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August 10, 2017

Sector Report: Tractors

This report is available to users in India for ₹40,000 + applicable taxes


Tractor sales to grow at a healthy pace in 2017-18 with normal monsoon forecast andfarm loan waiver announcements


CRISIL Research expects domestic tractor sales volumes to grow by 9-11%, with monsoon progress hovering around the normal threshold till date (5%below the Long Period Average as on 21 August). Additionally we expect an upside of 4-6% due the announcement of farm loan waiver in few states,taking the total expected growth for this fiscal to 14-16%.


While the monsoons were progressing well till the end of July, the momentum has slowed down mainly in the central region, apart from deficiencybeing witnessed in the peninsular areas. Kharif sowing has also come down, with acreage at 97.6 million hectares as on 18th August, lower by 1%compared to the same period last year. However, there are still expectations of a healthy harvest, and farm sentiments remain positive in most areas ofthe country. The farm loan waiver announced by governments of Uttar Pradesh (UP), Maharashtra, Karnataka and Punjab, is expected to provide afurther 4-6% upside to the industry growth, with incremental demand mostly coming from UP, Maharashtra and Punjab. Government focus on ruralinfrastructure development should also spur non-farm tractor demand in 2017-18.


Long-term growth of 8-10% expected


The tractor industry 5-year CAGR from 2017-18 to 2021-22 is expected to be 8-10%, with the outlook taking into account possibility of 1-2deficient rainfall years during 2017-18 to 2021-22.


Governments renewed thrust towards improving the rural economy, via measures such as doubling farm income by 2022, increasing spendtowards irrigation, and improving crop productivity by distributing soil health cards is expected to drive growth in the long term. This will alsobe supported by other measures like the e-NAM (National Agriculture Market), expanding crop insurance, and gradual spread of CustomHiring Centres. With increasing mechanization on farm fields, this bodes well for structural tractor demand growth.


With current tractor population of ~4million in India, penetration in India is only 1.3 hp/ha which is much below the world average of 3-4hp/ha, leaving much scope for growth. Keeping that as a benchmark, nearly 13 million farm tractors are required to till India's arable area of159.2 million hectares, indicating a sustained growth potential of 8-10% CAGR (excluding commercial tractors) until 2026-27.


Industry margins to remain stable in 2017-18


In 2016-17, operating margins are expected to have improved by 180-200 bps, on the back of strong traction in tractor demand during thefiscal, and increase in capacity utilization. The margin expansion was however limited by a pick-up in prices of basic raw materials.


Operating margin is expected to remain unchanged in 2017-18, as raw material costs rise during the fiscal, however, improvement inindustry revenues on the back of steady growth in sales volumes, and subsequent increase in capacity utilization should help support marginimprovement.


Return on Capital Employed (RoCE) is expected to have improved sharply in 2016-17, on the back of strong improvement in operating margins andcapacity utilization. Further improvement in utilization should help in continued increase of RoCE.