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Table of Contents
Short term demand
Long term demand
Competition & players dynamics
Tractor sales to continue on the growth path in fiscal 2020 assuming normal monsoon
CRISIL Research expects domestic tractor sales volumes to continue its growth momentum, and increase by 6-8% in fiscal2020, assuming normal monsoon. Below factors are expected to aid the tractor sales growth -
Government support (Central + State) of Rs 2 lakh crores through farm loan waivers and direct farm income support
Normal monsoon and higher food-grain crop output for kharif season in fiscal 2019 has led to positive sentiments in states like Uttar Pradesh, Punjab, Haryana - the major contributors to the high crop output. It is expected to lead to postive cash flow in the hands of farmers, supporting the industry.
Continued focus on rural road construction - by allocating higher amount to PMGSY scheme in interim budget 2019-20 is expected to support non-farm demand.
However, deficient rainfall in the states such as Maharashtra, Gujarat (Western region), Andhra Pradesh (Southern region), Bihar, Jharkhand (Eastern region) is expected to subdue the sentiments. However, with increased government regulation on illegal mining activities, commercial demand to take a hit from sand mining activities. Long-term growth of 7-9% expected
The long term tractor industry CAGR from fiscal 2018 to fiscal 2023 is expected to be 7-9%. The forecast also takes into account possibility of 1-2 deficient rainfall years during this period.
Governments renewed thrust towards improving the rural economy, via measures such as doubling farm income by 2022, increasing spend towards irrigation, direct farmer income support through PM-KISAN scheme and improving crop productivity by distributing soil health cards is expected to drive growth in the long term. This will also be supported by other measures like the e-NAM (National Agriculture Market), expanding crop insurance, and gradual spread of Custom Hiring centres. With growth in rural wages also decelerating, and increasing mechanization on farm fields, this bodes well for structural tractor demand growth.
With current tractor population of ~5 million in India, penetration in India is only 1.5 hp/ha which is much below the 8-10 hp/ha penetration of developed countries, leaving much scope for growth. Keeping that as a benchmark, nearly 13 million farm tractors are required to till India's arable area of 159.2 million hectares, indicating a sustained growth potential (excluding commercial tractors) until fiscal 2027
Operating margins to improve in fiscal fiscal 2020
In fiscal 2020, capacity utilization levels are expected to improve marginally. While tractor demand is expected to improve moderately, capacity additions are also expected by players, offsetting the contribution by growth in tractor production. Expected correction in basic raw materials in fiscal 2020, will lead to decline in basic raw material index by (3)-(5) and assist the expansion in margins in fiscal 2020 as players usually keep the benefit of declining raw material prices. Return on Capital Employed (RoCE) is expected to improve in fiscal 2020, on the back of expansion in operating margins and capacity utilization.