to buy 100,000 diesel engines a year. By 2014, its total capacity for diesel engines is expected to reach 700,000 units.

“We expect sales of our diesel cars to go up by 150,000 units next fiscal, just as petrol volume will go down by 50,000 units. Overall, our volume is expected to go up by 10%, led by diesel demand,” Bhargava said.

Motilal Oswal downgraded Maruti’s earnings estimate for the next two years because of a weak rupee and the impact of the increase in petrol prices on the car maker’s sales. The brokerage downgraded the earnings per share by 16% to Rs 74.5 a share for 2012-13 and 11% to Rs 98.3 for the next fiscal. In the past two years, petrol prices have risen 52%.

Maruti Suzuki fell 2.46% on BSE on Friday to close at Rs 1,117.05. The benchmark index, Sensex, lost 0.03% to close at 16,217.82 points.

The Motilal Oswal report said Maruti faces challenges in increasing diesel engine availability beyond 400,000 units in the current fiscal as diesel is the key volume driver.

amrit.r@livemint.com