New Delhi: Revenue of two-wheeler original equipment manufacturers (OEMs) is expected to grow 13-14% this fiscal, after rising 19-20% last fiscal, despite modest volume growth, driven by increasing preference for executive and premium motorcycles (>110 cc capacity) that yield higher realisations, according to Crisil Ratings.
Realisations will also benefit from the price hikes taken in January and April 2023 to pass on rising input costs and the costs for complying with the BS VI Stage II regulatory norms, which became effective from April 1, 2023.
Overall two-wheeler sales volumes are expected to rise ~8% on-year this fiscal to around 20.6 million units, driven by ~11% growth in the domestic markets (81% of overall volumes in fiscal 2023). Exports, on the other hand, will remain impacted for the second year in a row due to economic challenges and continuing high inflation in key markets of Africa, Latin America, Bangladesh and Sri Lanka. Net, overall domestic sale volumes would still be lower than the peak of 24.5 million units sold in fiscal 2019.
Operating profitability should sustain at 13-14% on better operating leverage, leading to healthy cash accrual. This, coupled with already-strong balance sheets, will keep the credit profiles of OEMs healthy despite higher capital spend, including for PLI-related investments and electric vehicle (EV) components.
An analysis of the top three two-wheeler makers, accounting for over two-thirds of the volume, indicates as much.
Anuj Sethi, Senior Director, Crisil Ratings, said, “Improving per capita income, especially in the urban and semi-urban markets, and the launch of more models are nudging consumer preference towards executive and premium motorcycles. Consequently, the share of such vehicles in overall motorcycle volume has risen to 52% last fiscal from 40% in fiscal 2019 (see Chart 1). On the other hand, demand for entry-level motorcycles (up to 110cc engine capacity), a price sensitive segment, has been slowing due to steep increase in the cost of ownership between fiscals 2019 and 2023. This is after OEMs hiked prices materially to offset costs of complying with emission regulations and higher commodity prices.”
Motorcycles accounted for ~69% of two-wheeler sales volume last fiscal, and scooters and mopeds 29% and 2%, respectively. Demand for scooters, including high-speed electric ones, is also expected to grow at a healthy clip, driven by sustained orders from urban markets.
While this would be the third straight year of volume growth, it would still be ~14% lower than the fiscal 2019 peak.
Meanwhile, this fiscal is unlikely to see major production capacity increase for traditional internal combustion engine (ICE) vehicles.
Poonam Upadhyay, Director, Crisil Ratings, said, “We expect investments to be largely for PLI commitments and to enhance capacity for EVs, which saw exponential growth last fiscal – albeit on a low base – despite wafer-thin margins. That said, improving operating leverage and premiumization in product mix will help OEMs sustain operating profitability at 13-14%. This, along with healthy accrual, will obviate the need to contract fresh debt, resulting in continuing strong credit profiles.”
In the road ahead, sustainability of demand and supply-chain management, especially for semiconductors used widely in executive and premium motorcycles, will bear watching. A weak monsoon could dent rural demand as well.