Maruti Suzuki sees petrol, hybrid models offsetting losses from diesel phaseout

Maruti Suzuki will add more petrol, hybrid and CNG models to its portfolio to compensate for the absence of diesel variants, chairman RC Bhargava said on Tuesday.

India’s biggest carmaker announced last week that it would discontinue production of diesel vehicles from April 1, 2020. Maruti believes that the relatively less expensive petrol, hybrid and CNG models will drive demand.

Bhargava believes that with diesel vehicles tipped to become much more expensive once BS-VI kicks in, consumers would be persuaded more by the design and the price of a vehicle rather than the engine.

“Today, customers buy diesel vehicles because they are economical and over the years a perception has been created that diesel cars are more powerful,” Bhargava told FE.

He added: “Tomorrow, when petrol variants with equal power are launched at a lower price, demand for these will automatically pick up.”

Maruti’s strategy is to replace its diesel models — which accounted for 23% of sales in FY19 — with petrol variants. Given these would be more attractively priced than the diesel models of competitors, Maruti would not lose market share.

Analysts at Kotak Institutional Equities are pencilling in a volume growth of 5% in 2019-20 on the back of an anaemic 4.7% increase in 2018-19. For 2020-21, volumes are expected to grow at a much better 8.7%. “We expect MSIL to gain market share by 130 bps over FY19-21 largely led by an increase in the share of petrol vehicles in the industry mix due to the sharp rise in diesel vehicle costs once BS-VI regulations are implemented in April 2020,” they wrote.

SIAM expects the passenger vehicle industry to grow by 3-5% year-on-year in 2019-20. However, Maruti Suzuki expects to grow volumes by 4- 8%.

The price differential between a diesel and petrol vehicle today is around `1-1.5 lakh, which, after BS-VI, will go up to `2-2.25 lakh. Since the price differential between the two fuels is around `8-10 a litre, the attractiveness of buying a diesel vehicle will disappear.

Bhargava said similar logic would apply to the compact SUV segment where today Maruti is the market leader with a share of 28%. The winner in this segment — Brezza — has a monthly average sales volume of 15,000-18,000 and is fitted only with a diesel engine. Post BS-VI, Brezza would cost roughly `9.85 lakh, up from the current `7.85 lakh.

However, if fitted with a petrol engine, the compact SUV could be priced at an attractive `6.5 lakh — much lower than the `7.85-lakh diesel variant.

Analysts, however, are not convinced, given that 70% of compact SUVs sold in the country today run on diesel.

Bhargava said the company might produce larger diesel vehicles of above 1.5 litre capacity if there was sufficient demand. Moreover, Maruti would offer hybrid and CNG vehicles. “As per market demand, we will also have more hybrid variants of several models,” he said.

Currently, Maruti offers Ertiga and sedan Ciaz with a mild hybrid system and is gearing up to launch the mild hybrid versions of S-Cross and Baleno, ensuring the vehicles return high fuel efficiency. Eight of Maruti Suzuki’s popular models, including Swift, Dzire, Baleno, Ciaz and Vitara Brezza, are currently available also with diesel engines.

With the price gap between petrol and diesel fuel having narrowed over the last few years, the share of diesel cars has come down significantly to 34% in 2018 from 53% in 2013, according to SIAM data. Today, the share of petrol vehicles is over 60%.

Analysts at Jefferies said Maruti’s volume growth could remain under pressure in the long term. “Overall volume growth could be in the range of 0-5% over 2020-21 as demand remains weak and Maruti loses market share,” they noted.