Challenges likely to get aggravated as consumer spending will be severely impacted by Covid-19 outbreak; operating margins of 2W OEMs to contract by 200-250 bps to 11.5-12% from 14 percent.
07 Apr 2020 | 26547 Views | By Shahkar Abidi
India’s two-wheeler industry (2W) 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.
As per an ICRA industry report, the ...
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India’s two-wheeler industry (2W) 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.
As per an ICRA industry report, the extent of the slowdown remains contingent on the severity of the coronavirus outbreak and thus continuation of lockdowns. Even prior to the outbreak, the demand for two-wheelers was expected to be flat in India amid a sharp rise in vehicle prices following the transition to BS-VI emission norms and subdued macro-economic scenario.
The challenges for industry 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. “There is a likelihood of downtrading by consumers as well once the economy starts to cripple back to normalcy. On the export front, while any long-term predictions are difficult, COVID-19 fallout and volatility in crude oil prices would be a near term negative,” ICRA said in its report.
According to Shamsher Dewan, vice-president, ICRA, “Besides lower sales, pressure on earnings will also arise due to costs involved in recalling 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”.
Past imperfect, future tense
FY2020 was all about inventory correction in the domestic two-wheeler (2W) industry as OEMs tried to counter the subdued demand before the transition to the new emission norms in FY2021. With weak retail off-take and the inventory build-up at the dealerships since H2 FY2019, most two-wheeler OEMs had resorted to production cuts and sharp reductions in wholesale dispatches in FY2020 in order to rationalise inventory in the system.
This resulted in a 16% YoY contraction in domestic wholesale despatches during the first 11 months of FY2020. In addition, the underlying demand sentiment in the industry also remained weak, given multiple headwinds including sharp rise in motorcycle and scooter price, slowdown in the economy, liquidity crunch, stringent safety regulations among others.
In the last fortnight of March 2020, the rapid spread of COVID-19 in India led to lockdowns and travel restrictions by the Centre and select State authorities. Customer walk-ins at dealerships trickled to nil and OEMs also shut down production in the last week of March, following the 21-day lockdown announced on March 24. Given the rapid spread of the pandemic, in India and overseas, and possibility of further extension of these lockdowns, revival from the down-cycle is expected to be delayed by at least a few quarters.