Though two-wheeler sales have fared badly at the start of the festival season, the segment’s slide is likely to be limited to 15% to 17% this fiscal. Improving rural prospects, consumers shifting from expensive vehicles to cheaper alternatives in a subdued income environment, and greater preference for personal mobility will support sales of motorcycles in the economy segment which accounts for 53% of sector volume last fiscal. Therefore, the fall in overall two-wheeler sales would be limited to 15-17% this fiscal, according to a Crisil study of 5 manufacturers, accounting for 80% of the sector’s sales volume.
Hinterland, which accounts for half of the two-wheelers sold, saw good traction in the Kharif (summer) sowing season supported by a good and evenly spread monsoon. With water reservoirs also at healthy levels of 87% on average, the tidings are good for the rabi (winter) crop, too. As a result, agriculture GDP is seen growing by 2.5% even as India’s GDP is estimated to contract ~9% in the current fiscal. Additionally, a hike in the minimum support price (MSP) for key crops will also boost rural income and discretionary spending.
According to Crisil Ratings, the rural demand for two-wheelers is seen recovering faster, with sales estimated to grow 500 basis points (bps) more than urban, where income growth is more tepid. This is underscored by data on rural two-wheeler retail registrations during April-September 2020. The economy motorcycle segment generates 75% of sales from the rural market and should benefit the most, given the milieu. Furthermore, price hikes of 10-12% to comply with BS-VI emission norms have increased the pricing gap between economy motorcycles and other segments, which is driving up a preference for the former. While the Covid induced lockdown has been lifted across the country, public transport remains somewhat restricted, it pointed out. With a sharper focus on social distancing, preference for personal mobility is rising which is, in turn, benefitting motorcycle.
Gautam Shahi, director, Crisil Ratings said: “The economy motorcycle segment likely to see lower volume contraction of 11-13% compared with 15-17% overall in two-wheeler sales this fiscal. Higher preference for economy motorcycles will also drive up the segment’s share by 300 bps to 56% of the overall pie.” Crisil ratings said that despite a decline in overall two-wheeler sales for two consecutive fiscals resulting in multi-year low capacity utilisation, operating margin of players will see only 200-300 bps decline to 12% this fiscal. Cost rationalisation efforts including higher transport by rail, and pruned advertisement spends will help partially offset higher cost BS-VI compliant vehicles.
Sushant Sarode, associate director, Crisil Ratings said, “While the two-wheeler sector has seen few weak business cycles in the past decade, the credit quality of manufacturers has largely remained unaffected due to strong balance sheets, limited debt, negative working capital cycle, and robust liquidity of players. Ergo, even two consecutive years of weak demand is unlikely to materially impact their credit quality. They also have sizeable cash surpluses (Rs 35,500 crore for the sample set), to help mitigate cash flow challenges.”
A reduction in GST rates, even if temporary, would come as a tailwind to sales across segments. Besides, any further increase in Covid-19 afflictions in the hinterland, and its socio-economic impact, will be the key monitorable. In the next fiscal, a low base effect along with the expectation of improvement in economic activity and gradual waning away of a pandemic may spur growth for two-wheelers to 10-12%, it added.
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