Bengaluru, NFAPost: For the first time in living memory, diesel prices have attained parity with petrol prices due to the recent increase in indirect taxes. From peak pricing gap of ~Rs 32/liter in Jun’12 to Rs 21/liter in Jul’15 to the current parity, share of diesel vehicles in the PV industry volume has already undergone a sharp reduction (from peak of 58% in FY13 to 29% in FY20 to ~15% in 4QFY20).

As the fuel prices has increased for the 20th day, the opposition party has took as an opportunity to surround the Modi government on this important issue, where the netizens of India has surrounded with the crisis. It is for the first time, diesel prices have gone higher than the petrol price at 79.88 rupees per litre in Delhi.

The fuel price is rising due to the additional duty that the government had imposed on petrol and diesel, to offset the revenue loss caused by the pandemic by taking advantage of low crude prices.

IThe hike is effectively meant that the Central government is collecting around 270% taxes on the base price of petrol and 256% in the case of diesel The Covid-19 outbreak has already made everyone cash crunch and the government is burdening the common man with high taxes on petrol and diesel while international crude oil prices have fallen and are at the lowest level in many years.

The BS6 related cost inflation and fuel price parity could further influence consumer preference. This could vindicate MSIL’s decision to exit diesel vehicles and focus on CNG/hybrid ones. The current sharp increase in fuel prices could also delay post-COVID recovery process for the PV industry; however, it should help 2W demand.  

Diesel prices in parity with petrol prices – a historic first…
–       For the first time in the last few decades, diesel prices are now at parity with petrol prices. This is driven by structural changes like diesel price deregulation and the recent increase in indirect taxes.
–       Diesel price deregulation from Oct’ 2014 led to structural reduction in the price gap of diesel v/ersus petrol. The gap narrowed down from a historic high of ~INR32/litertr in Jun’e 2012 (pre-deregulation) and ~INR21/litertr in Jul’-15 (post-deregulation) to an average ~INR7/litertr in for FY20.
–       Further, increase in specific excise duty in the first 1st week of May’ 2020 was higher in diesel (~INR13/litertr) than in petrol (~INR10/litertr). Also, increase in VAT in Delhi was also higher for dDiesel in Delhi (13pp increase for diesel v/s 3pp for petrol).


…will further influence consumers’ fuel preference, particularly in BS6 era…
–       Consumer preference for fuel has high correlation with the pricing gap between fuels and total cost of ownership. For e.g., share of diesel vehicles was the highest at ~58% in FY13 and in sync with the peak price gap witnessed in Jul’-12.
–       However, as the gap has narrowed to ~INR7/litertr in FY20, share of diesel vehicles also reduced to a low of ~29% in FY20 (~15% in 4QFY20).
–       With the double whammy of increase in initial cost of ownership for BS6 diesel vehicles as well as no material pricing advantage ofof diesel, it could further lead to a reduction in share of diesel vehicles. Under BS6, diesel at current diesel prices, payback period would be 8.5-9.5 years to recover the higher initial cost of ownership.


…MSIL better positioned with strength in petrol and CNG
–       With MSIL’s decision to exit diesel and the consequent aggressive pricing of competitors like Hyundai on BS6 diesel, there wereas  emerging concerns about MSIL’s ability to retain diesel buyers in its fold.
–       However, price parity between diesel and petrol would work to MSIL’s advantage considering its strong portfolio of petrol and CNG vehicles.
–       MSIL is evaluating of re-entry into diesel with ‘1.5 litertr and&  above’ engines if there is a need (it assesses need for one based on customers feedback). Also, it is evaluating use of hybrid technology to off-set the need for of diesel vehicles.


15% increase in petrol prices in 1QFY21 YTD might influence pace of recovery
–       In the last three months, fuel prices have seen sharp increase (~15% in petrol and 28% in diesel), as prices were increased consecutively for the last 18 days.
–       The fuel price inflation is happening at a time when there are concerns around job/income losses due to the COVID-19 impact.
–       Historically, we have seen demand deferment is seen for PVs when fuel prices have seen  consistent price inflation. However, this might benefit demand for 2Ws due to high fuel efficiencyies and lower cost of ownership.
–       We are factoring in for recovery for PVs from Sep’-20 onwards with onset of the festive season. For FY21, we are estimating PV volumes to decline ~14%.  and rRecovery, however, is expected by 18% in FY22E.


Valuation and & view
–       The COVID-19 pandemic has not only put the brakes on initial signs of recovery seen in 2Ws/PVs, but has also brought in uncertainty considering the several unknowns associated with its impact. This potentially deepens the impact of the BS6-related price increase on FY21 demand.
–       Valuations are reflecting for recovery from 2HFY21, leaving limited margin of for safety for any negative surprises. Hence, we prefer companies with: (a) higher visibility in terms of demand recovery, (b) a strong competitive positioning, (c) margin drivers, and (d) balance sheet strength.
–       MM and EIM are our top large-cap picks. Among the mid-caps, we prefer MSS.

As per Kapil Sibal, Congress leader “The government has earned Rs. 2.5 lakh crore in 3 months: Sibal “If the government had even the slightest feelings for the common man, instead of benefitting the companies and the government, the prime minister would have helped the common man with reduced fuel prices,” Sibal said at an online press conference.

India is highest in the world The tax of fuel in the US is 19%, Japan 47%, the UK 62 %, France 63% and Germany 65%. 10. Major economics have balanced tax system for fuel The people are in distress due to the corona pandemic , millions have lost their jobs and paying capacity of people has gone down due to the lockdown but the government is adding to the burden of the common man .

(The story is based on Motilal Oswal Institutional Equities inputs)


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