MUMBAI (Bloomberg) -- Tata Motors Ltd., a challenger to Hyundai Motor Co. in the fight to be India's No. 2 automaker, may gain an edge over the South Korean carmaker after the nation decided to end state controls on gasoline prices.
Prime Minister Manmohan Singh last week freed gasoline prices to pare spending, while keeping diesel subsidies for the time being. Tata may lure drivers from Hyundai and Maruti Suzuki India Ltd., the nation's biggest carmaker, as it has a wider range of diesel models, said Mahantesh Sabarad, a Mumbai-based analyst at Fortune Equity Brokers India Ltd.
“When you think of the beneficiaries of this move, the first name that comes to mind is Tata,” said Sabarad. “They have a sizeable portfolio of diesel vehicles.”
Tata gets as much as 80 percent of sales from diesel models, according to Sabarad. The carmaker sells Indica hatchbacks and Indigo sedans that run on the fuel and it's developing a diesel-powered version of the Nano, the world's cheapest car. Diesel accounts for about 20 percent of sales at Maruti and less at Hyundai. Honda Motor Co., the No. 5 automaker in India, doesn't offer any vehicles that run on the fuel.
“Honda will have a problem,” said Deepesh Rathore, managing director of IHS Global Insight India. “Hyundai doesn't have any diesel engines for small cars. These two companies will be adversely affected.”
20 Percent Cheaper
Diesel is about 20 percent cheaper than gasoline in India. The end of gasoline subsidies may help diesel cars account for as much as 30 percent of nationwide sales within two years from less than 25 percent now, according to Surjit Singh Arora, a Mumbai-based analyst at brokerage Prabhudas Lilladher Pvt.
Honda is developing a diesel engine that will be introduced in India, Jnaneswar Sen, vice president for marketing at the Tokyo-based company's local unit, said without specifying a timeframe. He said the new fuel-pricing rules won't affect sales as rising disposable incomes will boost overall demand.
Rajiv Mitra, a spokesman for Hyundai's India unit, and Debasis Ray, a spokesman at Mumbai-based Tata, which also owns Jaguar Land Rover, declined to comment. Mayank Pareek, New Delhi-based Maruti's head of marketing and sales, didn't answer calls to his cellphone.
Tata shares gained as much as 1.9 percent to 783.45 rupees and changed hands for 780.3 rupees at 11:23 a.m. Maruti fell as much as 1.2 percent.
‘A Good Concept'
The decision to free fuel prices is a “good concept” that the country needs in the long run, Prakash M. Telang, the head of Tata's India operations, said on June 25. The automaker is on course to pass Hyundai as India's second-biggest carmaker after opening a plant able to make as many as 250,000 Nanos annually earlier this month. The capacity of the plant is equal to about 80 percent of Hyundai's India's sales last fiscal year.
General Motors Co., ranked fourth in India, sells both diesel and gasoline, or petrol, models, said P. Balendran, a spokesman. The carmaker was seeing increasing demand for diesel models over gasoline even before the pricing changes, he said.
Auto sales in India have surged since the beginning of last year, helped by easier credit and lower interest rates. In the year ended March, car sales jumped 25 percent, the fastest pace in six years, to 1.53 million. Automakers, including Toyota Motor Corp., are expanding factories and introducing new models in the country to benefit from the increased demand.
Under the new fuel system, gasoline prices will be tied to global crude prices, Oil Secretary S. Sundareshan said last week. Bharat Petroleum Corp., India's second-largest state-run refiner, may now change gasoline prices every 15 days or monthly, said Chairman Ashok Sinha.
Higher Diesel-Car Prices
On June 25, the government also decided to raise the price of gasoline by about 3.5 rupees (8 cents) a liter and the price of diesel by 2 rupees. It was the third increase in fuel prices this year. Gasoline cost 47.93 rupees a liter in New Delhi last week, compared with 38.10 a liter for diesel, according to Indian Oil Corp.'s website.
Demand for diesel vehicles may be limited by the fact that they are generally more expensive than gasoline models. A gasoline-powered Maruti Swift hatchback costs from about 400,000 rupees ($8,620) in New Delhi while the diesel version starts at about 483,000 rupees, according to the automaker's website.
The government also intends to end subsidies on diesel eventually, Sundareshan told reporters in New Delhi on June 25, without providing a timeframe. When that happens, diesel-powered cars may become less attractive, said Eduardo Lopez, a senior demand analyst at the International Energy Agency in Paris.
Diesel Car Duty?
“We could see a reversal or a move back to gasoline,” he said. “What you've had until now was an increasing bias toward diesel because diesel was being sold so cheaply.”
A government-appointed panel that recommended India free fuel prices from state control also suggested an additional duty on diesel-powered vehicles.
The panel, headed by Kirit Parikh, a former member of the nation's Planning Commission, recommended levying 80,000 rupees more in duties on vehicles fitted with diesel engines so that the government collects the “same level of tax from those who use a diesel vehicle for passenger transport.”
The government hasn't said whether this recommendation will be enacted. Until it decides to implement this levy or to abolish diesel subsidies, consumers are most likely to focus on the increasing difference between gasoline and diesel prices, said IHS's Rathore.
“The absolute difference between the price of petrol and diesel will change,” he said. That will “shift sales from petrol-engine cars to diesel-engine cars.”