Indian two-wheeler industry (2W) is likely to witness another year of demand contraction with unit sales likely to decline 11-13% to around 18 million units in FY21 following the adverse impact of the Covid-19 outbreak on economic growth and discretionary spending. The extent of slowdown remains contingent on the severity of the coronavirus outbreak and thus continuation of lockdowns. Even prior to the disease outbreak, the demand for two-wheelers was expected to be flat in India amid sharp rise in vehicle prices following the transition to BS VI emission norms (resulting in 10-12% inflation) and subdued macro-economic scenario, said an Icra note on Monday.
The challenges for the industry are likely to get aggravated as consumer spending will severely impacted by the outbreak resulting in lower spending power both in urban and rural markets. There is a likelihood of downtrading by consumers as well once the economy starts to cripple back to normalcy. On the export front, while any long-term predictions are difficult, Covid-19 fallout and volatility in crude oil prices would be a near term negative.
Shamsher Dewan, vice-president, Icra, said, “We expect two-wheeler OEMs to brace for another year of lower earnings and decline in operating margins, to 11.5-12% from around 14% in the previous year. Besides lower sales, pressure on earnings will also arise due to costs involved in recalling BS IV inventory from dealers which is likely to remain unsold due to shutdowns. Furthermore, during periods of stress, OEMs will also have to extend credit support to its dealers thus leading to potential increase in working capital intensity.”
“Nonetheless, the credit profile of two-wheeler OEMs is characterised by strong balance sheet with negligible debt and healthy cash & liquid investments. The OEMs are expected to continue investing in new product development and enhancement of domestic and overseas sales network, though the pace may be muted in the near term,” he added. The fiscal 2020 was all about inventory correction in the domestic two-wheeler (2W) industry as OEMs tried to counter the subdued demand before the transition to the new emission norms in FY21. With weak retail offtake and the inventory build-up at the dealerships since H2 FY19, the 2W OEMs had resorted to production cuts and sharp reductions in wholesale dispatches in FY20 in order to rationalise inventory in the system. This resulted in a 16% y-o-y contraction in domestic wholesale dispatches during 11M FY20.
In addition, the underlying demand sentiment in the industry also remained weak, given multiple headwinds of sharp rise in 2W prices; slowdown in the economy impacting wage hikes and employment levels; liquidity crunch in rural India caused by weak rabi realisations and uneven monsoons damaging kharif crop in FY20.
In the last fortnight of March 2020, the rapid spread of Covid-19 in India led to lockdowns and travel restrictions by the centre and select state authorities. As customer walk-ins at dealerships trickled to nil and 2W OEMs also shut down production in the last week of March, following the 21-day lockdown announced on March 24, 2020.
Given the rapid spread of the pandemic in India and overseas and possibility of further extension of these lockdowns, revival from the down-cycle is expected to be delayed by at least a few quarters.
Dewan further said: “While recovery remains elusive in the near-term, over the medium term, Icra continues to maintain a volume CAGR estimate of 6-8% for the two-wheelers segment, backed by positive structural factors like favourable demographic profile, growing middle class, low 2W penetration, improving financing availability, participation of women in workforce and rapid urbanisation. Additionally, the under-developed public transport system in the backdrop of increasing road network in the past few years has steered personal mobility requirement which also supports the demand for two-wheelers.”
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