Subdued wages, low crop realisations choke sales
The pangs of slowdown in India’s rural economy — the key growth driver of domestic consuption — are the sharpest for two-wheleler makers who are facing dwindling sales.
Most of the country’s motorcycle manufacturers depend on the rural market to drive sales, but FY15 has been tepid for small towns and cities, leading to pressure on the top line.
India’s largest two-wheeler manufacturer, Hero MotoCorp, saw a 4% year-on-year sales decline in February. The Gurgaon-based company sells half its products in rural areas. In FY15, till February, Hero MotoCorp sales had fallen 15.1 % to 4,84,769 units.
Over the same period, Pune-based Bajaj Auto posted a 27.88% decline in sales to 2,16,077 units.
Honda Motorcycles India has seen sales drop 14.13% between October 2014 and February 2015. Prior data for Honda Motorcycles are not available in publilc domain.
“Around 25-30% of Honda’s motorcycle sales used to come from rural markets. That has taken a hit,” said a Mumbai-based auto analyst with a foreign brokerage. He declined to be identified as he is not authorised to speak to the media.
For Bajaj, its Discover series used to drive 45-50% of total sales. The Discover’s contribution to Bajaj’s overall volumes has come down by half though the Pulsar series has been performing relatively well.
“For the industry to pull back, the rural market has to improve. There are pockets that have been impacted more. In markets such as Bihar, Madhya Pradesh, and particularly in sugarcane growing areas of Uttar Pradesh and Maharashtra, the impact has been more than other rural markets”, a Hero MotoCorp spokesperson said in a email.
Hero MotoCorp has seen double-digit sales growth in other rural areas, such as those in West Bengal, Orissa, Karnataka, Uttarakhand and some parts of Uttar Pradesh. With the onset of the wedding season in April, rural sales are expected to pick up, the spokesperson added.
“Subdued rural wage growth and lower or delayed realisations on Rabi crops have weighed on consumer sentiment in rural regions,” an Axis Capital report issued in February said.
“Furthermore, deficit rainfall (in north and central India) and consequent crop damage have negatively impacted rural demand. This primarily impacts two-wheeler demand given the higher volume shares from rural markets.”
The auto analyst mentioned above said the negligible increase in the minimum support price for sugarcane farmers in Uttar Pradesh, Maharashtra and Madhya Pradesh resulted in a decrease in disposable income, which led to a fall in demand for motorcycles.
Ajay Srinivasan, head of research at Crisil India, says the minimum support price for farmers has risen by 5-6% this year, compared to 10-15% in the past.
“For rural demand to pick up, normal and well distributed monsoons will be critical and government push for infrastructure spending will push up wages, which is instrumental for increase in demand for vehicles”, explained Srinivasan.
Analysts say that rural wages in India grew 15-20% each year over the last four years, but in the last one year wage growth has been reduced to single digit.