Report says industry volume of 2-wheelers will fall over next 2 years

Rising ownership cost on the back of price rise by firms, a spike in insurance and petrol costs, coupled with the regulatory changes like mandatory ABS/CBS from next April, will roil volume growth of two-wheeler makers at around 5 per cent in the next two years, warned a report.

Two-wheeler makers are awaiting a storm as the cost of ownership goes up sharply due to regulatory pressures and spike in oil prices. This will have companies hiking prices again over and above the already 6-8 per cent announced this year so far, Kotak Securities said in its report Monday.

While two-wheeler prices have already gone up by 7-16 per cent over the past two months due to increase in insurance cost, the petrol prices have gone up steeply by over 7 per cent in the past two months alone.

"At an aggregate level, two-wheeler prices are likely to increase further by Rs 4,000-7,000 once by April 2020. All this will leave the industry volume slipping to 5 per cent per annum during FY19-21," the report said.

"Prices are likely to increase further as ABS/CBS systems will become mandatory from next April and BS-VI norms are implemented from April 2020. Therefore, we expect two-wheeler volume growth to slow down significantly over the next two years," it added.

Ownership cost can rise by 7-12 per cent between August 2018 and April 2019 led by a sharp increase in insurance costs as the Irdai has made it mandatory to purchase five-year third-party insurance and the Irdai proposal to increase owner-driver insurance to Rs 15 lakh from Rs 1 lakh earlier over the next five years, noted the report.

While the ownership cost of scooters will rise by around 6 per cent between August 2018 and April 2019, the same for premium motorcycles will rise by around 10-12 per cent.

Another regulatory hurdle is the mandatory introduction of ABS from April 2019 for two-wheelers with 125 -cc engines, while CBS will become mandatory for those under 125-cc engines.

The report expects the prices of two-wheelers to rise by 7-16 per cent between August 2018 and April 2019 if the proposal of Irdai to increase owner-driver insurance is implemented alone.

On another hand, this will have a negative impact on finance companies as well as finance penetration in this sector may not increase significantly from the present 35 per cent of two-wheelers financed now, it said.

With a 65 per cent share, the two-wheeler financing is dominated by NBFCs, which are now going through a challenging time. This may, however, help captive financiers like Bajaj Auto Finance and Hero Fincorp, which may get more aggressive, according to the report.

Accordingly the brokerage has reduced its earnings estimates by 2-18 per cent over FY19-21 for Bajaj Auto, Eicher Motors, Hero Motocorp and TVS Motor, led by a 2-9 per cent cut in its volume assumptions, and a 20-150 bps slide in operating their margins.