CRISIL expects tractor sales to touch a new peak of over 6.5 lakh units this fiscal given prospects of a successive normal monsoon, with declining interest rates and farm loan waivers by states also helping matters.
 

Sales had risen 18% last fiscal on good rains -- and despite demonetisation – after declining more than 10% in 2015 and 2016, when monsoon had played truant – underscoring the strong correlation between weather and the toplines of tractor makers.
 

Yet last fiscal’s sales, at 5.8 lakh units, were lower than in 2014, suggesting some pent-up demand could manifest given conducive conditions.
 

The Indian Meteorological Department (IMD) has predicted a normal monsoon this fiscal, too. And thus far, showers have been well-distributed, with cumulative rainfall at 102% of the long period average.
 

Says Manish Gupta, Director, CRISIL Ratings, “While the cascade of good tidings from weather to farm to the farmer is on, there is another structural positive to note, which is that average tractor penetration in India is very low at ~20 per 1,000 hectares. That underlines the kind of headroom for growth available over the long term.”
 

Additionally, the farm loan waivers in states such as Maharashtra, Punjab, and Uttar Pradesh which account for more than a quarter of the domestic tractor sales – plus the fact that other states could follow suit -- will put money in the hands of the farmers. This, along with declining credit cost will support tractor sales. The increase in minimum support price will also help.
 

Data suggest loan waivers can also offset the adverse impact of bad monsoons on tractor sales. For example, the waiver announced by the central government in fiscal 2009 had led to 30% growth in tractor sales in 2010 that, in turn, saw deficient monsoon. To be sure, there was another bolster here: subdued sales in the two fiscals preceding, which meant there was pent-up demand. And the momentum seen in fiscal 2010 continued through 2011 and 2012 because of normal monsoons.
 

In the longer-term, there are other tailwinds, too: a doubling of budgetary allocation for long-term irrigation funds, expansion of crop insurance coverage, a sharper focus on mechanisation, and increasing usage of tractors beyond tilling and haulage.
 

As a result, CRISIL’s credit outlook for tractor makers – it rates Mahindra & Mahindra and TAFE, two of the biggest in India with a combined market share of ~65% -- is positive, supported by strong demand and healthy balance sheets. With capacity utilisation in the industry at ~60%, companies can easily address surges in demand without fresh capex.
 

In the very near term, the extent of farm loan waivers and the spatial and temporal distribution of rains will be key monitorables.