Coronavirus Crisis: Two-Wheeler Sales Volumes Likely to Drop 11-13 Per Cent in FY2021, Says ICRA Study

The Indian two-wheeler industry was having a tough time even before the Coronavirus Pandemic set in and with the coming of the COVID-19 crisis; the situation is looking even bleaker. ICRA, an investment information and credit rating agency, says that the Indian two-wheeler market could see drop in total sales by up to 13 per cent in the current financial year. The demand for two-wheelers will contract and so will the sales, to somewhere around 18 million units, says an ICRA study. The final numbers for FY20 aren’t out yet. The Coronavirus outbreak and the market sentiment prevailing before that had led to discretionary spending and of course, a massive spanner in the working of the auto industry.

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 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. 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.”

The economic slowdown before the COVID-19 outbreak hit along with a general price rise for two-wheelers thanks to BS6 emission regulations has thrown the industry into a disarray. In terms of exports too, ICRA predicts a negative sentiment as the fallout of the Coronavirus pandemic is global and the volatility in the prices of crude oil could be understood as a near term negative.

Shamsher Dewan further added, “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-wheelers segment, backed by positive structural factors like favourable demographic profile, growing middle class, low 2W penetration, improving financing availability, participation of women in workforce and rapid urbanization. Additionally, the under-developed public transport system, in the backdrop of increasing road network in the past few years, has steered personal mobility requirement which also supports the demand for two-wheelers.”

The study further says that FY2020 was basically a year which was all about inventory corrections. The demand was subdued and with the country moving to BS6 emission norms, two-wheeler companies were forced to cut down on production, reduce wholesale dispatches and offer discounts on BS4 stock in order to sell them off completely. These factors resulted in a 16 per cent dip in domestic wholesale dispatches in February 2020.

Source: ICRA

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