Two-wheeler sales to bear the brunt of fuel price rise

High fuel prices coupled with high ownership cost dents the demand, especially of entry-level two-wheelers, which comprises 75% of total retail sales.

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With Brent crossing the $100-mark on Thursday and the prospects of oil marketing companies raising fuel prices once the assembly elections across some states come to an end on March 7, two-wheeler dealers are a worried lot. Fuel prices anyway are at elevated levels and any further hike will kill whatever chances of resurgence of demand they were seeing with the Omicron-related restrictions being eased.

Oil marketing firms have not hiked fuel prices since November 4 last year when the government reduced excise on petrol by `5 and diesel by `10. This had brought some respite to the consumers but in terms of fuelling demand for two-wheelers, brought little relief.

Two-wheeler dealers FE spoke to said that inventory levels for two-wheelers are already high, running at 60-90 days against the normal 25-30 days, and if sales do not pick up, they would need to once again urge the manufacturers to go slow on despatches. “The despatches by manufacturers tempered a bit in January as inventory was quite high in December but it has not stopped. We would once again raise the issue with the manufacturers,” said one of the leading dealers in western India.

High fuel prices coupled with high ownership cost dents the demand, especially of entry-level two-wheelers, which comprises 75% of total retail sales.

“As far as the uncertainty caused in crude oil prices due to the Russia-Ukraine conflict is concerned, this will certainly have a significant impact on the segment, but I think till the time election results are declared on March 10, the OMCs will not increase fuel prices. While this is a short time-frame cushion, we will be bracing ourselves with high fuel prices which will definitely once again impact two-wheeler sales in India and specifically Bharat,” Vinkesh Gulati, president, Federation of Automotive Dealers Associations (Fada), told FE.

“When fuel prices breached the `100-mark, the de-growth in two-wheeler sales reached 25%+. With the government reducing tax on fuel, the de-growth reduced to 15% level. We will once again see high de-growth of 25%+ when fuel prices rise above the `100-mark due to the Russia-Ukraine crisis,” he added.

IHS Markit associate director Suraj Ghosh said that the two-wheeler category, especially the entry-level, mass-commuter segment, is extremely sensitive to the total cost of ownership dynamics, and running cost is a key element of the total cost of ownership equation. “If fuel price goes up it disturbs a very key element that determines a lot about the final purchase decision of prospects. So, yes the higher ownership cost will definitely impact two-wheeler sales adversely,” he said.

Saket Mehra, partner and auto sector leader, Grant Thornton Bharat, said that under the two-wheeler segment, 100-125 cc motorcycles and 110 cc scooters, which make for up for the majority, are favoured by buyers with running cost as a key consideration, and with any spike in fuel prices, the criterion of running cost is impacted and, thus, many defer purchases.

A leading dealer told FE that manufacturers now won’t have much of a choice but to lower despatches because their receivables against dealers are rising. Normally, dealers take vehicles from manufacturers on a cash and carry basis but with pandemic breaking out and demand slowing, the same moved on to credit.

The problem of high inventory is despite the despatches by manufacturers declining on a yearly basis. For instance, two-wheeler despatches during the October-December period was the lowest in the last nine years, according to Society of Indian Automobile Manufacturers (Siam). During December, it was down by 11% on a y-o-y basis. The retail sales of two-wheelers declined by 20% in December on a year-on-year basis.

Unlike passenger vehicles where the demand is high but supply from manufacturers is low because of cut in production due to chip shortage, two-wheelers are facing low demand. The reason is that ownership cost has gone up by around 30% since April 2019 when the transition from BS4 to BS6 happened along with a host of safety measures. Further, in the last one year, fuel prices have also risen by around 30-34%.

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First published on: 25-02-2022 at 10:08 IST