Mahindra may cut expansion plans if diesel tax is imposed

An expected drop in sales may prompt Mahindra & Mahindra to cut scheduled capacity expansion plans, if the government goes ahead with the imposition of additional tax on diesel vehicles, according to the country's biggest maker of sports utility vehicles.

M&M president (automotive and farm equipment sectors) Pawan Goenka on Tuesday said that the city-based company would be "affected like anybody else" if the diesel tax comes in. "Whether it will be for three months or a permanent drop I do not know. But we certainly would reduce our forecast for next year if that was to happen," he said.

About 99 per cent volume of the Mumbai-based auto-maker is generated by diesel-powered vehicles. These include utility vehicles, multi-purpose vehicles and sedans. The company stands to lose maximum amongst all vehicle-manufacturing companies if the additional tax on diesel is introduced.

M&M will have to reduce its sales forecast downwards for the next financial year, stated a senior official in the company. It has so far seen a sales growth of 35 per cent during 10 months ended January at 197,000 units. With the fear of consumers moving away from diesel or dropping plans of buying a vehicle altogether, M&M is looking to shelve plans to do brownfield expansions.

"It will also have an impact on some of the expansion plans we have..." Goenka said. "We may slow down some investment we had planned on the basis of certain assumption of growth; so it may have an affect. Thus, we have to wait and see what actually happens to volume growth. That call will be taken only after the budget."

Till 2014, the company is on a course: spend Rs 5,000 crore (Rs 50 billion) as capital expenditure for M& M Limited and another investment plan of Rs 2,000 crore (Rs 20 billion), which is equity infusion in group companies such as Mahindra Vehicle Manufacturers, Mahindra Navi-star Automotives and others.

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Expansion, which would most likely get impacted as a result of the diesel tax, will be planned for the Chakan unit. This is following a saturation at the Nashik plant besides a similar state at the Kandivali (Mumbai) plant. This expansion, according to Goenka, will get slowed down.

"Basically, by scaling back I meant that we don't invest in capacity at the pace that we have planned. The only place where we are investing in capacity is Chakan because all the other plants are full anyway," added Goenka.

An expert group headed by economist Kirit Parikh had recommended Rs 80,000 additional excise duty be levied on diesel-driven vehicles to minimise usage of the fuel for personal consumption. The Indian line-up of M&M, Tata Motors and Maruti Suzuki could be among the worst affected companies, if the finance ministry accepts the proposal.

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Though the growth in sales of passenger vehicles this year has been just 1.45 per cent, the demand for diesel variants has grown significantly. Seven or eight out of every 10 compact cars sold in the country are powered by a diesel engine.

"Mahindra is primarily in the SUV segment," Goenka notes. "If diesel sales go down by 10 per cent (as a result of the tax), only a part of it will go to petrol. My view is that (demand) will be lost and it won't go to petrol totally, because we are not making petrol attractive but we are making diesel less attractive."

The company is also working on the second phase of expansion plans, scheduled to take place at Chakan (off Pune). These plans are subject to developments on the value-added tax front, where it is in discussion with the Maharashtra government. The phase-2 expansion will be similar to phase-1 expansion. On this, the company expects to spend an additional Rs 3,000-4,000 crore (Rs 30-40 billion).