Bittersweet times for two-wheeler makers

India’s two-wheeler industry is seeing some light at the end of the tunnel. But it is too soon to celebrate. After suffering the worst possible economic downturns in years, the industry registered double-digit growth in FY23, although on an abnormally low base. Some green shoots in terms of robust production cycles were visible at best in patches and can be well-spread only when the sales show similar correlation across the country.

The country’s two-wheeler sales are have shown a growth of 17 percent growth in FY23 that translates to roughly 15.8 million units as compared to 13.57 million units sold in the previous year.

Industry leaders opine that the general sentiment amongst the prospective two-wheeler buyers is gradually turning positive, and the quality of economic growth has started translating to the bottom end of the pyramid, which is reflecting in the demand curve.

To get a better perspective of the situation on ground, Autocar Professional spoke industry players and sector experts. The production schedule for FY24 shows a double-digit growth in output, indicating there is confidence in this growth sustaining, despite signs of economic slowdown flagged off by the World Bank and Asian Development Bank. However, the sales volume growth for the two-wheeler industry in the current fiscal year will remain lower than the pre-pandemic level and is expected to be in the range of 5-10 percent.

Honda Motorcycle and Scooter India (HMSI), the country's second largest two-wheeler maker, is confident of posting double digit growth in FY24, led by a series of new products, including its new Shine 100 cc model, which will bring in incremental sales.

"The normalcy in demand is returning, and even the rural markets are showing signs of recovery, with the introduction of the new 100 cc motorcycle, it expects to bring in incremental volumes," Atsushi Ogata, outgoing Managing Director, President and CEO, HMSI told Autocar Professional last month.

Interestingly, there’s a clearcut preference from the market when it comes to cubic capacity. Rakesh Sharma, Executive Director (ED) of Bajaj Auto says the growth in the last two quarters was positive, and the company expects the gentle tailwind of economic growth to help sustain this demand momentum this year as well. “In the last two quarters, retail sales grew by five to eight percent, while the entry segment grew by one or two percent. The 125 cc and above motorcycle segment grew in double digits,” Sharma explained.

He also highlighted that the impact of GDP growth has started reaching pockets of the lower income group, which accounts for 60-70 percent of two-wheeler buyers. “Their purchasing power is improving, there is a fair bit of confidence amongst them about the sustainability of future income streams, which is helping the market,” he added.

Many industry experts, however, opine that the future of the sector is still in flux, as it not only needs to weather inflation but also combat the slowdown in rural and export markets.

Looking at the current economic conditions and projections of a below normal monsoon this year, brokerage firms opine that it will be too early to cheer for recovery. “The recovery in demand would be impacted by increasing vehicle ownership cost (vehicle price hike + interest rates) along with inflationary pressure impacting the surplus income and a likely global recessionary trend denting exports,” Arti Roy of CareEdge Ratings said.

Segment-wise, motorcycle sales are estimated to grow by four or five percent, while scooter sales are expected to grow by four to six percent in FY24. The electric two-wheeler volume sale is expected to surpass 1.5 million in FY24, post reporting substantial growth of 210 percent in FY23 at 7.18 lakh driven by new launches and strong demand.

Another credit rating agency, CRISIL sees around 8-10 percent growth for two-wheelers in FY24. Within the motorcycle segment, the executive and premium segments should continue to perform better than the entry level segment. Demand for mopeds, which account for about four percent of domestic two-wheeler sales, is expected to remain sluggish with a shift in consumer preference towards other vehicle segments, the agency added.

Rural markets are fragile
Rural demand, which accounts for 65 to 70 percent of the total ICE two-wheeler demand, has been under pressure for the past two years, particularly in the entry-level 100-110 cc motorcycle market. Domestic entry level motorcycle sales, the demand for which is primarily rural driven, account for 45-50 percent of total domestic motorcycle volumes.

The decline in rural sales has been impacting overall two-wheeler sales due to a lethal cocktail of various factors such as the transition to Bharat Stage VI emissions, commodity inflation, higher fuel prices, and insurance costs.

Underscoring the impact of inflationary pressure, FADA President Manish Raj Singhania said, "Rural India, which still has not performed, continues to remain under pressure due to a spike in inflation eating into the consumption of the rural consumer. In addition, prices of entry level motorcycles have also risen due to commodity induced inflation price hikes, impacting affordability."

According to Arti Roy, Associate Director, CareEdge Ratings, headwinds like rising interest rates and concerns of lower crop yields resulting from an uneven monsoon only stand to worsen the rural sentiment. “The indication of lower agricultural output affected by El Nino will emerge as major headwinds hitting rural income, which will result in a squeeze on demand in FY23-24,” she added. 

Besides, with the introduction of new regulatory norms like OBD 2, the two-wheeler prices are expected to increase further. “During the past four years, prices have risen by around 25-30 percent especially for motorcycles which has impacted the sales of entry-level motorcycles in rural areas. Moreover, further price hikes of five to seven percent by the OEMs in the current year and increasing lending rates would dent the rural demand,” Roy highlighted.

 Scooters, on the other hand, are estimated to grow at a faster pace than motorcycles. This is because scooter demand is more urban centric, said Anuj Sethi, Senior Director, CRISIL Ratings.

“Re-opening of offices and educational institutions, increased preference for personal vehicles, higher urban incomes, as well as wider availability of new models in the 125cc segment have helped consumer demand,” he added.  Another trend is that within scooters, the share of EV scooters is gradually rising, as the final cost of ownership is expected to be similar when compared with non-electric models. 

Faltering exports
Prime two-wheeler manufacturers like Bajaj Auto, Hero MotoCorp and TVS Motor are also watching global headlines closely in the year ahead, as macroeconomic and political uncertainties continue  to obstruct business operations and escalate reputational risk. This global economic gloom has increasingly undercut consumer demand over the past two quarters, pushing buyers in the region to curtail spending. During the period April 2022-February 2023, India, one of the world's leading two-wheeler exporters, witnessed a drop of over 16 percent year-on-year to 34.06 lakh units. According to Rakesh Sharma, Executive Director (ED) of Bajaj Auto, devaluation driven by price increases and erosion of purchasing power due to across-the-board inflation in emerging markets has impaired demand. “Exports continue to face strong headwinds due to the difficult macroeconomic environment in most emerging markets. We estimate that it will take perhaps until May or June for normalcy to start returning, first in Latin America, followed by Africa. And thereafter, we can start to rebuild the stocks and address high demands,” he said during a February quarterly call.

He also highlighted that the availability of the US dollar for trading and the cautionary stand taken  by most central banks to convert foreign exchange continue to make operations quite difficult. Notably, exports comprise almost 50 percent of the two-wheeler and three-wheeler sales of Bajaj Auto, which exports to over 90 countries. 

The inflationary trend in Africa is also affecting Chennai-based TVS Motor's overseas business and presents a difficult outlook ahead. The company also highlighted that the war in Ukraine and the depreciation of the local currency are also affecting disposable income.

Looking forward to exports, while the OEMs see retail sales improving as customers digest new prices, they are sanguine about the availability of foreign exchange, particularly in South Asia and Africa.