Two-wheeler volumes likely to contract by 11-13% in FY21 due to Covid-19: Icra

Ratings agency Icra on Monday said two-wheeler volumes are expected to contract by 11-13% in FY2021 due to the coronavirus pandemic.

The challenges are likely to get aggravated as consumer spending will be severely impacted by the outbreak resulting in lower spending power both in urban and rural markets, Icra said in a statement.

The extent of slowdown remains contingent on the severity of the coronavirus outbreak and thus continuation of lockdowns. Even prior to the disease outbreak, the demand for two-wheelers was expected to be flat in India amid sharp rise in vehicle prices following the transition to BS 6 emission norms (resulting in 10-12% inflation) and subdued macro-economic scenario, it said.

Giving an estimate, the ratings agency said, "The two-wheeler industry is likely to witness another year of demand contraction with unit sales likely to decline between 11-13% to around 18 million units in FY2021 following the adverse impact of the Covid-19 outbreak on economic growth and discretionary spending."

Icra Vice President Shamsher Dewan said on earnings front too, two-wheeler original equipment manufacturers (OEMs) are expected to brace for another year of lower earnings and decline in operating margins, to 11.5-12 per cent from around 14% in the previous year.

"Besides lower sales, pressure on earnings will also arise due to costs involved in re-calling BS 4 inventory from dealers which is likely to remain unsold due to shutdowns," he said.

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, he added.

"Nonetheless, the credit profile of two-wheeler OEMs is characterised by strong balance sheet with negligible debt and healthy cash and 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," Dewan said.

Icra said given the rapid spread of the pandemic, in India and overseas, and possibility of further extension of lockdowns, revival from the down-cycle is expected to be delayed by at least a few quarters.

"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 two-wheeler penetration, improving financing availability, participation of women in workforce and rapid urbanisation," Dewan said.

Additionally, he said 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.