Two-wheeler volumes to contract by 16-18% in FY2021: ICRA

Nandana James Mumbai | Updated on August 06, 2020

A weak macroeconomic scenario and Covid-19 demand-supply disruptions are among factors that are likely to weigh on two-wheeler volumes.   -  M Moorthy

Rating agency lowers earlier estimate for a 11-13 per cent decline in volumes

The two-wheeler industry is likely to decline by 16-18 per cent - as against the earlier estimate of 11-13 per cent - to around 17 million units in FY2021, according to ICRA Ratings.

This is due to the overall weak macroeconomic scenario, the Covid-19 demand-supply disruptions, looming income uncertainties and the increased cost of ownership of BS-VI vehicles, it said in a statement on Thursday.

ICRA also expects two-wheeler OEMs to be privy to a decline in average operating margins by 150-200 bps to 11.5-12.0 per cent. “Notwithstanding the same, price escalations and a depreciating rupee, coupled with continuous cost rationalisation initiatives, would provide some support,” it noted.

The aggregate capacity utilisation levels for the industry sample is expected to decline to 55-60 per cent from around 70 per cent, it said. While any major expansion plans are expected to be deferred till demand recovers sufficiently, it is expected that OEMs will continue investing in new product development and network expansion, it said.

However, the rural economy offers some growth off-shoots in the form of a healthy rabi output and lower Covid-19 impact, it said. Higher farm income has led to a sequential pick-up in two-wheeler demand in June and July 2020, it added.

“After a timely onset, the progress of the monsoon remains healthy across most regions. Benefiting from favourable moisture conditions and seasonally high reservoir levels, kharif sowing has been progressing well (up ~19 per cent till July 24, 2020). These factors, coupled with the Government's agri-focused initiatives, are expected to support farm cash flows and two-wheeler demand,” said ICRA.

In the urban markets, which have been more severely impacted by the pandemic, a preference for personal mobility could push near-term two-wheeler demand, it said. “However, these would only help to partially offset the adverse impact of the pandemic. Given expectations for a sharp decline in India's GDP, lower job creation and income uncertainties, two-wheeler demand will most certainly remain adversely impacted. There is a likelihood of downtrading by consumers as well once the economy starts to cripple back to normalcy,” it explained.

The ratings agency expects the near-term demand environment to remain challenging, but continues to maintain a volume CAGR estimate of 6-8 per cent for the two-wheeler segment over the medium term.

Published on August 06, 2020

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