November 15, 2016
Entry segment two-wheeler’s near term growth momentum may be impacted by the ban on high denomination notes: ICRA
The recent move by the Government of India to ban the legal tender character of the high denominated bank notes of Rs 500 and Rs 1000 issued by Reserve Bank of India (RBI) from the midnight of November 08, 2016 is expected to have a moderate adverse impact on the domestic two wheeler sales volumes in the near term – a sector which appears to have been on steroids posting a growth of 16.0% growth (YoY) during April-October 2016.
While the prevalence of the usage of unaccounted for cash for purchases of two wheelers is not as high as in certain other sectors, the temporary liquidity issues owing to restrictions on cash transactions entailing bank notes of Rs. 500 and Rs. 1000 denominations is likely to affect the demand for the segment of two wheelers which are cash-purchase driven. As per ICRA’s estimates, rural markets account for about 60- 65% of the entry segment motorcycle sales and given the high propensity for cash purchases in the rural markets, the entry segment of the motorcycles is expected to be a casualty. Though favourable monsoons have been a significant trigger for healthy demand from the rural markets during the current fiscal, most of the sales have been sentiment driven given that the kharif crop sales have commenced in October / November. However, the recent ban on high denomination notes and the consequent constrained liquidity may result in dip in realisations as well as delay in realisations of crop sales thereby causing postponement of demand for such vehicles. Additionally, unavailability of adequate cash during the preparation of sowing time for next Rabi season is also likely to have a bearing on farm incomes in the next season. On the other hand, the >500cc super-premium segment is also likely to witness some volume pressure given the relatively high prevalence of unaccounted for cash in the purchases of this segment motorcycles. Nevertheless, owing to minimal contribution of this segment to the overall two-wheeler sales, the impact of the same on the domestic volumes is likely to be negligible unlike that of entry segment motorcycles.
However, ICRA believes that the adverse impact is likely to be a short term one. With strong structural factors and demand drivers, the two wheeler volumes are likely to revive in the forthcoming months.
According to Subrata Ray ,Senior Group Vice President, ICRA: “The Government’s move to withdraw the legal tender character of Rs. 500 and Rs. 1000 denominated notes could negatively impact demand in the short term for entry level motorcycles that have a sizeable rural customer base. Given that the ban on currency notes coincides with kharif crops reaching markets, there could be an adverse impact on realisations as well as cash collections for farm community. Additionally, with restrictions on cash availability and farmers’ priorities of deploying the same for sowing requirements of winter crop besides servicing other obligations, the demand for two wheelers may be postponed”.
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