Indian two-wheeler industry Essay

Overview The Indian two-wheeler (2W) industry recorded sales volumes of 13. 4 million units in 2011-121, a growth of 14. 0% over the previous year. In a year wherein growth in other automobile segments particularly, passenger vehicle (PV) and medium & heavy commercial vehicle (M&HCV), slowed down to single digits – marred by demand slowdown due to northward movement of inflation, fuel prices and interest rates – the 14% growth recorded by the 2W industry remained steady. However, the momentum in the 2W industry’s volume growth too has been losing steam lately as evident from the relatively lower volume growth of 11. 0% recorded in H2, 2011-12 (YoY) against a growth of 17. 1% recorded in H1, 2011-12 (YoY). The deceleration in growth is largely attributable to the motorcycles segment which grew at a much lower rate of 7. 8% (YoY) in H2, 2011-12 vis-a-vis 16. 4% in H1, 2011-12; even as the scooters segment continued to post 20%+ (YoY) expansion during both halves of the last fiscal. With this, the share of the scooters segment in the domestic 2W industry volumes increased to 19. 1% in 2011-12 from 17. 6% in 2010-11. Overall, ICRA expects the domestic 2W industry to report a volume growth of 8-9% in 2012-13 as base effect catches up with the industry that has demonstrated a strong volume expansion over the last three years at cumulative annual growth rate (CAGR) of 21. 8%. Over the medium term, the 2W industry is expected to report a volume CAGR of 9-11% to reach a size of 24-26 million units (domestic + exports) by 2016-17, as we believe the various structural positives associated with the domestic 2W industry including favourable demographic profile, moderate 2W penetration levels (in relation to several other emerging markets), under developed public transport system, growing urbanization, strong replacement demand and moderate share of financed purchases remain intact. Table 1: Trend in Sales Volumes of the Indian 2W Industry Volumes (Units, Nos.) Domestic Motorcycles Scooters Mopeds Total Domestic 2010-11 9,019,090 2,073,797 697,418 11,790,305 Exports 2010-11 Motorcycles Scooters Mopeds Total Exports Source: SIAM Q1 2011-12 2,464,143 532,867 190,672 3,187,682 Q1 2011-12 1,480,983 52,312 6,295 1,539,590 1 Refers to domestic sales volumes ICRA LIMITED 482,566 20,949 1,461 504,976 YoY Growth (%) Q2 2011-12 Q3 2011-12 Q4 2011-12 2,558,515 650,155 192,859 3,401,529 2,556,782 659,643 186,472 3,402,897 2,514,699 720,176 206,863 3,441,738 Q2 2011-12 Q3 2011-12 Q4 2011-12 492,408 24,696 3,478 520,582 448,090 23,950 2,796 474,836. 434,521 21,010 1,341 446,872 2010-11 22. 9% 41. 8% 23. 5% 25. 8% 2010-11 34. 3% 73. 6% -8. 8% 35. 0% Q1 2011-12 17. 5% 13. 3% 21. 0% 17. 0% Q1 2011-12 27. 1% 100. 4% -44. 0% 28. 6% Q2 2011-12 15. 4% 29. 0% 7. 0% 17. 3% Q2 2011-12 31. 7% 88. 5% 159. 2% 34. 0% Q3 2011-12 9. 2% 21. 6% 2. 6% 11. 0% Q3 2011-12 21. 8% 92. 0% 188. 0% 24. 5% Q4 2011-12 6. 3% 29. 4% 16. 4% 11. 1% Q4 2011-12 18. 1% 29. 0% -2. 3% 18. 5% Corporate Ratings Anjan Deb Ghosh +91 22 3047 0006 anjan@icraindia. com Analyst Contacts: Subrata Ray +91 22 3047 0027 subrata@icraindia. com Jitin Makkar +91 124 4545 368jitinm@icraindia. com. MEDIUM TERM DEMAND DRIVERS STAY PUT An analysis of the mix of Indian populace and the structure of the Indian 2W industry brings to the fore several key attributes namely, India’s demographic advantage, moderate 2W penetration levels and shrinking of replacement cycle; factors that have combined to propel the industry’s volumes over the last 10 years from 4 million units in 2001 to 13 million units in 2011. In ICRA’s view, these growth drivers are likely to remain relevant over the medium term and continue to provide impetus to the industry’s volumes. Chart 1: Estimated population of India’s Youth (20-40 years age) 250 Demographic Advantage 229 207 206 189 200 161 157 million 150 100 41 million youth estimated to be added to India’s population mix over the next five years 50 0 2001 Male 2011E Female 2016E Source: Census 2001; Census 2011; ICRA’s Estimates In the age bracket of 20-40 years, which is the key target segment for 2W, around 77 million youth got added to the Indian population mix in the last decade, which has been the key contributor to the 2W industry’s volume growth over the last 10 years. India’s demography continues to remain favourably on its side with average age of 25 years, which is 9 years younger than China, and more than 12 years and 19 years younger than the US and Japan, respectively. Over the next five years, the incremental addition in India’s youth population is estimated to be ~41 million, a fairly large number that is likely to sustain the strong demand for 2W. The 20-40 years age group is characterized by a combination of earning power and high spending propensity, which should increase the likelihood of conversion of potential ownership into actual ownership. Chart 2: Trend in 2W Penetration in Indian Households 18 16 35% 13. 8 14 Underpenetrated Market 35% The 2W penetration level in Indian households was 12% in 2001. This low 2W penetration provided the structural thrust to the domestic industry’s volume growth over the last decade whose annualized volumes expanded by a factor of 3. 4x during this period. As of 2011, the 2W penetration levels in Indian households, while having increased to 21%, continue to remain moderate and much lower than in some of the other emerging markets such as Brazil, Indonesia, Thailand and Taiwan. Also, the penetration rates differ vastly between India’s rural and urban areas, with rural areas being under-penetrated by a factor of 2. 