The two-wheeler industry (2W) is likely to witness another year of demand contraction with unit sales likely to decline between 11-13% to around 18 million units in FY2021 following the adverse impact of the Covid-19 outbreak on economic growth and discretionary spending. As per ICRA note, 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. 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.
Elaborating further, Mr. Shamsher Dewan, Vice President, ICRA says, “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 re-calling 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 characterized 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.”
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 FY2021. With weak retail offtake and the inventory build-up at the dealerships since H2FY2019, the 2W OEMs had resorted to production cuts and sharp reductions in wholesale dispatches in FY2020 in order to rationalize inventory in the system. This resulted in a 16% Y-o-Y contraction in domestic wholesale dispatches during 11m FY2020. In addition, the underlying demand sentiment in the industry also remained weak, given multiple headwinds of – a) sharp rise in 2W prices; b) slowdown in the economy impacting wage hikes and employment levels and; c) liquidity crunch in rural India caused by weak rabi realizations and uneven monsoons damaging Kharif crop in FY2020.
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.
States Mr. Dewan, “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 urbanization. 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.”
