CRISIL expects a well-distributed and normal monsoon – as forecast by the Indian Meteorological Department (IMD) recently – to limit the impact of the Covid-19 pandemic on tractor sales volume this fiscal.

Despite a 37% on-year decline in April and May combined, tractor volume will likely be barely 1% below last fiscal’s level, in sharp contrast to a double-digit decline expected for the rest of the automobile industry.

That, and lower raw material costs and strong balance sheets bode stable credit outlook for tractor makers this fiscal.

The IMD has forecast the south-west monsoon to be at 102% of the long period average (LPA) in calendar 2020. Crucially, it sees rains well-distributed at 96-107% of the LPA in all the four regions. The monsoon’s approach so far has been timely with rains 21% above normal in June to date. The forecast for July and August – crucial months for kharif crop – is also encouraging at 103% and 97%, respectively, over LPA.

Says Manish Gupta, Senior Director, CRISIL Ratings, “Apart from overall adequacy, monsoon needs to be spatially well-distributed – by geography and timeliness (June-September) – to propel farm incomes and stoke demand for tractors. The IMD’s forecast is very encouraging for tractor volumes this fiscal.”

Favourable distribution of rains can even offset the adverse impact of a below-normal monsoon, such as in fiscal 2019 when domestic tractor sales volume grew a strong 8% on a high base and despite monsoon being 9% below the LPA. In fiscal 2020, on the other hand, poor month-wise distribution and large state-wise variation in rains – despite an above-average monsoon season overall – contributed partly to a 10% decline in tractor sales volume (see Chart 1).

Additionally, agriculture will be supported by high reservoir levels, seen at a massive ~94% higher than last year and 71% above the average of the past decade¹.

The recent hike in minimum support prices for major crops by 3-8% this kharif season also augurs well for rural incomes – more so as this follows a bumper rabi crop. While the recent locust attack could still play spoilsport, it came when most of the rabi crop had been harvested, and sowing was yet to commence for the kharif season.

Rural supply chains for tractors have been quick to bounce back from the lockdown, too, with more than 75% dealerships having reopened. That, along with some pent-up demand from March, led to 4% growth in domestic tractor sales volume in May on-year, despite the impact of the pandemic.

Sustained volumes, combined with benign raw material prices (80% of total costs), will support tractor profitability (EBIT margins) this year. Prices of key inputs such as steel and iron are expected to reduce 4-6%. This would provide manufacturers the headroom to increase discounts to stimulate volumes, if needed. Incidentally, even in fiscal 2020, lower commodity prices had helped the industry maintain margins despite a 10% volume decline.

Says Naveen Vaidyanathan, Associate Director, CRISIL Ratings, “Operating profitability of tractor makers should remain strong at 15% this fiscal. Given limited capex needs, credit profiles are expected to remain healthy, with the debt-to-equity ratio for the industry² likely to sustain below 0.1 time.”

That said, the pandemic’s progress, the distribution and volume of rains, and timely containment of the locust attack will be key monitorables from here.

¹ According to the Central Water Commission’s report on 123 large reservoirs that comprise two-thirds of the national storage capacity
² Companies considered include Mahindra and Mahindra, Escorts, Tractors and Farm Equipment, and TAFE Motors and Tractors