Growth in domestic tractor sales volume will be limited to 3-5% this fiscal, given the strong second wave of Covid-19 infections and rising cases in hinterland, apart from high-base effect of last fiscal. This is despite the forecast of a normal monsoon auguring well for farm incomes and therefore tractor demand.

Also, the operating margin¹ of tractor makers will shrink on an average by ~200 basis points (bps) due to firming up of steel prices, which is the primary raw material and accounts for bulk of the cost. Albeit, operating margins will still remain healthy.

The credit profiles of tractor makers² will, continue to remain stable, supported by strong and almost debt free balance sheets, as well as robust liquidity.

Says Gautam Shahi, Director, Crisil Ratings Ltd, “The already high base of last fiscal and severity of the second wave preclude significant tractor volume growth this fiscal. Several states have imposed lockdowns recently, and crucially, rural India has been less insulated this time around. Maharashtra, Uttar Pradesh, Haryana, Karnataka, Madhya Pradesh and Rajasthan, which account for over 50% of tractor volumes, have seen a surge in infections.”

Domestic tractor volumes logged a whopping 27% on-year growth last fiscal to a record 9 lakh units. This growth was driven by strong government spend on rural schemes and an increase in farm incomes, supported by good monsoons. Moreover, rural India was less impacted by the pandemic last fiscal and farmers redirected savings from spending on marriages, etc, towards tractor purchases.

Part of the good augury is expected to continue with forecast of a well-distributed and normal monsoon (98% of long period average) this year, too. This should benefit farm incomes and help sustain demand for tractors. An all-time high rabi-sowing and expected good kharif season, driven by healthy reservoir levels, will be supportive, too.

Additionally, increased government spending in rural India and prospects of higher minimum support prices for 2021-22, should buoy rural incomes. Also, non-agricultural tractor demand (20-25% of demand), which moderated last fiscal, is expected to recover, supported by recovery in rural infrastructure and mining activities compared with last fiscal.

Even as tractor volumes growth remains in positive territory, players in the sector have seen their cost of operations rise sharply as the price of the primary raw material, steel (75-80% of total cost), has appreciated sharply. Primary steel prices increased by over ~60% in the six months through April 2021, and are expected to remain strong in the near term, before easing in the second half.

Although tractor players generally enjoy good pricing power, they are expected to absorb a part of the cost inflation given the sudden surge in steel prices.

Says Naveen Vaidyanathan, Associate Director, Crisil Ratings Ltd, “We could see a moderation in operating margin to 15-17% this fiscal, from ~18-19% seen in fiscal 2021, as players absorb part of the cost inflation. This, however, will still be healthy, given expected high capacity utilisation of ~78-80% in fiscal 2022 and strong operating leverage. Credit profiles, too, are expected to remain healthy, with negligible debt levels for most players, robust cash surpluses of Rs 16,000 crore and low capital expenditure requirement.”

For the road ahead, the monitorables include the surge in Covid-19 infections and its spread to the hinterland, the progress and spread of monsoon, and their impact on rural demand.

¹ Operating margin is defined as earnings before interest and taxes
² Companies considered include Mahindra and Mahindra, Escorts, Tractors and Farm Equipment, and TAFE Motors and Tractors, which comprised about 70% of domestic industry sales in fiscal 2021.