5x as compared to urban areas. Additionally, the social trend in favour of nuclear families is expected to further increase the number of households which could be potential targets for the 2W industry. 30% 12 million 40% 16. 8 25% 25% 10 7. 9 8 5. 4 6 20% 14% 15% 10% 4 7% 2 5% 0 0% 2001 No. of Rural Households 2011 No. of Urban Households 2W Penetration – Rural 2W Penetration – Urban Source: Census 2011 ICRA LIMITED Chart 3: Trend in 2W Population in India. 30 25 million 20 Population of 22. 5 million units, equivalent to cumulative 2W sales volumes from 1995 to 2001 Population of 51. 8 million units, equivalent to cumulative 2W sales volumes from 2007 to 2011 24. 0 15 13. 3 10 9. 3 5 0 2001 2W Population – Rural 2011 2W Population – Urban Source: Census 2011, SIAM, ICRA’s Estimates Chart 4: Age Profile of 2W in India 100% 90% 30% 39% 80% 70% 53% 17% 60% 50% 21% 40% 30% 35% 52% 20% 10% 0% 40% 11% Motorcycle > 10 years Scooters 6-10 years Source: SIAM, ICRA’s Estimates ICRA LIMITED Shrinking Replacement Cycle 27. 8 Mopeds 0-5 years. While the 2W population in India has more than doubled over the last decade, the replacement cycle is estimated to have reduced from around 7 years (in 2001) to around 5 years (in 2011). The reduction in 2W replacement cycle implies that the average annual mileage covered per 2W has been on the rise, given that (distance run multiplied by age) of 2Ws is unlikely to have changed much over the years. As per industry estimates, around 50% of the total domestic sales of 2W are now made to first-time buyers, 30% to customers looking to upgrade from their existing vehicle, and 20% to buyers seeking a second vehicle for the household. The break-up suggests that currently around 50% of the sales in the domestic 2W market are made to replacement buyers. Considering that the industry has sold around 49 million 2W in the domestic market in the last five years, the total replacement demand works out to be a fairly large number. Add to this the healthy growth in sales to first-time buyers in recent years, driven in particular by sales to the rural market, the replacement opportunity could only increase in the future. From the consumer perspective, although replacement involves fresh capital spending, the inducement of upgrading to an improved technology 2W, having better performance, features and more attractive styling; complemented with increased spending propensity are expected to be the prime ingredients feeding replacement demand. SEGMENTAL ANALYSIS OF THE 2W INDUSTRY The motorcycles segment accounts for a bulk of 2W industry’s sales volumes; however, the scooters segment has grown relatively faster over the last five years Chart 5: Trend in 2W Segment Volume Mix (Domestic) 100% 90%. 4. 5% 12. 0% Chart 6: Trend in segment-wise sales volume growth of 2W 5. 7% 5. 8% 6. 0% 5. 9% 5. 8% 45% 14. 5% 15. 5% 15. 6% 17. 6% 19. 1% 35% 80% 70% 25% 60% 50% 40% 83. 5% 15% 79. 8% 78. 7% 78. 4% 76. 5% 75. 1% 30% 5% 20% -5% 10% 0% 2006-07 Source: SIAM 2007-08 2008-09 2009-10 2010-11 Motorcycles Scooters Mopeds 2011-12 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 -15% Motorcycles Scooters Mopeds Source: SIAM With sales volumes of 10. 1 million units, the motorcycles segment is the largest sub-segment of the domestic 2W industry accounting for a bulk of its volumes. However, over the last five years, the motorcycles segment has seen its volume share in the domestic 2W industry slide down to 75. 1% in 2011-12 from the highs of 83. 5% recorded in 2006-07. Although domestic motorcycle volumes grew at 9. 0% CAGR during the last five years, both the scooters segment as well as the mopeds segment grew at a much faster CAGR of 22. 2% and 17. 0%, respectively; contributing to reduction in the motorcycle segment’s volume share. The three 2W sub-segments are targeted at distinct consumer categories. The motorcycles are targeted at the male population in both rural areas as well as urban areas (with further segmentation based on usage pattern – family bike or individual bike, consumer profile – commuter Vs performance seeker etc); the scooters are more of an urban phenomenon targeted at the female population (TVS Scooty, Hero Pleasure), male population (Hero Maestro) as well as unisex offerings (Honda Activa, TVS Wego); mopeds are targeted at the lower middle-class segment and derive a large part of their volume share from the rural sector where they are used as a utility vehicle bearing heavy loads on rough village roads. While each of the three sub-segments has distinctive growth drivers, we expect the scooters segment to maintain its pace of growth faster than that of the 2W industry as a whole. The faster volume growth of the scooters segment is expected to be driven by (a) growing acceptability of gearless scooters, particularly by women; (b) rising urbanization and increasing proportion of working women; (c) expanding product offerings in the scooters segment; and (d) comparatively lower base. Accordingly, ICRA expects the scooters segment to gradually increase its share in the domestic 2W market from 19. 1% in 2011-12 to ~27% by 2016-17E. With this, the volumes in the domestic scooters market are estimated to get doubled by 2016-17E over the current levels.