Effect of hike in diesel car prices only temporary: Analysts

The government is contemplating hiking the excise duty on diesel cars to deter the well-off from exploiting the subsidised fuel. The hike is unlikely to alter the demand for diesel vehicles in the long term, an Edelweiss report noted. 

Should the duty be hiked, the impact on companies like Mahindra & Mahindra and Maruti Suzuki will only be a short-term phenomenon. 

"If the government hikes excise duty on diesel cars, Mahindra & Mahindra will be the worst hit as almost 100 percent of its product portfolio comes under the diesel category. To some extent, Maruti Suzuki will be impacted as 30-35 percent of its portfolio is diesel. 

However, the hike will be a one-time cost for buyers. Customers are paying more attention to running and maintenance costs which will more than offset the hike impact. This will help diesel car manufacturers in the long term," Ashwin Patil, Research Analyst at LKP Securities, said. 

"A modest hike of 2-3 percent is not likely to affect demand for diesel cars as seen in Maharashtra due to a long waiting period of 3-6 months," the Edelweiss report said. 

"If the government chooses to increase excise duty by 6 percent, it may lead to cancellation of bookings for diesel vehicles in the short term, shifting some demand in favour of petrol vehicles. The commercial UV segment may pass on the cost though some near-term demand may be hit at the entry-level personal UV segment," the report added. 

Sale of petrol vehicles slumped following the recent sharp rise in petrol prices and that of diesel vehicles have risen due to the regulated fuel prices. 

"There is a huge discount being offered on petrol cars largely because of the lack of demand and diesel cars are really doing well. Maruti probably has a good capacity to churn out more numbers in the diesel sector. 

Worries remain that the government may probably impose something on the diesel cars, which did not materialise in the budget. Having said that, the RBI rate cut and the loosening policy might help the auto sector quite a bit," Dilip Bhat, Joint Managing Director at Prabhudas Lilladher told ET Now. 

A hike in the excise duty on diesel cars will shift customer attention toward petrol cars and can come as a relief to petrol car manufacturers. 

"Sales volumes have been dwindling. Petrol prices have gone up, you have seen volumes drop, especially of petrol cars. If the diesel tax does come through, then probably there could be a bit of a rebalancing over the next three to six months," Satish Ramanathan, Director & Head - Equities at Sundaram Mutual, said.