Diesel – End of the road?

13 Sep 2023 , 11:07 AM

The minister subsequently clarified that no such proposal is “under active consideration”. Nevertheless, analysts at IIFL Capital Services have looked at the potential impact of such a move, if it were to be implemented. Although diesel penetration is the highest in CVs and Tractors, these are unlikely to be punished.

That makes PVs most exposed to this potential levy. Within PVs, diesel penetration has come off substantially over the years. M&M has the highest exposure to diesel (84%) within its PV portfolio. Other PV OEMs have brought down diesel exposure substantially. An additional GST levy of 10% would result in 7-8% increase in prices of diesel vehicles, hurting affordability and possibly accelerating the shift away from diesel.

Possibility of additional 10% levy on Diesel PVs

Penetration of diesel is the highest in CVs and Tractors, followed by PVs. In view of diesel being the default fuel for CV and Tractors, and due to its direct impact on agriculture, transportation cost and general inflation, analysts at IIFL Capital Services believe these segments may be excluded from the levy. That makes PV (and mainly SUV) most exposed to this potential levy.

Share of Diesel in PV has come off substantially

Diesel penetration has come off from 50% in FY14 to 18% in FY23. The penetration of diesel within PVs has come off over the years due to i) Stricter emission norms, which made small-capacity diesel engines unviable ii) Reduction in total cost of ownership (TCO) arbitrage due to higher-priced diesel vehicles and increase in price of diesel fuel iii) Maruti’s decision in 2019 to shift away from diesel.

Maruti exited Diesel in 2019; Mahindra most exposed

Maruti exited the Diesel segment in 2019. Tata Motors has also cut its diesel exposure substantially from 80% in FY14 to 15% in FY23. Toyota (despite very high exposure to the SUV segment) has brought down diesel exposure from 85-90% in FY14-17 to 30%, aided by gasoline models shared with Suzuki (Glanza, HyRyder) as well as the recent launch of Innova HyCross (gasoline, strong hybrid). Among PV OEMs, Mahindra is the most exposed to diesel with 84% of its PV sales volume still derived from diesel variants (as per Vahan registration data).

A 10% levy may make TCO economics unfavorable for Diesel PVs

Over the years, the price gap between gasoline and diesel fuel has come off as the government has reduced fuel subsidy on diesel. Moreover, diesel vehicles are higher-priced compared to petrol. Lastly, with stricter emission norms, small-capacity diesel engines have become unviable. This means that diesel vehicle sales are now concentrated in larger higher-priced vehicles (mainly SUVs). In this category, the % difference in TCO between gasoline and diesel has narrowed substantially. A 10% additional GST levy may make the equation unfavorable for diesel.

May result in advantage for strong hybrids till electrification takes off

The pricing of strong hybrid variants is fairly close to that of the Diesel Automatic transmission variants of the existing models. More importantly, strong hybrid variants command much higher fuel efficiency compared to competing diesel models. Higher taxes on Diesel vehicles may shift the balance favorably towards strong hybrids.