Ratings agency ICRA has revised its earlier estimates for the two-wheeler industry sales, and expects a likely decline between 16-18 percent (as against 11-13% earlier) to around 17 million units in FY2021. The revised estimates is on the back of overall macro-economic scenario, the Covid-19 demand-supply disruptions, looming income uncertainties and increased cost of ownership of BS-VI vehicles.
Accordingly, ICRA expects two-wheeler OEMs to brace for another year of lower earnings and decline in average operating margins by 150-200 bps to 11.5-12 percent. The company says notwithstanding the same, price escalations and depreciating rupee coupled with continuous cost rationalisation initiatives, would provide some support. In addition, the aggregate capacity utilisation levels for the industry sample is expected to decline to 55-60 percent from around 70 percent.
However, despite moderation, the two-wheeler OEMs will continue to have strong credit profiles characterised by healthy ROCE (average ranging between 18-20 percent) and comfortable balance sheets with negligible debt and strong cash & liquid investments. On the other hand, any major expansion plans are expected to be deferred till the demand recovers sufficiently, it is expected that the unprecedented slowdown, Covid-19 pandemic and lockdowns have interrupted the pace of overall economic recovery and has led ICRA to revise its forecast for GDP contraction in FY2021 to 9.5 percent Y-o-Y from the earlier estimated 5 percent.
Notwithstanding the overall muted macro-economic sentiments, on the positive side, the rural economy offers some growth off-shoots in the form of healthy rabi output and lower Covid-19 impact. Higher farm income has led to sequential pick-up in two-wheeler demand in June and July 2020. After a timely onset, monsoon progress remains healthy across most regions. Benefitting from favourable moisture conditions and seasonally high reservoir levels, kharif sowing has been progressing well (up ~19% till July 24, 2020). These factors coupled with government’s various agri-focused initiatives, are expected to support farm cash flows and two-wheeler demand.
ICRA says in the urban markets, which have been more severely impacted by the pandemic, a preference towards personal mobility could push near-term two-wheeler demand. However, these would only help to partially offset the adverse impact of the pandemic. Given the expectation of sharp decline 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.
On the export front, the rating agency says while long-term drivers remain favourable, Covid-19 fallout and volatility in crude oil prices (as it impacts demand in key markets) remain a near term negative. Nonetheless, an attractive product portfolio and continued focus of Indian 2W OEMs on building and expanding overseas sales and after sales networks (replacement market) provides potential for growth in the medium term.
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