Following the covid-19 crisis, the two-wheeler industry is expected to see another tough year with demand further shrinking by up to 13% in FY2021, credit rating agency Icra Ltd said on Monday.
Icra said that as impact of the pandemic on the economic growth and discretionary spending, which was already under stress through the last fiscal, the two-wheeler demand is likely to further contract in the range of 11-13% year-on-year.
The two-wheeler industry, Icra estimates, will shrink to 18 million units in FY2021.
India’s two-wheeler industry had jumped to 20 million units in FY2018 from 17.5 million units in FY2017, growing at 15% YoY. This growth was precisely led by the urban demand (up 20% YoY) for scooters and rural demand (up 14% YoY) for the motorcycles.
However, the situation was grim in March 2020, which recorded a sharp drop of about 40% YoY amid the countrywide lockdown to contain the fast spreading covid-19 infections.
Sales data reported by the leading companies such as Hero MotoCorp Ltd, Honda Motorcycle & Scooter India Pvt Ltd (HMSI), TVS Motor Company Ltd, Bajaj Auto Ltd, Royal Enfield and Suzuki Motorcycle India Pvt Ltd, which together account for about 96% of the total domestic two-wheeler market, suggested that the two-wheeler segment may have recorded a YoY decline of more than 17% in FY2020.
The said six leading companies recorded cumulative domestic sales at 16.7 million units in FY20 as against 20.28 million units during the year-ago period.
The demand for two-wheelers for FY21 was earlier expected to remain flat due to the 10-12% price rise under BS VI emission norms from 1 April 2020 and subdued macro economic scenario, the Icra note had estimated prior to the covid-19 outbreak.
“The challenges for the industry are likely to get aggravated as consumer spending will be severely impacted by the outbreak resulting in lower spending power both in urban and rural markets,” Icra said.
According to Shamsher Dewan, vice president, Icra, the two-wheeler companies would see another year of lower earnings and decline in their respective operating margins to 11.5-12% from around 14% in the previous year.
“Pressure on earnings will arise due to costs involved in re-calling (unsold) BS IV inventory from dealers. Furthermore, during the period of stress, the OEMs will also have to extend credit support to its dealers thus leading to potential increase in working capital intensity,” Dewan said adding that the two-wheeler companies, however, have strong balance sheets with negligible debts.
The two-wheeler sales, also an indicator of an average individual’s purchasing power, would continue to see underlying headwinds such as economic slowdown impacting wage hikes and employment and liquidity crunch.
Icra said that given the rapid spread of the pandemic in India and overseas, and the possibility of further extension of the lockdowns, revival from the down-cycle could get delayed by at least a few quarters.