Tractor volume may contract 5-7% this fiscal: Report

Tractor sales in the last fiscal stood at an all-time high of 8.78 lakh units

The tractor industry volume is likely to contract 5-7% in the current fiscal on weak growth in rural income, moderation in rural infrastructure spending and higher channel inventory, says a report.

Tractor sales in the last fiscal stood at an all-time high of 8.78 lakh units, rating agency Crisil said in a report on Tuesday, adding the high base effect would also contribute to the decline. However, despite lower volume, resilient margins of 14-16% and strong balance sheets are expected to keep credit profile of the manufacturers stable, it said.

Also, long-term growth potential remains healthy given lower penetration of 1.5 hp per hectare, compared with an average 6-7 hp in the developed economies and 3-4 hp in the emerging economies. This should give hope to domestic tracker makers, though an immediate revival in tractor sales remains contingent on an improvement in purchasing power in rural markets, it added.

“We believe weak growth in rural income, moderation in rural infrastructure spending, higher channel inventory, and the high base effect will lead to de-growth in tractor sales volume by 5-7% this fiscal,” Crisil said.

Noting that the industry is cyclical and heavily dependent on rural incomes and monsoons, it said the rural income was impacted towards the second half of last fiscal because flat crop production after two years of 5-6% growth, and farm profitability declined due to weak pricing.

Consequently, rural wage growth was lower at 3-4% compared to an average 6% in the preceding two years, it said adding lower growth in spending on rural infrastructure has also impacted non-farm tractor demand in recent months.

Additionally, exports, which contribute 10-11% of sales, also declined 28% in the first quarter due to moderation in demand from Latin America. But in the second half, demand should be supported by a sharply improved progress of the Southwest monsoons in the past few weeks, which has brought down the deficiency from 19% as of July 24 to a surplus of 1% as of August 28.

“The likelihood of normal monsoons has increased with the rains catching up in the last few weeks. This augurs well for farm income and tractor demand. Additionally, the recent budget announcements for agriculture and allied activities, the loan waivers in some states and the hike in minimum support prices for kharif crops, along with rural development initiatives are likely to push sales,” it said.

Despite lower overall volume, the operating margins of tractor makers should be resilient at 14-16%, supported by easing commodity prices.

The prices of steel and pig iron, which account for 90% of the raw material costs, have corrected about 7- 10% between April and July. This should help mitigate the impact of discounts being offered by tractor makers to push sales, Crisil said.

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Printable version | Apr 3, 2020 3:38:04 PM |

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