Worried that the automaker was losing out on vehicle sales in India due to a lack of diesel options in its portfolio, Honda Motors (HMC) has finally decided to launch a new diesel car called Amaze in India in the next fiscal year (i.e. April' 13 – March'14), according to reports.

The automaker will roll out a diesel variant of its existing sedan, City, as well. Amaze will be built on the same platform as Brio, the car designed specially for the developing countries.

Honda's vehicle sales declined by 8.47% to 54,427 units in 2011/12 although sales were also affected by supply chain disruptions caused by floods in Thailand. Still, India only accounts for less than 2% of Honda's global sales, the India Times reports, and with this move, the automaker hopes India to contribute more to its overall profitability.

Amaze will also be launched in Thailand although only the gasoline version will be available. The automaker is relying heavily on developing economies as it looks to double the vehicle sales in the next five years, as per a recent Trefis article. Its Chinese sales have also taken a hit due to a wave of anti-Japanese sentiment that has risen in the country because of tensions between Japan and China over claims on the disputed islands.

The diesel conundrum

With Honda's sales getting stagnated, launching diesel cars was necessary to grab a foothold of the Indian auto industry. Diesel is heavily subsidized by the Indian government while the gasoline prices are partially deregulated. Thus, the sales of diesel vehicles are booming as their running costs are only a fraction of what they are for gasoline powered vehicles.

There has been pressure on the Indian government to free up the diesel prices in order to lower the burden of subsidies in the wake of rising fiscal deficit, but the government has been hesitant so far since the move is not politically feasible. Farmers and the poorer sections of the society are heavily reliant on the fuel in India.

Therefore, the government is also open to the idea of levying a one-time hefty tax on diesel vehicles to discourage people from buying diesel vehicles. Diesel cars are environmentally more harmful than gasoline cars and rising diesel vehicle sales will only increase the government's total subsidies on the fuel. Lack of a clear policy by the government had deterred Honda from investing in diesel vehicles until now. India's auto industry is the sixth largest in the world and a total of 3.4 million passenger and commercial vehicles were sold in the country in the fiscal year ending on March 31, according to a report.

Our price estimate of $37 for Honda's stock is around 20% above the current market price.