Two-wheeler sector to grow at over 10 per cent CAGR: ICRA

The Indian two-wheeler (2W) industry has shown a strong volume growth over the last two-years, having grown by 25 per cent in 2009-10 and 27 per cent in 2010-11 to reach 13.3 million units.

This strong double-digit growth has been driven by multiple factors including pent-up demand of the 2007-08 and 2008-09 period when the industry volumes were essentially flat, besides various underlying factors including India's rising per capita GDP, increasing rural demand, growing urbanisation, swelling replacement demand, increasing proportion of cash sales and the less measurable metric of improved consumer sentiment.

According to ICRA's senior group vice president and co head, corporate ratings, Subrata Ray, ''The two-wheeler industry should grow at a volume CAGR of 10 per cent -12 per cent over the next five years to reach a size of ~21-23 million units by 2015-16 as the fundamental growth drivers - comprising of expected steady GDP growth, moderate 2W penetration levels, favourable demographic profile, under developed public transport system and utility quotient of a 2W – are intact."

Ray says the entry of new players in the industry, multitude of new model and variant launches, growing distribution reach, cheaper ownership costs on a relative basis, should be some of the other prime movers for industry growth over the medium term.

"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,'' he maintains.

The rating agency says the Indian two-wheeler sector is set to evolve as several new players are keen to enter into the Indian market which would further intensify competition.

It says most existing manufacturers plan to extend / strengthen their reach into the rural and semi-urban markets to harness incremental growth opportunities; and manufacturers are showing increased thrust on 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.