The Indian two-wheeler industry finds itself amongst the list of casualties of the global financial disaster. Job-losses, pay-cuts, low consumer confidence and cautious stance of vehicle financers has had an adverse impact on the domestic two-wheeler sales that registered a modest 2.6 % growth in financial year 2008-09 (FY-09) over FY-08. Of late, cheaper petrol, comparatively lower interest rates and the excise duty cut due to the stimulus packages have brought in some relief for this disturbed industry.

In this phase of muted growth, company-level performances varied significantly with some excelling and some putting up a weak show. The market leader Hero Honda registered a healthy growth of 12 % in its domestic sales whereas Bajaj Auto disappointed with its domestic sales plunging by 23% in FY09 over FY08. Likewise, TVS Motors saw its domestic sales dropping marginally by 1.4 % in FY09, but in contrast, Honda Motorcycles and Scooters India (HMSI), a wholly owned subsidiary of Honda Motor Company, recorded a robust 16.5 % growth in domestic sales in India. According to CARE Research, a large bouquet of two-wheeler models and variants to offer, coupled with strong-hold in entry level segment comprising 75 – 125 cc motorcycles with a strong focus on rural markets has benefited Hero Honda , whereas soaring demand in the easy to operate and light weight gearless scooters has benefited HMSI.

CARE Research, in the recently released report on ‘Indian Two-wheeler Industry’, observes that the urban market for two-wheelers is largely penetrated with nearly 57 of every 100 youths that earn an income to support the ownership of a two-wheeler (i.e. the target population) already owns one. In fact, in some big cities, nearly three-fourths of the target population own a two-wheeler. Thus, the opportunity is limited in urban areas. However in case of rural areas, merely 15 % of the target population owns a two-wheeler and thus the opportunity is humungous. Lower penetration in rural areas can be attributed to supply side constraints due to widely dispersed target population which has discouraged the penetration of two-wheeler manufacturers, dealers as well as vehicle financers in these areas. However, the income levels of rural households are rapidly increasing and more and more villages and smaller towns are turning into attractive market for consumer products, including two-wheelers Furthermore, rural households are largely insulated from the dents of the global financial crisis.

“Rural India would be the next growth frontier for India’s two-wheeler industry” remarked Ms. Revati Kasture, Head, CARE Research. “Excise duties are already at lower levels and the scope of expansion in target market on account of reduction in the cost of ownership is very limited. In light of the same, along with already high penetration in urban markets, rural India offers big opportunity to the industry. Ability of the players to increase their focus and penetration in these markets would determine their fortunes in next few years” added Ms. Kasture.

CARE Research estimates the domestic two-wheeler demand to be somewhat weak for the next 9 – 12 months with sales foreseen to grow by 6.7 per cent in FY10 to 7.9 million units from 7.4 million units in FY09. The demand is likely to pick up thereafter with economy stabilizing and resumes its buoyancy. CARE Research expects domestic two-wheeler sales to grow to 11.3 million units by FY14, signifying a compounded annual growth rate (CAGR) of 8.8 per cent.

“Easy availability of cheap two-wheeler finance would be one of the critical factors in achieving the said growth rate as nearly half of the two-wheeler sold in India are purchased on finance” says Mr. D.R. Dogra, Deputy Managing Director, CARE Ratings. “The macro economic outlook still remains weak, with GDP forecasted to grow by 6.5 per cent in FY10, the slowest since FY03. The consumer confidence level would take some time to improve. Furthermore, the players in TW finance industry are still cautious in lending” added Mr Dogra.