New Delhi, Two-wheeler industry unit sales are now likely to decline between 16 and 18 per cent to around 17 million units in FY2021 on the back of the overall macro-economic scenario, ICRA Ratings said on Thursday.

The ratings agency had earlier estimated a decline of 11-13 per cent, but revised the forecast considering the Covid-19 demand-supply disruptions, looming income uncertainties and increased cost of ownership of BS-VI vehicles.

Accordingly, ICRA expects two-wheeler OEMs to brace for another year of lower earnings and decline in average operating margins by 150-200 bps to 11.5-12 per cent.

Nonetheless, the price escalation and the depreciating rupee, coupled with continuous cost rationalisation initiatives, would provide some support, it said.

"The aggregate capacity utilisation levels for the industry sample is expected to decline to 55-60 per cent from around 70 per cent. However, despite moderation, the 2W OEMs will continue to have strong credit profiles characterised by healthy 'ROCE' (average ranging between 18-20 per cent) and comfortable balance sheets with negligible debt and strong cash and liquid investments," the ratings agency said in a statement.

"While any major expansion plans are expected to be deferred till the demand recovers sufficiently, it is expected that OEMs will continue investing in new product development and network expansion."

According to the ratings agency, fiscal 2021 started on a sombre note as the pandemic outbreak caused unprecedented disruptions to both supply and demand.

"While the operations resumed in May 2020, the unabated rise in Covid-19 infections in unlock phase have resulted in localised re-imposition of lockdowns in several states," the statement said.

"This has interrupted the pace of overall economic recovery and has led ICRA to revise its forecast for GDP contraction in FY2021 to 9.5 per cent YoY from 5 per cent estimated earlier."

Notwithstanding the overall muted macro-economic sentiments, the agency said that on the positive side, the rural economy offers some growth off-shoots in the form of healthy rabi output and lower Covid-19 impact.

"Higher farm income has led to sequential pick-up in 2W demand in June and July 2020. After a timely onset, monsoon progress remains healthy across most regions," the statement said.

"Benefiting from favourable moisture conditions and seasonally high reservoir levels, kharif sowing has been progressing well (up 19 per cent till July 24, 2020). These factors coupled with the government's various agri-focused initiatives, are expected to support farm cash flows and 2W demand."

In the urban markets, which have been more severely impacted by the pandemic, the agency said a preference towards personal mobility could push near-term demand.

"However, these would only help to partially offset the adverse impact of the pandemic. Given the expectation of sharp decline India's GDP, lower job creation and income uncertainties, two-wheeler demand will most certainly remain adversely impacted," the statement said.

"There is a likelihood of downtrading by consumers as well once the economy starts to cripple back to normalcy."

On the export front, ICRA said that while long-term drivers remain favourable, Covid-19 fallout and volatility in crude oil prices (as it impacts demand in key markets) remain a near term negative.

"Nonetheless, an attractive product portfolio and continued focus of Indian 2W OEMs on building and expanding overseas sales and after sales networks (replacement market) provides potential for growth in the medium term," the agency's statement added.