 "Rural Distress: Monsoon to be vital for tractor, 2-wheeler companies")
With Indian weather department predicting weak monsoon, motorcycle and tractor companies are planning rural showrooms and new products to push sales, which remain muted due to falling rural incomes.
Last year, the motorcycle segment clocked 10.74 million units in sales, a moderate growth of 2.5 per cent, much less than the expected growth of five-to-six per cent. The reason why rural markets are crucial for two-wheeler makers is that the former accounts for one in every two motorcycles sold. Therefore, any variation in demand in rural markets could impact the entire two-wheeler sector.
The outlook for the sector looks hazy as the India Meteorological Department (IMD) has warned of a below-normal rainfall this year even as several thousand villages in Maharashtra and Madhya Pradesh are already grappling with a drought-like situation. According to the IMD, this year’s southwest monsoon will be below normal at 93 per cent of the long period average — the average rainfall received by the country over 50 years since 1951.
This will likely put additional pressure on tractor and two-wheeler manufacturers, who were hoping that a good monsoon will bring the consumers back to the showrooms.
“The Indian economy is dependent on agriculture with about 55 per cent of population depending on agriculture though it has significantly reduced over the past decade. But the direct consumption of automobiles is also not very high except in a few segments, which include entry-level segment cars and mass segment motorcycle market,” said Y S Guleria, senior vice-president (sales and marketing) at Honda Motorcycle & Scooter India.
Entry-level motorcycles (100-110cc), which make up for about 60 per cent of total motorcycle sales, depend heavily on rural demand. Mileage and cost influence buying decision in this segment. Scooters are largely urban-centric and remain indifferent to the vagaries of rural markets.
Tractors will be another biggest loser if monsoon remains below-normal even this year. The sharp decline in farm yield since the middle of last year coupled with lower realisations will directly impact tractor off-take, believe industry watchers.
Last year, the motorcycle segment clocked 10.74 million units in sales, a moderate growth of 2.5 per cent, much less than the expected growth of five-to-six per cent. The reason why rural markets are crucial for two-wheeler makers is that the former accounts for one in every two motorcycles sold. Therefore, any variation in demand in rural markets could impact the entire two-wheeler sector.
The outlook for the sector looks hazy as the India Meteorological Department (IMD) has warned of a below-normal rainfall this year even as several thousand villages in Maharashtra and Madhya Pradesh are already grappling with a drought-like situation. According to the IMD, this year’s southwest monsoon will be below normal at 93 per cent of the long period average — the average rainfall received by the country over 50 years since 1951.
This will likely put additional pressure on tractor and two-wheeler manufacturers, who were hoping that a good monsoon will bring the consumers back to the showrooms.
“The Indian economy is dependent on agriculture with about 55 per cent of population depending on agriculture though it has significantly reduced over the past decade. But the direct consumption of automobiles is also not very high except in a few segments, which include entry-level segment cars and mass segment motorcycle market,” said Y S Guleria, senior vice-president (sales and marketing) at Honda Motorcycle & Scooter India.
Entry-level motorcycles (100-110cc), which make up for about 60 per cent of total motorcycle sales, depend heavily on rural demand. Mileage and cost influence buying decision in this segment. Scooters are largely urban-centric and remain indifferent to the vagaries of rural markets.
Tractors will be another biggest loser if monsoon remains below-normal even this year. The sharp decline in farm yield since the middle of last year coupled with lower realisations will directly impact tractor off-take, believe industry watchers.
Despite lower sales last year, this year’s tractor sales are expected to be muted as prospective buyers will likely postpone their purchase or take tractors on rent.
Data from the Tractor Manufacturers Association show domestic sales were 488,227 units between April 2014 and January 2015, the first 10 months of the last financial year, against 541,795 units sold in the same period last year, a fall of 10 per cent. The decline has been steeper in November-December-January, a fall of nearly 30 per cent.
“We have not seen a more sharp drop in tractor sales since 2005,” added Pawan Goenka, executive director at Mahindra and Mahindra, which is the market leader in tractors with a share of 42 per cent.
Further, non-agricultural use of tractors (for hauling) has also seen a dip and is expected to remain that way if there is no improvement on infrastructure spending, say analysts. “Non-agri demand pull has also remained subdued, with slow pick-up in the pace of infrastructure and construction activity,” said research and rating agency ICRA.
Not wanting to depend on monsoon, companies have already started working on Plan B. These include decisions on opening new showrooms in rural areas and new product launches.
“As crops yield are reducing, this is a reality, which we are facing. We have to bring flexibility in manufacturing and formulate the right strategy. Every manufacturer has that plan broken down in weeks and months and depending on market dynamics; we need to prioritise and internally decide what needs to be done. Communications, strategising, networks prioritisation, marketing and product launches are some of those things and we all have to then tweak the plan according to the situation,” added Guleria.
Meanwhile, analysts are hoping that the urban market will likely look up in the coming months given that factors such as inflation, interest rates and fuel prices look favourable.
"With moderate inflation and the likelihood of reduction in interest rates, ICRA expects urban consumption demand to firm up to an extent in the coming months. Even if the monsoon in 2015 is favorable, a substantial pickup in rural consumption demand is likely to be visible only post the kharif harvest, i.e. in H2 FY 2016", ICRA said.