Two-wheeler volume is seen dropping 8-10% this fiscal under the impact of a number of inclement factors, including sluggish rural demand, low festive-season sales, higher prices, and deferred purchases as consumers eye electric vehicles (EVs).

The decline in volume¹ is expected on an already-low base after two consecutive years of decline, at 13% in fiscal 2021 and 18% in fiscal 2020 (see chart in annexure). This is also the first time in over a decade, where two-wheeler sales are declining for three successive fiscals.

Credit profiles of two-wheeler makers, however, will remain healthy, given large cash surpluses and strong balance sheets. A CRISIL Ratings study of three manufacturers, which account for ~70% of the sales volume of the sector, indicates as much.

Segment-wise, motorcycle volume, which account for two-third of overall two-wheeler volumes, will see a drop of about 8-9% this fiscal. As such, 65-70% of these motorcycles are sold in rural areas, whereas scooter is a predominantly urban product.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “The second, third covid waves and delayed harvest impacted rural demand for two wheelers this fiscal. Besides higher vehicle and fuel prices also affected rural demand this fiscal, unlike last fiscal, when rural India was less impacted by the first covid wave. Consequently, sales of rural-focused economy motorcycles (~52% to two-wheeler sales), are expected to fall 5-6% this fiscal.”

Sales of executive motorcycles are expected to fall ~20% on account of weak festive-season demand (see October and November registrations in annexure). On the other hand, sales of premium motorcycles, where pricing is not a major issue, will decline by 7-8% due to supply side constraint of semi-conductors. Scooter sales will fall 10-11% on an already low base due to downtrading to electric scooters (including low speed), marking the fourth consecutive year of volume decline.

Meanwhile, the domestic two-wheeler industry has taken three price hikes so far this fiscal, resulting in 6-7% higher prices in current fiscal, adding to the 10-15% increase seen last fiscal (because of BS-VI norms). This sharp increase in prices have delayed recovery in two wheelers sales during current fiscal, any incremental hike may delay recovery in sales further.

While internal combustion engine or ICE two-wheeler sales continue to be impacted as explained, sale of electric two-wheelers on the other hand, is seeing robust demand, although on a small base. Sales of electric two-wheelers is expected to gradually dent sales of ICE scooters to a larger extent over next two fiscals before penetrating the motorcycle segment. Having said that, overall share of electric two-wheelers is unlikely to exceed 5% over the next couple of fiscals.

Says Gautam Shahi, Director, CRISIL Ratings, “Three consecutive years of decline will take two-wheeler sale volumes back to the fiscal 2014 level and it may take 3-4 years to reclaim the peak sales volume of 2.11 crore seen in 2019. That said, volume growth is expected to be better at 6-8% next fiscal, on a low base, due to moderate recovery in rural incomes, new product launches, normalisation of chip availability, and sharper focus of manufacturers on premiumisation.”

Despite the three price hikes, operating margin is expected to contract by up to 200 basis points (bps) to ~13% this fiscal, driven by sharp increase in steel and aluminium prices, which account for more than half of the total material cost. The margins are projected to improve ~100 bps next fiscal, likely aided by expected softening of raw material costs and improvement in sales.

Credit profiles will continue to remain strong, with limited debt on the balance sheet of major players and robust liquidity of over Rs. 15,000 crores. Investments in e-mobility are expected to rise through the organic and inorganic routes, and are likely to be funded from internal accruals.

That said, the spread of Covid-19 infections in the hinterland, future covid waves and consumer behaviour around personal mobility will bear watching.

¹ Compared to earlier estimate of growth of 10-12% this fiscal as per press release dated July 16, 2021