India’s two-wheeler industry is likely to witness another year of demand contraction. Unit sales are likely to decline between 11-13 percent, to around 18 million units, in FY2021, following the adverse impact of the COVID-19 outbreak on economic growth and discretionary spending. As per an ICRA industry report, the extent of the slowdown remains contingent on the severity of the coronavirus outbreak and the continuation of lockdowns. Even prior to the outbreak, the demand for two-wheelers was expected to be flat in India, amid a sharp rise in vehicle prices following the transition to BS6 emission norms and a subdued macro-economic scenario.

The challenges for the industry are likely to get aggravated. The outbreak will have a severe impact on consumer expenditure, resulting in lower spending power in both, urban and rural, markets. “There is a likelihood of downtrading by consumers as well, once the economy starts to cripple back to normalcy. On the export front, while any long-term predictions are difficult, the COVID-19 fallout and a volatility in crude oil prices would be a near term negative,” ICRA said in its report.

According to Shamsher Dewan, vice-president, ICRA, “Besides lower sales, pressure on earnings will also arise due to costs involved in recalling BS4 inventory from dealers, which is likely to remain unsold due to shutdowns. Furthermore, during periods of stress, OEMs will also have to extend credit support to its dealers thus leading to a potential increase in working capital intensity.”

FY2020 was all about inventory correction in the domestic two-wheeler industry as OEMs tried to counter the subdued demand before the transition to Bharat Stage 6 in FY2021. With weak retail off-take and the inventory build-up at the dealerships since H2 FY2019, most two-wheeler OEMs had to resort to production cuts and sharp reductions in wholesale dispatches in FY2020 in order to rationalise inventory in the system.

This led to a 16 percent YoY contraction in domestic wholesale dispatches during the first 11 months of FY2020. In addition, the underlying demand sentiment in the industry also remained weak, given multiple headwinds including a sharp rise in motorcycle and scooter prices, slowdown in the economy, a liquidity crunch and stringent safety regulations, among others.

In the last fortnight of March 2020, the rapid spread of COVID-19 in India led to lockdowns and travel restrictions by the Centre and select State authorities. Customer walk-ins at dealerships trickled to nil and OEMs also shut down production in the last week of March, following the 21-day lockdown announced on March 24. Given the rapid spread of the pandemic in India and overseas, and possibility of further extension of these lockdowns, revival from the down-cycle is expected to be delayed by at least a few quarters.