Credit ratings agency ICRA on Monday said that it expects domestic two-wheel (2W) volumes to contract by 1 per cent to 4 per cent year-on-year (YoY) in FY22, following a weak festive season performance for the industry. Furthermore, the agency also stated the contraction is also due to an impact of "relentless increase in 2W prices as well as record high petrol cost, among others."
The rural offtake has lagged urban, possibly due to moderated agri-sentiments caused by uneven monsoons and delayed harvesting across regions. In the urban markets, the delay in reopening of schools and colleges, weak income sentiments due to job losses or salary cuts (in the aftermath of the pandemic) and extended work-from-home policies by corporates, have impacted sales, according to ICRA.
Also, the sales of 8.05 million two-wheelers in the domestic market in April-October period of FY22 are flat on a YoY basis despite a severely contracted base, it further stated.
Additionally, the financiers have remained cautious, after witnessing an increase in delinquency levels.
While the demand for premium two-wheelers, which comprise around 15 per cent of the overall domestic volumes, has fared relatively better, the OEMs have faced supply constraints due to the ongoing global semi-conductor chip shortages, ICRA said, adding, overall, given the existing inventory at dealerships post-festive season (40-45 days), a high growth in wholesale dispatches in the remaining part of the fiscal is unlikely.
"The entry-segment (75-110cc), which dominates two-wheeler sales in India, has remained subdued this year, reflecting extensive (and extended) impact of the second wave of the pandemic. The lacklustre festive season performance also highlighted continued wariness among the low-income population regarding big-ticket purchases," said Rohan Kanwar Gupta, Vice President and Sector Head for Corporate Ratings at ICRA.
Income uncertainties, caused by job losses, salary cuts or limited increments, while facing COVID-19-related medical expenses (actual or anticipated) and skyrocketing cost of two-wheeler ownership, have led to purchase deferrals this festive season, he said.
"Given the muted sales, the inventory at dealerships is also relatively high, which could mean only a marginal, if any, traction in wholesale volumes in remaining FY22," added Gupta.
Noting that while the recent cut in petrol prices, the upcoming wedding season (typically lends itself to increase in two-wheeler purchase in rural markets) and opening up of labour-intensive industries like travel, tourism, and hospitality are favourable for demand recovery in the forthcoming months, the ratings agency said that a meaningful growth is likely to be seen only in the next fiscal.
"On the financial front, given the high operating leverage of the industry, subdued demand and elevated raw-material costs are expected to keep the operating margins constrained for the 2W OEMs in the current fiscal. However, these will likely be supported by price escalations and cost rationalisation initiatives," said Gupta.
The credit profile of two-wheeler OEMs would continue to remain healthy, supported by strong balance sheets with high net worth, limited debt and sizeable cash and liquid investments, as per ICRA.
While the capex would be higher than the FY21 levels, major expansion plans are expected to be deferred till a meaningful demand recovery, Gupta said.
"The OEMs will continue to invest in new product development, new technologies (including electric vehicles) and network expansion in both the domestic and the overseas markets," he added.
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