Indian two-wheeler industry to face one more year of demand contraction

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CHENNAI: The two-wheeler industry 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.

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 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 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.”

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