Amid an evolving Covid-19 situation, ICRA expects a 12-14 per cent Y-o-Y growth in two-wheeler (2W) volumes in FY22. While the overall consumption and investment demand may take some time to recover after the devastating second wave, India’s rural economy is expected to provide some support.
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The continued preference for personal mobility solutions, amid the pandemic, would also drive up some demand. Even as the pace of domestic demand recovery remains uncertain, the steady growth in 2W exports is encouraging and is expected to support industry volumes in FY2022.
Rohan Kanwar Gupta, Vice President & Sector Head, Corporate Ratings, ICRA, said: “The extensive localised lockdown measures, implemented due to the second wave between April and June 2021, were almost akin to the nationwide lockdown last year. Several 2W OEMs preponed their shutdown maintenance schedules during these months, which hit wholesale volumes significantly in April and May 2021.”
He further added: “Unlike the first wave, the surge in infections in non-metro and rural hinterlands, dampened rural consumer sentiments as well. This reflected in a sharp sequential fall in 2W retail sales in the mini festive and wedding season in April-May 20,21. The inventory at dealerships, at 30 days+ at May-end, was also relatively high, which could mean only a gradual recovery in wholesale volumes, till the stocking begins for the forthcoming festive season.”
Taking a cue from the high-frequency indicators of economic recovery following the second wave, ICRA had moderated its GDP growth forecast in June 2021 to 8.5 per cent Y-o-Y for FY22 (previously at 10.5 per cent). While uncertainty continues to persist regarding a possible third wave, the rating firm continues to maintain a stable outlook for the 2W industry. It is expected that a low base, healthy rural cash flows, and continued preference for personal mobility would support 2W demand in the festive season.
Nevertheless, the same would be closely linked to the pace of the vaccination drive and demand disruption due to the resurgence of Covid-19; uneven monsoons or volatilities in exports could pose downside risks to the current estimates.
Given the high operating leverage of the industry, subdued demand and continued hardening in raw-material costs are expected to keep the operating margins constrained for the 2W OEMs in the current fiscal. However, these will likely be near-about the FY21 levels (13.5-14 per cent), supported by price escalations, a depreciating rupee and continuing cost rationalisation initiatives. The RoCE of 2W OEMs would also continue to remain at healthy levels, ranging between 22-24 per cent.
“In line with ICRA’s Stable outlook on the industry, the credit profile of 2W OEMs is expected to remain healthy, supported by strong balance sheets, limited debt and healthy cash and liquid investments. While the capex would likely be higher than the FY21 levels, major expansion plans are expected to be deferred till a meaningful demand recovery. Nonetheless, the OEMs will continue to invest in new product development and network expansion in both domestic and overseas arenas,” Gupta added.