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Automotive Product Finder Magazine | Sub-segment motorcycles dominating 2-wheeler industry
Sub-segment motorcycles dominating 2-wheeler industry
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The two-wheeler industry volume growth might register a 3-5 per cent expansion in FY2020 with the subdued consumer sentiments continuing to weigh on demand in H1FY2020. On the exports front, the growth rate is likely to moderate from FY2019 levels but is expected to remain healthy. Over the medium to long term, the 2W industry is expected to report a volume CAGR of 6-8 per cent, writes Neellohit Banerjee.
The two-wheeler domestic market grew by 4.9 per cent YoY during FY2019 as against 14.9 per cent growth reported during FY2018 over the previous fiscal. This can be a result of meek consumer sentiments especially after the increase in insurance premiums and interest rates. Moreover, weaker realisations for kharif crops as well as lower rabi output has also resulted in moderation in sentiments for rural buyers too, especially in the last two quarters of FY2019. This was completely opposed to FY2018, wherein the industry had benefitted from favourable rural demand on the back of two seasons of normal monsoon, as well as reduced base of FY2017.
Considering exports volumes that reported healthy 16.5 per cent growth, the two-wheeler industry (domestic and exports) volume growth stood at 6.3 per cent in FY2019 over the previous fiscal. “Exports grew steadily with a YoY growth of ~17 per cent recorded in FY19. The overall industry performance was subdued compared to the previous fiscal,” informs Kavan Mukhtyar, Partner & Leader – Automotive, PwC India.
Segments which shined
The motorcycles segment recorded highest sub segment growth at ~8 per cent. New launches (RE and Suzuki Motorcycles) saw the >500 CC category gaining some traction but volume growth was driven by 75-110CC (+13 per cent) and 125-150 CC (+23 per cent) segments. FY19 also saw a pause in the rapid purchase of scooters witnessed in the past years, but the segment is ripe and has potential to grow further with e-2Ws coming in, increasing women riders and India’s rising millennial rider population.
During FY2019, motorcycles stood as the best performing segment expanding by 7.8 per cent YoY while scooter (the fastest growing segment in the recent few years till FY2018) reported flat volumes. “The motorcycle segment growth was driven by the entry level sub-segment (75-110cc) which accounts for ~62 per cent of segmental volumes. The 75-110cc sub-segment ended FY2019 with YoY growth of 13 per cent, fueled by aggressive pricing by select OEMs, new model launches and upbeat rural demand during the initial part of the fiscal,” says Anupama Arora, Vice President & Sector Head – Corporate Ratings, ICRA Ltd.
The entry level sub-segment also benefitted from consumers preferring entry-level motorcycles as they offer a better price proposition given its better fuel economy as well as significant differential in acquisition price (especially following price reduction by select OEMs) as against scooters.
“Apart from this, the 125-150cc sub-segment also reported 25 per cent YoY growth during FY2019, fueled by regular new launches and model refreshes besides some consumers downtrading from higher segments (above 150cc segment), following weaker income growth/ outlook. Overall, with increasing fuel prices in FY2018 as well as aggressive pricing from select OEMs tilted the demand towards motorcycles (have better fuel economy), coupled with higher demand from rural areas in the initial part of the fiscal, aided motorcycle segment growth,” Arora adds.
The volumes in the >150cc sub segment motorcycles declined marginally in FY2019 over the previous year. “The entire motorcycle segment >150cc showed a minor de-growth. (YoY 0.8%) in FY19. “Premiumisation is a definite theme for profitable growth and hence new players have entered India (Benelli, India). But, primarily India continues to be a value-driven 2W market,” reveals Mukhtyar.
Arora is of the view, “While the weak income growth and increased finance costs as well as overall acquisition costs (insurance cost increases, safety norms related cost increases) adversely impacted demand in general, there were certain geography specific factors (for instance, demand moderated from markets like Kerala) that weighed on demand. Moreover, the segment also witnessed some consumers downtrading to the 125-150cc sub-segment that witnessed new model launches as well as aggressive pricing by select OEMs.”
