Two Wheeler Industry – Growth Indicators

One reason, of course, Is statistical as this period of high double-dealt growth has wowed up after a rather sedate previous two years, when the AWE industry volumes had shrunk by 5% in 2007-08 and had grown by a mere 5% in 2008-09. In addition to the contribution of pent-up demand, the AWE industry growth over the last two years has been supported strongly by various underlying factors including Indian’s rising per capita GAP, increasing rural demand, growing arbitration, swelling replacement demand, increasing proportion of cash sales and the less measurable metric of improved consumer sentiment.

Going forward, CIRCA expects the AWE industry to port a volume CARR of 10-12% over the next five years to reach a size of -21-23 million units by 2015-16 as it views the fundamental growth drivers comprising of expected steady GAP growth, moderate AWE penetration levels, favorable demographic profile, under developed public transport system and utility quotient of a AWE – to be intact.

Additionally, the entry of new players in the industry, multitude of new model/ variant launches, growing distribution reach, cheaper ownership costs on a relative basis are expected to be some of the other prime movers for industry growth over the medium term. In Sacra’s view, while the trend in rising commodity prices, hardening interest rates and increasing fuel costs may lead to some moderation in industry growth over the short term, the growth over the medium to long term is expected to remain in double digits.

CIRCA believes the landscape of the Indian AWE industry is set to evolve as several new players are keen to enter Into the Indian market which would further Intensify competition; most existing players plan to extend/ strengthen their reach Into the rural and semi-urban markets to harness Incremental growth opportunities; and manufacturers are showing Increased thrust n new product development and repositioning to tap new customer segments.

These dynamics would ensure that business does not remain as usual for the large Incumbents as market share may change hands to some extent. Nevertheless, the existence of strong product capability, wide distribution network and established supply chain will continue to be the necessary conditions to sustain competitive advantage and achieve economies of scale. In view of the higher than expected demand last year, several Memos had faced capacity constraints in their supply chain models, reflected in long waiting periods at dealers’ end.

To overcome June 2011 Refers to April-March period comprising of both domestic as well exports sales volumes CIRCA Rating Services www. Carding. Com Page 1 of 23 CIRCA Rating Feature Two-Wheeler Industry: An CIRCA Perspective supply constraints and also to gear up for meeting the continued buoyancy in demand, most players currently have plans to expand production capacity which would entail large capital expenditure (cape) both by Original Equipment Manufacturers (Memos) as well as suppliers.

While this may pull down the profitability metrics of industry participants over the short term, the anticipated strong volume Roth should enable them to tide over the short term pressures and emerge with a bigger scale and a relatively stronger credit profile over the medium term. 0 Also, CIRCA views the current asset-light business model of Memos as a key positive as most of the players source a majority of components from suppliers and in-house facilities are generally limited to component assembly (or manufacture of select parts).

Thus, capacity expansion in existing facilities by Memos is likely to involve only moderate incremental cape; although the quantum is expected to be much higher for Memos ho plan to establish Greenfield facilities to augment existing capacity which may impact ROCK to some extent. Further, for suppliers engaged in capital intensive product segments like castings, forgings and machining, the payback is expected to be accomplished over a relatively longer time horizon as compared to that likely to be achieved by Memos or other auto component manufacturers.