Two-Wheelers to Witness Muted Growth during  FY2017: ICRA

Scooters to help industry post low single-digit growth while motorcycles expected to de-grow

Weak year for domestic two-wheeler industry

The domestic two-wheeler industry reported a 4.4% year-on-year (y-o-y) growth in Q3 FY2016 whereas for the 11 months ended February 2016 (11M FY2016), it reported a 2.2% growth in volumes. The low volume growth is mainly attributable to the weak performance of the motorcycle and moped segments, which reported 1.2% and 5% de-growth respectively, during 11M FY2016 over the corresponding previous; volumes for both these segments are primarily driven by rural demand. The income growth in the rural sector has been weak over the last two fiscals with two consecutive drought years impacting kharif production while the rabi crop was affected by unseasonal rains. These factors along with low growth in rural wage rates adversely impacted demand for motorcycles in FY2015 as well as 11M FY2016. However, the scooter segment posted a y-o-y growth of 11.5% for 11M FY2016, which was mainly driven by urban demand and new launches. The motorcycle and scooter segments posted              y-o-y growth rates of 0.9% and 14.2% respectively, mainly on account of the festive season falling in Q3 FY2016 and not being split between Q2 and Q3 as had happened during FY2015. 

Scooters: High base effect, capacity constraints moderate growth rates compared to previous years but still continue to outperform the two-wheeler industry 

Urban demand has fared well for the scooter industry, which continued to post healthy growth numbers for Q3 FY2016 and 11M FY2016 at 14.2% y-o-y and 11% y-o-y, respectively. The average monthly sales for Q3 FY2016 stood at 435,806 units as compared with 381,530 units for Q3 FY2015. During 11M FY2016, the average monthly sales of scooter stood at 416,513 units (up from 373,536 units for the same period the previous year). The 90-125cc segment, accounting for around 98% of the scooter volumes, continued to grow by 13.1% y-o-y during 11M, FY2016 with consumer preferences shifting to higher engine capacity and high powered scooters. Honda Activa remains the highest selling scooter in the country with monthly average sales of ~200,000 units during 11M FY2016. Piaggio created a new segment—the 150cc premium scooter segment—with the launch of Vespa in September 2015; however, it has met with limited customer acceptance so far. Going forward, the demand for scooters is expected to continue growing on the back of continued healthy urban demand post-implementation of the Seventh Pay Commission’s recommendations. 

Motorcycles: Weakness in commuter segment volumes drags overall motorcycle market volumes 

In line with the recent trend, the entry segment, accounting for the bulk of the domestic motorcycle industry, continued to report de-growth in Q3 FY2016 on account of weak rural sentiment. The executive segment (125cc), however, showed signs of improvement, which led to the domestic motorcycle industry reporting a meagre 0.6% y-o-y growth in volumes. The growth was primarily on account of the entire festive season falling in Q3 FY2016 as opposed to FY2015 when the festive season was split between Q2 and Q3. In percentage terms, the 150cc segment reported a steep decline y-o-y on account of discontinuation of CB Unicorn 150 and CB Trigger by Honda to launch refreshed models in the 150-250cc category (premium commuter); this led to the high growth in the 150-250cc category. The entry and executive segments are generally affected by macroeconomic factors, unlike the premium and super premium segments, which are dependent on changes in consumer lifestyle, preferences, availability and income levels. The >250cc category continues to report healthy growth numbers on back of the success of Royal Enfield, which is perceived as a lifestyle brand.

Hero MotoCorp gains market share at expense of Honda in overall two-wheeler segment in Q3 FY2016 

- Hero MotoCorp Ltd (HMCL) gained significant market share in the two-wheeler industry on a quarter-on-quarter (q-o-q) basis in Q3 FY2016 (39.6% as compared with 36.6% in Q2 FY2016) following the launch of Hero Duet and Hero Maestro Edge in the scooter segment at the beginning of the festive season. The market share was further supported by steady sales of its flagship brands Splendor and HF Deluxe in the motorcycle segment, which continued to move ~200,000 units and ~100,000 units per month, respectively. Currently, the absence of a product in the premium segment may hamper the company’s growth in the medium term, given the gradual shift in consumer preference from the commuter to the premium segment. 

