Impact of Diesel Car Ban on Automobile Sector in India

The plea submitted by the ministry of petroleum and natural gas to ban the diesel passenger vehicles in India has created a chaos for the investments in the automobile sector. India is adopting initiatives to switch towards energy friendly solutions like electric vehicles to promote environment sustainability.

The Indian government has proposed the ban of diesel cars to contribute towards reducing greenhouse gas emissions with an aim of producing 40% of its electricity from renewable sources by 2070. With the ban of diesel cars in India, the government aims to achieve the targets of net carbon zero in the coming years.

In India, the ban of diesel cars can highly impact the investments in the auto sector. A shift towards natural gas (as it is less polluting) from diesel cars suggests a considerable change in the automobile industry.

Automobile Industry in India

Before getting in depth about the impacts of the diesel ban on the automobile sector, first let us have a glimpse of the automobile sector in India. In India, the passenger car market is expected to grow at a CAGR of over 9% by the year 2027. The automobile sector in India has a great contribution towards India’s GDP and has employed 19 million people directly or indirectly.

On the other hand, the market of electric vehicles is estimated to reach Rs 50,000 crores in India by 2025. The government of India has encouraged foreign investment in the automobile industry through schemes like the Production Linked Scheme.

Impact of Diesel Ban on Automobile Sector

In India, the ban of diesel to switch towards energy based solutions will result in directly impacting the business of the automobile sector. Let us consider the major impacts here on a broader note:

Manufacturing Investment

Companies who have already invested heavily in diesel engine technology and production need to reallocate their resources and adopt other alternatives like electric vehicles, hybrids or hydrogen powered vehicles.

Not only this, the manufacturers are required to invest in research and development towards other alternatives to survive in the automobile market quickly. Therefore, companies have to bear increased costs of research and development; also they might have to focus on potential consolidation or partnerships.

Investors Sentiments

Investor sentiments might shift from traditional use of diesel to environmental friendly and sustainable technology by increasing the consumption of electric vehicles. Due to this, the companies involved in the production of electric vehicles, charging infrastructure and battery technologies may see a surge in the stock prices.

Investment Opportunities in Electric Vehicles

Because of the diesel ban in India, investors find a great opportunity for investment in the companies that are involved in the production of electric vehicles. Investors might increase their position in these companies as it is expected that prices will experience a surge in the future.

Many EV startups are attracting investments that produce alternative energy vehicles that can result in increased stock price movements. Also, companies involved in the production of renewable energy will likely experience benefits from the increased demand for EVs. Moreover, it will benefit the companies that supply components like batteries, electric motors, etc.

Short Term Market Volatility

Due to the ban on diesel, a situation of fear might get built up that can affect consumer’s sentiments and hence creating short term volatility in stock prices across the automobile sector. The stock prices might experience unexpected swings as investors tend to react strongly to changes in regulations or technological breakthroughs.

Long Term Structural Changes

Companies that are indulged in manufacturing of diesel vehicles might find a need to shift towards cleaner technologies by adopting innovation. They might require the companies to change their structure through mergers or acquisition to meet the demands of the society. This could help to improve the stock performance of companies that belong to the automobile sector.

Diesel Based Companies

A ban on diesel will majorly impact oil refiners and fuel suppliers that are heavily dependent on diesel consumption as it can lead to negative consequences in their stock performance. Moreover the companies that are heavily indulged in commercial vehicle production that are significantly reliant on diesel engines might have to face various challenges as they can lose stock market share due to increased regulatory costs and a shift in market demand.

How to invest in the automobile sector?

To invest in the automobile sector or any other sector in the stock market, you must have in-depth knowledge about the demand and supply approach which helps to analyze the buying as well as selling pressure in a security. If your technical analysis based on a top down approach supports the investment in a company then it is considered a great buying option.

To invest in the automobile industry, understanding stock market sectors and its rotational cycle provides extra advantage to grab the information about booming sectors. The sector rotation or the rotation cycle consists of four phases: expansion, peak, contraction, and trough.

Each sector goes through these phases, investors must determine the rotational phase of the automobile sector in order to make informed investments. Arun Sir and Sooraj Sir have explained the concept very well through the sector class. (https://www.youtube.com/watch?v=ZNoqLgQv0hU)

The Final Thought

The diesel ban in India might immensely affect the automobile sector especially the companies that are heavily dependent on manufacturing diesel based engines. Investors tend to shift their investments towards EV companies instead of diesel companies. To invest in companies, you must gain proper technical knowledge through a demand and supply approach for a better understanding of long term and short term investments.

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