India’s bicycle industry is pedalling to a decadal-high demand growth of 20% this fiscal, with sales likely to touch 1.45 crore units compared with 1.2 crore¹ units last fiscal. The ongoing Covid-19 pandemic has spurred demand for bicycles owing to improving fitness consciousness and leisure requirements.

The resultant improvement in cash flows – amid higher capital expenditure – will support the credit profiles of Crisil-rated bicycle manufacturers, which account for ~60% of industry volume.

India is the second-largest manufacturer of bicycles in the world. The industry is classified into four segments – standard, premium, kids and exports. Demand for standard bicycles, which is the largest segment (accounting for half of all bicycles sold in 2020) is driven by government purchases. Government departments procure these bicycles through a tender process and distribute under various welfare schemes. Demand for premium and kids bicycles (nearly 40%) is driven by fitness and leisure needs. Exports and sales of other kinds of bicycles constitute the remaining 10% demand (refer to chart 1 in annexure).

In the five fiscals through 2019, bicycle sales volume logged a modest compound annual growth rate of ~5%. In fiscal 2020, it contracted a massive 22% as government purchases plunged and a large bicycle manufacturer downed shutters. However, last fiscal saw a turn for the better.

Says Nitesh Jain, Director, Crisil Ratings Ltd, “The pandemic-induced constraints on fitness and leisure options increased the demand for bicycles, especially in the premium and kids segments. Strong growth in these limited the overall decline in sales volume to just 5% in fiscal 2021 despite a further reduction in government purchases. The momentum is likely to continue this fiscal, too, given the ongoing second wave of pandemic, and should lead to a 22% growth for the premium and kids segments.”

In the past couple of months, however, orders from government departments have started improving. Consequently, demand for standard bicycles is likely to grow after two dull years.

Overall sales growth this fiscal will support the profitability of bicycle makers for two reasons. One, improved product mix as the premium and kids segments have higher profitability and their market share has increased 1,000 bps to over 50% now. Second, demand in the premium and kids segments is relatively price-inelastic. That allows manufacturers to pass on any increase in the prices of raw materials such as primarily steel, which accounts for 60-65% of the total cost of manufacturing a bicycle. This was also evident last fiscal (refer to chart 2 in annexure) where profit margins improved despite higher steel prices.

Says Rakshit Kachhal, Associate Director, Crisil Ratings Ltd, “We expect the industry’s margins to further improve by 110-130 bps this fiscal. While manufacturers will borrow more to enhance their capacities this fiscal, debt metrics will still improve. We see interest coverage rising to ~4.8 times from ~3.6 times last fiscal.”

While lockdowns have slammed the brakes on sales, pent-up demand can be expected once sales outlets open.

This analysis assumes demand would decline by a third in the first quarter of the current fiscal. Recovery is expected from the second quarter with Covid-19 caseloads and lockdowns likely to peak in June, and as vaccinations pick up pace. Any subsequent resurgence in infections will be a monitorable.

¹ This is estimate for the organised segment volumes which roughly account for three fourth of the total industry volumes.