Two-wheeler OEMs' revenue to rise 13-14 pc this fiscal: Report

MUMBAI: Two-wheeler OEMs' revenue is likely to rise 13-14 per cent this fiscal despite modest volume growth, driven by increasing preference for executive and premium motorcycles that yield higher realisations, Crisil Ratings said on Tuesday.

The two-wheeler original equipment makers (OEMs) topline had grown 19-20 per cent last fiscal, as per the credit ratings agency. Motorcycles above 110 cc fall under the executive and premium segment. Overall, two-wheeler sale volumes are expected to rise around 8 per cent year-on-year this fiscal to around 20.6 million units, driven by around 11 per cent growth in the domestic markets (81 per cent of overall volumes in fiscal 2023), it said.

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, Crisil Ratings said. While this would be the third straight year of volume growth (in two-wheelers), it would still be around 14 per cent lower than the fiscal 2019 peak, the rating agency said. Meanwhile, this fiscal is unlikely to see a major production capacity increase for traditional internal combustion engine (ICE) vehicles, it added.

''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 premiumisation in product mix will help OEMs sustain operating profitability at 13-14 per cent. This, along with healthy accruals, will obviate the need to contract fresh debt, resulting in continuing strong credit profiles,'' said Poonam Upadhyay, Director at Crisil Ratings.

Motorcycles accounted for around 69 per cent of two-wheeler sales volume last fiscal, and scooters and mopeds 29 per cent and 2 per cent, 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, it said.

Realisations will also benefit from the price hikes taken in January and April 2023 to pass on rising input prices and the costs for complying with the BS VI Stage II regulatory norms, which became effective from April 1, 2023, it 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, said Anuj Sethi, Senior Director at Crisil Ratings.

''Consequently, the share of such vehicles in overall motorcycle volume has risen to 52 per cent last fiscal from 40 per cent in fiscal 2019. ''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,'' he added.

Operating profitability should sustain at 13-14 per cent on better operating leverage, leading to healthy cash accrual, it said.

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, the agency said.