Assessing BS VI’s impact
With proposed implementation of BS VI from April 1, 2020, the OEMs are likely to launch the BS VI variants of their products by Q3-Q4 of FY2020. The BS VI version of the products are likely to be costlier than the outgoing BS IV versions, but the actual price hike remains to be seen as that remains contingent on demand conditions and cost considerations. “However, given significant changes to engine, price increase in BS VI models is inevitable; thus, there is likely to be some pre-buying during the last few months of FY2020. However, this could moderate the demand growth in FY2021 to an extent,” believes Arora.
According to Mukhtyar, BS VI compliance will necessitate upgradation of some key components along with development of newer technologies; vehicle prices are expected to increase by around 10 per cent (across segments). Pre buying and focus on inventory liquidation in FY 20 would result in modest growth of 2W sales in FY20. “We may also see a revival in e-scooter sales in FY20,” Mukhtyar adds.
What lies ahead for OEMs
According to Arora, the two-wheeler demand in FY2019 was adversely impacted by multiple geography specific events as well as other factors like insurance price hikes, liquidity tightness for financiers (that impacted the interest rates) besides higher acquisition cost (raw material price increase as well as increase on account of implementation of safety norms – ABS/CBS). “Furthermore, rural demand also moderated in the second half of FY2019 following weakening farm profitability and continues to remain modest. After a bumper Kharif season led to lower crop realisations due to demand-supply mismatch, coupled with lower Rabi sowing adversely impacted rural demand,” she reveals. Muted consumer sentiments continue to adversely weigh on two wheeler demand and the recovery is expected only in H2FY2020.
“High input and material costs, rising fuel prices, higher insurance costs & interest rates and uncertainties around the policy environment – these are definitely challenges that OEMs would target to address in different ways,” believes Mukhtyar. Apart from this, increasing costs (ABS/CBS, RM, transition to BSVI emission norms) and limited ability to hike prices in the backdrop of moderating demand, poses a challenge for the OEMs to maintain their margins.
ICRA expects the two-wheeler industry volume growth to register a 3-5 per cent expansion in FY2020 with the subdued consumer sentiments continuing to weigh on demand in H1FY2020. The increased ownership cost following rise in acquisition cost (safety norms tightening as well as raw material price increases), amidst muted rural and urban consumer sentiments, will likely impact the purchasing decision of the consumer. “The growth is expected to recover in H2FY2020 as expectation of normal monsoon may result in improvement in rural sentiments and anticipation of higher prices for BSVI variants may aid pre-buying in Q4 FY2020. On the exports front, the growth rate is likely to moderate from FY2019 levels but is expected to remain healthy,” says Arora.
The modest growth in the 2W industry would probably continue in FY20 as well. “Rural demand would be moderate with a below normal monsoon expected. However, financing has eased out (when compared to last two quarters) and a likely rise in disposable income of middle class (tax rebate in interim budget) would act as growth catalyst. Overall, two-wheeler sales are expected to grow by 5-7 per cent during FY20,” predicts Mukhtyar.
“Over the medium to long term, the two wheeler industry is expected to report a volume CAGR of 6-8 per cent with positive structural factors like favourable demographic profile, growing middle class, increasing penetration, participation of women in workforce and rapid urbanisation,” says Arora. 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. In addition to the robust demand drivers in domestic market, improving quality, safety standards and under-penetrated and/or untapped overseas markets also provide another growth opportunity to the 2W OEMs
The 125-150cc sub-segment also reported 25 per cent YoY growth during FY2019, fueled by regular new launches and model refreshes besides some consumers downtrading from higher segments (above 150cc segment) following weaker income growth/outlook.”Anupama Arora, Vice President & Sector Head – Corporate Ratings, ICRA Ltd
Two Wheeler Industry
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