Two Wheeler Industry - Growth Indicators

Topics: Income, Honda, Household income in the United States Pages: 40 (11726 words) Published: August 13, 2013

Anjan Ghosh (+91-22-30470006) Subrata Ray (+91-22-30470027) Jitin Makkar (+91-124-4545368)

 The Indian two-wheeler (2W) industry has shown a strong volume growth over the last two-years, having grown by 25% in 2009-10 and 27% in 2010-111 to reach 13.3 million units. This strong double-digit growth has been driven by multiple factors. One reason, of course, is statistical as this period of high double-digit growth has showed up after a rather sedate previous two years, when the 2W industry volumes had shrunk by 5% in 2007-08 and had grown by a mere 5% in 2008-09. In addition to the contribution of pent-up demand, the 2W industry growth over the last two years has been supported strongly by various underlying factors including India’s rising per capita GDP, increasing rural demand, growing urbanization, swelling replacement demand, increasing proportion of cash sales and the less measurable metric of improved consumer sentiment. Going forward, ICRA expects the 2W industry to report a volume CAGR of 10-12% over the next five years to reach a size of ~21-23 million units by 2015-16 as it views the fundamental growth drivers comprising of expected steady GDP growth, moderate 2W penetration levels, favourable demographic profile, under developed public transport system and utility quotient of a 2W - to be intact. Additionally, the entry of new players in the industry, multitude of new model/ variant launches, growing distribution reach, cheaper ownership costs on a relative basis are expected to be some of the other prime movers for industry growth over the medium term. In ICRA’s view, while the trend in rising commodity prices, hardening interest rates and increasing fuel costs may lead to some moderation in industry growth over the short term, the growth over the medium to long term is expected to remain in double digits. ICRA believes the landscape of the Indian 2W industry is set to evolve as several new players are keen to enter into the Indian market which would further intensify competition; most existing players plan to extend/ strengthen their reach into the rural and semi-urban markets to harness incremental growth opportunities; and manufacturers are showing increased thrust on new product development and repositioning to tap new customer segments. These dynamics would ensure that business does not remain as usual for the large incumbents as market share may change hands to some extent. Nevertheless, the existence of strong product capability, wide distribution network and established supply chain will continue to be the necessary conditions to sustain competitive advantage and achieve economies of scale. In view of the higher than expected demand last year, several OEMs had faced capacity constraints in their supply chain for select components which resulted in persistent demand-supply gap for few models, reflected in long waiting periods at dealers’ end. To overcome

June 2011


Refers to April-March period comprising of both domestic as well exports sales volumes ICRA Rating Services Page 1 of 23

ICRA Rating Feature

Two-Wheeler Industry: An ICRA Perspective

supply constraints and also to gear up for meeting the continued buoyancy in demand, most players currently have plans to expand production capacity which would entail large capital expenditure (capex) both by Original Equipment Manufacturers (OEMs) as well as suppliers. While this may pull down the profitability metrics of industry participants over the short term, the anticipated strong volume growth should enable them to tide over the short term pressures and emerge with a bigger scale and a relatively stronger credit profile over the medium term.  Also, ICRA views the current asset-light business model of OEMs as a key positive as most of the players...
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