Don’t miss the latest developments in business and finance.

Two-wheelers prove to be better bet for auto makers amid economic slowdown

Analysts attribute this to the slowdown in the job market, which has a bigger economic impact on urban India

Two wheelers
Two-wheeler sales have consistently outpaced PVs over the past decade
Krishna Kant Mumbai
3 min read Last Updated : Oct 12 2020 | 11:10 PM IST
Two-wheelers have turned out to be a better bet for auto makers, compared to passenger cars and sports utility vehicles (SUVs). Sales of passenger vehicles (PVs), including SUVs, had declined to a four-year low of 2.65 million in FY20, even as the two-wheeler market grew 9 per cent between FY16 and FY20. In FY20, domestic PV sales slid 22 per cent year-on-year (YoY) to 2.65 million units, while two-wheeler sales declined 18 per cent YoY to 17.4 million.
 
Two-wheeler sales have consistently outpaced PVs over the past decade. PV sales have grown at a compound annual growth rate (CAGR) of 3 per cent over the last 10 years, against the 6.4 per cent CAGR in two-wheeler sales.
 
Analysts attribute this to the slowdown in the job market, which has a bigger economic impact on urban India. “Most people usually start with the purchase of two-wheelers when they land their first job, and then upgrade to cars or SUVs as their income improves. This conversion is no more happening as fast as in the past,” says Jinesh Gandhi of Motilal Oswal Financial Services. Others say two-wheelers are more popular in rural regions and smaller towns, while four-wheelers attract more demand in metros and bigger cities.
 
“The economic slowdown seems to have had a bigger impact on purchasing power in metros and bigger cities. This has translated into a harder hit on car sales,” says Shailendra Kumar, chief investment officer of Narnolia Securities.


 
Consequently, the ‘two-wheeler to car’ ratio has seen a sharp rise. There were 4.8 two-wheelers for every PV 10 years ago, but the ratio has spiked to a 17-year high of 6.7x. This has led to a situation where auto makers such as Honda are raking in higher revenues and profits from two-wheelers.  In FY19, Honda Motorcycle & Scooters India reported revenues of Rs 27,000 crore, vis-a-vis Rs 17,000 crore clocked by Honda Cars India.
 
Similarly, Honda’s two-wheeler venture in India reported an operating profit of nearly Rs 3,500 crore in FY19, against Rs 1,400 crore reported by Honda Cars.  Honda is among the few automakers with a strong presence in both two-wheelers and passenger cars. Data for FY20 was not available for any of the Honda subsidiaries in India. Analysts say this has caused the deviation from the phenomenon of graduation to a four-wheeler along with a rise in income and consumer aspirations. This phenomenon was at its strongest during FY04 to FY11.
 
The result was a steady decline in the ‘two-wheeler to PV’ sales ratio between FY04 and FY11, as car sales grew faster than two-wheelers.
 
For example, PV sales nearly tripled during the period, from 1 million in FY04 to 3 million in FY11, growing at an annualised rate of 16 per cent. During the same period, two-wheeler sales doubled from 5.4 million to 11.7 million, growing at an annualised rate of 11.8 per cent.
 
Consequently, for many analysts, the ‘two-wheeler to PV’ sales ratio is a strong barometer of the health of the overall consumer market, as well as of the broader economy.

Topics :two wheelersPassenger VehiclesSUVs

Next Story