Cut diesel engine, car output due to low demand: Maruti

India's largest passenger car maker Maruti Suzuki has reduced production of diesel engines as well as diesel powered cars due to a fall in demand, Chairman RC Bhargava, said on Wednesday.

Demand for diesel cars has dropped to 25,000 while the company has a production capacity of 42,000 vehicles, and so it was decided to operate at two shifts instead of three at its Manesar plant, he said, adding that the reduction in petrol-diesel price gap is the key reason for the drop in demand.

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The petrol-diesel price differential is down to Rs 18 in several circles, compared to Rs 27 at its peak, he said. The gap has been narrowing since the government allowed public sector oil marketing companies to hike diesel prices in small amounts every month.

Bhargava said that the price differential will vanish maybe in a year or two and so diesel cars are not selling as fast as they were till a few months ago.

Maruti Suzuki's sales in June declined 13 percent year-on-year to 84,455 units. Sales were down across its portfolio. Even, the DZire compact sedan, which has been among its top selling model, saw sales fall near 9 percent and sales of the Ertiga multi-utility vehicle, another successful model, also slipped 11 percent.

Despite the decline in wholesale demand (cars shipped to dealers), Bhargava says retail sales are rising month-on-month and so is hopeful that retail sales growth this year will be 5 percent.

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Below is the edited transcript of his interview with CNBC-TV18:

Q: If you just start off by confirming for us whether Maruti has indeed cut their production of diesel engines and if yes then by how much?

A: Yes, we have reduced the C shift in the Manesar plant because demand has tapered off to a large extent. Just to give you some figures, the industry sales of diesel cars in March 2012 were as high as 147,000 cars. In June this year it has dropped to 108,000 cars. Similarly for Maruti, we were selling something like 37,800 cars in November last year. This year in June, this has dropped to 25,700. Now, there is obviously no need to produce at the full capacity which was about 42,000 engines in one month and making about 42,000 cars per month when the demand has dropped to something like 28,000 - that is what the retail sales were. So it has dropped by about 1/3rd so we have just reduced one shift.

Q: I wanted to understand, generic point here. About a year back when we started to see diesel price hikes gradually and when we saw crude prices falling and petrol prices also falling, we saw that gap actually narrowing a bit between petrol and diesel. Now what has happened is especially over last two weeks, that gap is almost back to its all time high in terms of petrol price and diesel price. Do you think diesel vehicles will still continue to be a preference going forward and as such companies will still continue to invest heavily in diesel vehicles?

A: The gap between petrol and diesel prices at one stage was about Rs 27 per litre. Today that gap is Delhi is about Rs 18 per litre. It is not only the gap as it exists today. The customers are aware of the fact that diesel prices will continue to go up at probably 50 paise per month. Till this whole area of subsidy is wiped out and there is no under recovery on diesel cost. So they know that even if today the gap is Rs 18 and this has happened because the rupee has fallen so much, at some point of time the diesel prices and the petrol prices gap, it maybe in a year’s time, two year’s time, will only be to the extent of the difference in taxes on petrol and diesel, nothing else because diesel is not supposed to have a subsidy and that gap as I understand in tax is about Rs 10-11 per litre. So people are not buying diesel cars because they see this big gap and eventually they know the gap won’t exist.

Q: That’s true, not just companies like yours but there are other companies in the auto space that have been sort of hit really hard because of this sudden slump that we have seen in diesel car demand. When we spoke to you in the month of March, you had indicated that Maruti is expecting to see a 5 percent volume growth in FY14 and an approximately 9-10 percent revenue growth. Do you think you will have to scale down this volume estimate because of the sudden slowdown that we have seen?

A: I am not yet of that moot that we are not going to see growth because if I look at the retail figures of sales in the market, the retail figures are going up month by month. We saw that in April this year. Our sales in the retail, I am not talking of the wholesale sale to the dealers, the retail sales were about 68,000 cars in April. It has moved to 80,400 in May and to 90,300 in June. The wholesale figures which we would report and which forms the basis of all the comments about the slowdown are only to be considered in consumption with the retail figures.

What has been happening in April is that the inventories with the dealers have gone up to levels which were not commensurate with the levels which we think are okay. We have been reducing the sales to the dealers but increasing retail sales to bring down the inventories in the dealer stocks. So far, this increase in the retail sales still makes me feel little bit more optimistic that the market is not as bad as the wholesale figures seem to indicate. We could still get a 4-5 percent growth this year overall in terms of retail sales.

Q: In the month of June, your exports declined quite significantly, about 40 percent or so. Was that a bit of an aberration, do we expect exports to come back to the normal?

A: Export figure should not be looked at on a monthly basis because export figures relate to what is actually shipped out of the port. A lot depends when a ship which is going to take cars actually gets a berth and when it is loaded and when it sails. So it is better to look at quarterly figures at least to see what’s happening on the export side. So far we are on target with our year’s export figure which is close to 115,000-120,000 cars.

Q: Just coming back to that point you made about the diesel demand, how long do you think you will have to shut this third facility of diesel engine production and will you also look to cut down car production eventually?

A: We have cut down the diesel car production. The sale of cars has dropped over the years. I am not sure if people are fully aware that petrol cars have been declining in sales since about April 2011. In March 2011, we sold almost 90,000 petrol cars. In June, this had dropped to 51,000 petrol cars. Look at the kind of drop. The industry had the same situation. It sold 157,000 petrol cars in March 2011. This has dropped to 90,000 petrol cars in the last month.

In that context, we have had to cut down our production over the months. We have got capacity which is lying idle, it is kind of unused capacity and there is no help for it because the market is not growing. Now, in these months, the diesel production and the diesel sales were going up both for industry and for us. But last three or four months, diesel sales for the industry and for Maruti have also started going down.

Overall, the industry is witnessing a decline. Although Maruti is alright in terms of retail sales but let’s see what happens now in the next few months with the festival season coming along and hopefully with elections nearing, there will be more spending, more buying of cars so there is still hope.