Domestic tractor sales volume should recover faster than expected and notch up 10-12% growth this fiscal, compared with a de-growth of 1%¹ estimated earlier, as a raft of tailwinds lifts farm incomes despite the Covid-19 pandemic. Higher volume and improved product mix will drive expansion in operating margin² of tractor makers³, supporting credit profiles.

Good monsoon and higher crop production generally support farm incomes and provide a fillip to tractor demand. In the just-past rabi season, crop production surged a significant 7% on-year. This is reflected in the strong pick-up in tractor sales volume in the second quarter of this fiscal despite a sharp de-growth in the first quarter due to pandemic-related containment measures. In April-September, industry volume was up 12% on-year.

Tractor volumes may continue to grow for the rest of this fiscal given good crop prospects over the medium term and timely government interventions. Good rains in June have facilitated early sowing and boosted kharif acreage. Further, a well-distributed and 9% above-normal monsoon season have meant reservoir levels surging to their highest in five years. That is a good augury for the upcoming crop seasons.

Says Gautam Shahi, Director, CRISIL Ratings, “Strong upsurge in government spending on agriculture in the first six months of this fiscal, and a ~4% increase in minimum support price for marketing year 2020-21, should boost farm incomes. That may help sustain the growth momentum in tractor volume.”

Tractor demand growth in the southern and western parts of India is expected to be particularly strong, given higher kharif sowing and a copious monsoon, both of which are crucial for these regions. Sales volume in the two regions in April-September (see annexure) has surged almost 45% and 13%, respectively.

Also, tractor demand for use in agriculture, which accounts for two-thirds of total demand, is expected to significantly outpace commercial-usage demand, which is linked to economic activity. This is expected to materially improve the volume share of 41-50 horse power tractors to ~52% this fiscal from ~49% last fiscal. That could tantamount to ~200 basis points (bps) fillip in the average realisation of tractor makers.

Says Naveen Vaidyanathan, Associate Director, CRISIL Ratings, “Higher utilisation and better product mix will crank up the operating margins of tractor makers by 100-200 bps to ~17% this fiscal. That, and healthy balance sheets (with debt to equity ratio at ~0.1 time on average) and robust liquidity (~Rs 11,000 crore as on March 31, 2020) will support credit profiles.”

In the road ahead, the spread of the pandemic, especially in rural areas, and whether it leads to further containment measures, will be a monitorable.

¹ https://www.crisil.com/en/home/newsroom/press-releases/2020/06/good-monsoon-to-limit-tractor-volume-skid-to-1percent-this-fiscal.html
² Operating margin is defined as earnings before interest and taxes
³ 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 2020.