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Smooth ride helps two-wheeler segment to buck downtrend

Against a backdrop of sluggish growth of the economy and the automobile industry during 1997-98, the two-wheeler industry was an exception, registering a positive growth rate.

This has contributed to a more stable business and sound financial risk profile of the major players in the two-wheeler industry, lending stability to credit ratings of such issuers. However, the growth rate of about three per cent in 1997-98, was significantly lower than the growth rates of around 12-15 per cent witnessed in the previous 3 or 4 years, according to the Credit Rating Information Services of India Limited.

During 1997-98, the total production of the two-wheeler industry crossed the three million mark touching about 3,044,164 vehicles. The year witnessed a marked increase in the share of motorcycles in the entire two-wheeler category.

This is attributable to the fact that while the motorcycle segment grew at about 16 per cent, the scooter and moped segments registered negative growth rates. The high growth rate of the motorcycle segment was partly at the cost of the scooter and mopeds segments and is largely attributed to increased motorcycle sales in the semi-urban and rural markets where endurance, ground clearance and fuel efficiency are the key product features driving demand.

With the two-wheeler industry characterised by dominance of a few large players, growth rates in the different segments of the industry are largely influenced by the performance of a few players.

Hence while the growth in the motorcycle segment was mainly driven by the strong sales growth demonstrated by Hero Honda Limited and TVS Suzuki Limited, Bajaj Auto Limited's depressed sales resulted in negative growth in the scooter segment.

In future, CRISIL expects the two-wheeler industry to structurally change from being a commodity industry governed by strengths in distribution and pricing to an industry which is driven more by product features and branding. This is likely to pose new challenges to major players in terms of both preserving their respective market shares as well as in achieving volume growth.

Players are likely to invest substantial resources in product upgradation, incorporation of additional features and in brand building. CRISIL also expects all the manufacturers to diversify their risk by expanding their product range to cover all product categories. Recognising the changing market dynamics, CRISIL expects a series of product launches by the major players in the two-wheeler industry in the near- to medium-term with increasingly active involvement of their foreign collaborators.

While CRISIL foresees the demand in the two-wheeler industry to continue to increase -- albeit at lower rates than that witnessed in the earlier years due to a significantly higher base -- the competition is expected to intensify in view of the changing demand scenario. In addition to leading two-wheeler manufacturers expanding their existing capacities, competition is expected to intensify and CRISIL expects this to translate into marketing challenges.

Increased working capital requirements add some pressure on the profit margins. However, the underlying fundamentals of the two-wheeler industry continue to remain robust and risk profile of the major manufacturers is expected to remain stable.

A key feature factored in by CRISIL while evaluating the risk profile of the rated players has been their healthy financial position as evidenced by low gearing and adequate profitbility. In the face of competitive pressures in the future, the healthy financial position is likely to stand the rated companies in good stead.

UNI