That the recent diesel price increase will delay the recovery in truck sales doesn’t appear to have sunk in. Both the big truck firms, Ashok Leyland Ltd and Tata Motors Ltd, and the BSE Auto index have jumped 5-8% since the increase last weekend.

The negative impact of the hike on both freight rates and truck sales was ignored by the Street. Or, maybe it was offset by the central bank’s 25 basis points cut in the cash reserve ratio, the portion of deposits banks have to keep with the Reserve Bank of India. This signals lower interest rates in the near term, which is good for auto sales.

But such positive sentiment is unlikely to last. A 5 per litre (12%) rise in diesel price saw an overnight increase in retail freight rates by around 7-8%. Will this freight increase be sustained? Will the user industry be able to absorb or pass on this hike?

The recent Index of Industrial Production data indicated that consumption of durable and non-durable items fell to a five-month low. Cement prices finally gave way last month on weakening demand. Sectors such as agro-chemicals and fertilizers were negatively affected by poor monsoon. It might, therefore, be difficult for the industry to absorb freight rate increases, which means freight rentals may soften and demand for trucks may fall.

“With a four-five days average waiting for return load, we maintain medium and heavy commercial vehicle goods (truck) segment would contract by 9-10% in FY13E, given the drop in freight availability and softening of truck rentals," Surjit Arora, an analyst at brokerage firm Prabhudas Lilladher Pvt. Ltd, wrote in a recent report.

For the near term, therefore, the diesel price increase could play spoilsport in the much-awaited recovery in truck sales in the second half of fiscal 2013. The impact may be higher on Ashok Leyland—80-90% of its sales comprises lorries—than Tata Motors; three-fourths of its consolidated revenue accrues from its overseas unit. Besides, the latter’s product mix in domestic markets, too, is skewed in favour of smaller pickups.

It is certain truck sales will be the worst hit by the diesel price hike. A report by Brics Securities Ltd explained that utility vehicles, which have been growing at more than 40% year-on-year over the past few months, are unlikely to be impacted yet (increase in cost of ownership is only 3% and not likely to affect purchasing decisions), and a combination of competitive pricing and lifestyle choices will continue to drive sales. In fact, any drop in interest rates could boost sales in this segment.

The key lies in the revival of consumption and investment demand, which should help sustain freight rates that have been sliding in the past four months.

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