Two wheelers segment expected to showcase healthy growth rate in FY2019 even as OEMs face challenges on account of stringent safety and emission norms, says Anupama Arora.
The two-wheeler volumes in domestic market grew at a healthy rate of 14.8 per cent Y-o-Y during FY2018 to reach 20.2 million units. The growth rate in two wheeler domestic volumes in FY2018 is highest since FY2011, with multiple factors influencing the growth trends as the year progressed. The highlight of the growth during the current year was a robust demand in the scooters segment that outpaced the industry growth and also a strong recovery in rural demand, which reflected in a pick-up in motorcycle volumes, especially at the entry level.
The year was characterised by periodic swings in growth rate caused by a confluence of factors, eg, channel filling by OEMs during April 2017 (post BS IV) and July 2017 (post GST rollout), pre-festive season dealer stocking during August-September 2017. During the latter half of the fiscal, the growth gained pace, supported by strong double-digit growth during November 2017-February 2018 partly driven by low base of previous fiscal and partially benefitting from positive demand sentiments, especially from the rural market. During FY2018, the two major products segments of scooters and motorcycles contributed to growth, expanding by healthy double-digits over the corresponding previous.
Scooter segment driving the market
Scooters reported positive demand trends throughout the year with 19.9 per cent growth in volumes during FY2018, continuing to outpace the industry growth and gain share in the overall domestic two-wheeler mix. The growth has been derived majorly from urban areas while rural and semi-urban areas have also witnessed increased acceptance of scooters with improved road quality, unisex appeal as well as growing women participation in work force.
Overall, during the last decade, the share of scooters in the total two wheeler sales in India increased from 15 per cent in FY2009 to 33 per cent in FY2018 with the scooter volumes growing at a CAGR of 21.7 per cent between FY2009 and FY2018. Scooters have witnessed increased acceptance following narrowing gap in fuel efficiency with motorcycles following technical advancements, besides OEMs initiatives towards light weighting has increased the attractiveness of this product segment in a price sensitive market like India. Moreover, attributes like continuously variable transmission (CVT) has removed the hassles of gear changing and increased the ease of driving and alloy wheels have brought in aesthetic appeal. In addition to these, the scooterisation trend has also been aided by growing participation of women in the work force, higher urbanisation levels and improved road conditions along with targeted marketing campaigns and regular launch of newer models by OEMs.
Given the meaningful size of scooters segment (6.7 million units in FY2018) and continuing strong growth streak, the OEMs have launched products targeting different customer segments. Continuing this trend, in the last few months there has been increased activity on the higher end of 90-125 cc sub-segment of scooters with various OEMs launching new 125cc models. These new models are aimed at customers who are looking for a more powerful and feature rich scooter and demand is expected mostly from urban areas.
Motorcycles report a double digit growth in FY2018
For the motorcycle segment that had witnessed stable to muted volume growth during FY2013-2017, FY2018 turned out to be year characterised by secular growth across most sub segments with overall domestic sales growing by 13.7 per cent Y-o-Y during FY2018, a double-digit growth for the segment after a hiatus of five years. The growth has been driven notably by the 75-110 cc sub-segment supported by general improvement in rural demand sentiment on the back of near normal monsoon in the last two fiscals.
Except for the 125-150 cc sub-segment, that witnessed some demand transition to 150- 200 cc driven by new products/ variants by major OEMs with engines displacement of approximately 160cc segment offering higher power, all other sub-segments reported growth during FY2018. Moreover, the higher displacement premium motorcycles continue to expand their share in the domestic motorcycle pie and accounted for 7 per cent of the total volumes in FY2018 from mere 2 per cent in FY2014. This trend is expected to continue with the premiumisation being driven by improvement in disposable incomes.
Mopeds segment remains marginal
Even though the two major segments of the two-wheeler industry grew handsomely, the volumes of mopeds contracted by 3.5 per cent during FY2018. This is a single product segment and with shift of consumer demand towards lower displacement motorcycles that witnessed various refreshes, this segment suffered during the last fiscal.
Two wheelers to continue healthy growth in FY2019
Overall for FY2018 the two-wheeler volume growth for domestic market surpassed ICRA’s expectations, riding on demand recovery from rural households and healthy urban demand. The demand recovery from rural households drew strength from improved farm sentiments as well as cash flows following two seasons of near normal monsoons and resultant healthy crop output. This optimism exhibited by farm community is being complemented by the Government’s increased focused on financial inclusion, increased budgetary support towards investments in infrastructure, especially irrigation, roads as well as housing and their ripple effects on employment generation.
Moreover, Government’s vision to double farmer’s income by 2022 bode well for the sentiments supported by expectations of higher Government expenditure in FY2019 in the backdrop of this fiscal being the election year. In the near term, consumption demand from rural sector is also driving support from an expectation of normal monsoon precipitation as indicated by weather forecasting agencies, even as spatial distribution can create disparity in demand trends. Moreover, pay revision by 3-9 state governments should support urban demand.
Even though in the near-term demand drivers remain strong, the OEMs continue to face challenges from commodity price inflation as well as tightening safety and emission norms that have significant cost implications. While BSIV implementation brought about smaller cost impact per vehicle, the introduction of anti-lock brakes in new models with engine capacity >125 cc from April 1, 2018 (and CBS on new vehicles with engine capacity <125 cc) may also result in new launches at a higher price. Moreover, with these norms being introduced to all existing vehicles too from April 1, 2019, the prices of vehicles falling under the category of > 125 cc are expected to rise given their volumes being merely 7.1 per cent of total domestic two-wheeler sales and thus, limited benefits on account of scale economies.
Moreover, implementation of BSVI emission norms from April 1, 2020 would require optimisation of combustion process and change in engine mechanism to electronic fuel injection system as well as changes in exhaust system. These changes in safety and emission compliance and ongoing inflation in commodity prices would increase vehicle costs. The OEMs may face challenges in passing on the entire cost increases, leading to margin pressures over the next two fiscals.
Over the medium term, the two wheeler industry is expected to report a volume CAGR of 8-9 per cent with demand expected to be driven by structural factors like favourable demographic profile, growing middle class, increased participation of women in workforce and growing urbanisation. Over the medium term, ICRA also expects the increasing penetration of organised finance into tier 2/3 cities as well as rural centres. Additionally, the under developed public transport system, in the backdrop of increasing road network in the past few years has steered personal mobility requirement, supporting the demand for two wheelers. Notwithstanding the demand drivers in domestic market, the large opportunity in overseas markets of Africa, South Asia and Latin America also offer avenues for growth to two-wheeler industry.
About the author:Anupama Arora is the VP, Sector Head - Corporate Ratings of ICRA Limited.