The two-wheeler industry is likely to witness another year of demand contraction with unit sales likely to decline between 11-13 per cent to around 18 million units in FY2021 due to the the Covid-19 outbreak’s impact on economic growth and discretionary spending, according to ICRA.

Even prior to the disease outbreak, domestic demand for two-wheelers was expected to be flat amid a sharp rise in vehicle prices following the transition to BS-VI emission norms (resulting in 10-12 per cent inflation) and the subdued macro-economic scenario, the credit rating agency said on Monday. “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 the urban and rural markets,” said ICRA.

Also read: Two-wheeler makers’ huge BS-IV inventory will not go away post lockdown

There is also a likelihood of downtrading by consumers once the economy starts to crawl back to normalcy, noted ICRA.

The extent of the slowdown remains contingent on the severity of the coronavirus outbreak and the continuation of lockdowns, it added.

On the export front, while any long-term predictions are difficult, the Covid-19 fallout and volatility in crude oil prices would be a near-term negative, it said.

“We expect two-wheeler OEMs to brace for another year of lower earnings and decline in operating margins, to 11.5-12 per cent from around 14 per cent 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,” said Shamsher Dewan, Vice-President, ICRA.

Further, during periods of stress, OEMs will also have to extend credit support to its dealers, thus, leading to a potential increase in working capital intensity, he said.

Given the rapid spread of the pandemic, in India and overseas, and the possibility of a further extension of these lockdowns, revival from the down-cycle is expected to be delayed by at least a few quarters, said ICRA.

“While recovery remains elusive in the near-term, over the medium term, ICRA continues to maintain a volume CAGR estimate of 6-8 per cent for the two-wheeler segment, backed by positive structural factors such as a favourable demographic profile, a growing middle-class, low two-wheeler penetration, improving financing availability, participation of women in the workforce and rapid urbanisation. Additionally, the under-developed public transport system, in the backdrop of an increasing road network in the past few years, has steered the personal mobility requirement, which also supports the demand for two-wheelers,” said Dewan.

Also read: Two-wheeler sales continue to skid amid Covid-19 pandemic

 

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