Sunday, Jun 15, 2003
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By Ramnath Subbu
The tractor industry has been sitting on a huge inventory build-up over the last five years and a normal monsoon would greatly alleviate their precarious position. Speaking to The Hindu, Mallika Srinivasan, Director, TAFE, said, "The last two years have been particularly difficult and challenging for the industry. There have been bad drought conditions in Rajasthan and Gujarat. We have probably hit the bottom now. A revival depends on the monsoon. A reasonably good monsoon and we could be seeing some revival in the season after next (post 2004)". An analysis done by Credit Rating and Information Services of India (Crisil) indicates that the year-end receivables of the five domestic tractor majors — Mahindra & Mahindra, Escorts, Eicher, Punjab Tractors and Tractors and Farm Equipment (TAFE) — have risen from less than a month's sales in 1996-97 to over five month's sales in 2002-03. The receivables were around 65,000 units as at March 31, 2003, which is equivalent to almost half their annual wholesale volumes in 2002-03. And this is in spite of the fact that manufacturers sharply cut down wholesale volumes in 2002-03 (to around 1.60 lakh units from 2.16 lakh units in 2001-02) in response to the weak demand conditions. "The early signs of trouble emerged in 1997-98 when retail volumes first diverged from wholesale volumes. Weakening retail demand combined with surplus capacity saw manufacturers competing for volumes and market share. Consequently, higher dealer credit became a popular way of boosting wholesale volumes. But with retail sales weakening, receivable levels increased steadily, resulting in a build-up of stocks in the distribution pipeline," according to Crisil. The industry is in an overcapacity situation now. While the consolidated capacity is well in excess of three lakh units per annum, wholesale sales in the industry during 2002-03 was 1.70 lakh units. "In the period between 1999 and 2002, market share was the criteria and players augmented capacities and went in for de-bottlenecking. Today the industry is left with little option but to control inventory and clear stocks," said Ajay Dwivedi, head, corporate ratings, Crisil. "Given the current situation, companies are re-engineering their manufacturing processes and reducing break-even levels. The intent is to maintain a strong financial profile," said Mr. Dwivedi. Over a period, there has been a gradual shift towards higher horsepower tractors. This trend, according to Mr. Dwivedi, is likely to continue. This is a result of corporate farming and land holdings having been integrated. On the other hand, it is also a response to conditions — higher HP tractors are required where soil conditions are hard while softer, clay soil conditions require lower HP tractors. Essentially then, States such as Andhra Pradesh and large parts of Maharashtra would require higher HP tractors while States such as Haryana and Punjab could settle for lower HP. "There has been a small shift in preference towards higher HP but in every State there is a differentiation depending on the soil conditions and crops. We at TAFE have developed a product specifically for Maharashtra where we have taken cognisance of the black soil and the pulling tonnage required for sugarcane crops," said Ms. Srinivasan. However, the distribution on the basis of horsepower does not bear that out. While 55-60 per cent of tractors sold are in the 35 hp range, 20 per cent are in the 45 hp range and the balance is accounted for by the below 25 hp and above 50 hp range. Another feature is that while earlier players were specialised in specific HP ranges — Eicher on 25 hp, TAFE on 35 hp and Escorts on 45 hp, today, players are expanding their portfolio across the board. Eicher had entered the 35 hp range and is now getting into the 45 hp range also. M&M is already present across the board. Today, manufacturers are focusing on product development, an area where there was low activity in the 1990s. But also, that period was a deficit market, a seller's market while today the scenario has changed to a buyer's market. Crisil expects retail volumes to remain weak over the next 12-18 months. "Such weak demand conditions coupled with large inventory pile-up are likely to exert margin pressure over the medium term. The likelihood of bad debts may also have a bearing o the financial profile of some of the tractor majors. Tractor players' ability to control bad debts and sustain their high working capital levels will be a critical determinant of their future risk profile". According to Mr. Dwivedi, "Over the long term, the players' ability to develop new products in response to the market's changing requirements such as the shift towards high tonnage segments or the greater emphasis on features, style and comfort would be crucial".
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