- Bajaj Auto Ltd (Bajaj) has gained marginal market share in the motorcycle industry in 11M FY2016 (18% compared with 17% in FY2015) on the back of new launches: CT100, Platina ES and new range of Pulsar and Avenger. Poor acceptance of the Discover series had led to loss of market share for Bajaj in the 100cc segment till FY2015; however, the launch of Platina, CT100 and CT100b in the commuter segment during FY2016 benefited the company. Bajaj has recently launched CT100b, a stripped down variant of CT100, at an aggressive price point and the model has met good initial response. Further, the launch of V150 in the 150cc segment is expected to strengthen the company’s position in the premium commuter motorcycle sector. In the overall two-wheeler industry, Bajaj commands a market share of 11.5% (both for Q3 FY2016 and 11M FY2016). 

- Honda Motorcycle and Scooter India (HMSI) has the largest share of the pie in the scooter segment by virtue of its flagship brand Activa. In 11M FY2016, the company had a 55.5% market share; but in Q3 FY2016 the market share was 51.7%, mainly on account of new launches from Hero MotoCorp. In the overall two-wheeler industry, Honda continues to be the second largest player with a 26.1% market share for 11M FY2016. The launch of Honda CB Shine SP and CB Unicorn 160 strengthens the company’s portfolio in the commuter and premium segments. The unveiling of a new segment, crossover, via Honda Navi provides the company with the first-mover advantage; however, customer response for the same remains to be seen. 

- TVS Motor gained 50 basis points (bps) y-o-y in market share to 14.2% for Q3 FY2016 in the overall two-wheeler industry. The company has gained marginally in both the scooter and the motorcycle segment on the back of Jupiter and Apache, respectively. In the motorcycle segment, a refreshed Victor has been launched recently, but bookings for the model are yet to start.

ICRA expects the domestic 2-wheeler industry to end FY2016 with a modest growth of 2-3%, largely driven by demand for scooters and premium motorcycles; the other segments, especially entry-level motorcycles and mopeds, are expected to report de-growth. Weak farm sentiments following two consecutive years of poor monsoons (which impacted kharif crops even as unseasonal rains affected the rabi output in FY2016), modest increase in minimum support prices and low rural-wage growth have adversely impacted rural income levels, which account for a sizeable portion of the demand for entry-level motorcycles. Thus, the de-growth in volumes in the entry-level segment has pulled down volume growth in the motorcycles segment during 11M FY2016 even as the executive segment reported flat volumes, while the premium segment bucked the trend benefiting from consumers upgrading to higher segments and grew at a rapid pace. Scooter volumes, despite starting the year with a low growth pace, gained traction from Q2 FY2016 and grew at a healthy pace of 12% during 11M FY2016, driven largely by product launches as well as continued demand from urban centres. 

ICRA expects demand for two-wheelers to grow at a muted pace of 4-6% during FY2017 after a modest 2% growth in domestic volumes during 11M FY2016. Although increased allocations towards rural development and welfare schemes in the Union Budget for 2016-17 and growth in National Rural Employment Guarantee Act (NREGA) expenditure, besides the government’s focus on improving irrigation infrastructure, augur well for the farm sector, demand recovery from rural households is expected to be gradual and, in turn, linked to the volume and dispersion of monsoon rainfall. Additionally, the implementation of the recommendations of the Seventh Pay Commission in phases and expectations of softer interest rates would support demand (which remains healthy) for two-wheelers from urban households. 

Over the medium term, ICRA expects the two-wheeler industry to report a volume CAGR (Compound Annual Growth Rate) of 8- 9% to reach a size of 22-23 million units (domestic + exports) by FY2019. The expectation draws on various structural positives associated with the domestic two-wheeler industry, including favourable demographic profile, moderate two-wheeler penetration levels (vis-à-vis several other emerging markets), under-developed public transport system, growing urbanization, strong replacement demand and moderate share of financed purchases. Besides, there is also a large opportunity for the industry to grow its presence in overseas markets, mainly Africa and Latin America.




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