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Monsoons hold the key to profits - Views on News from Equitymaster
 
 
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  • Jan 15, 2000

    Monsoons hold the key to profits

    India is the world's largest tractor market with a density of about 10.5 tractors per thousand hectares of gross cropped area (GCA) compared to the world average of 19 tractors. However in the agriculture intensive states of Haryana, Punjab and Uttar Pradesh, the penetration rate is 26 tractors per thousand hectares.

    The tractor market in India has six main players - Mahindra & Mahindra (M&M) (market share 28.5 percent), Punjab Tractors (Swaraj) (18.4 percent), Escorts (18.6 percent), Massey (17.4 percent), Eicher (7.7 percent) and HMT (4.9 percent).

    The tractor market can be broadly divided into 5 categories viz., less than 20 HP, 20-30 HP, 30-40 HP, 40-50 HP and above 50 HP. The main segment of the tractor industry is the 30-40 HP segment accounting for more than half the total sales. The share of this segment has been growing rapidly over the last four years.

    During April - December 1999, the tractor segment showed a positive growth of around 8.3 percent (year on year). The main drivers of tractor demand are credit availability and agricultural production. The availability of credit from government sources and the boom in agriculture buoyed the performance of this sector even as the domestic industrial production slumped in financial year 1998 and 1999. The tractor segment has recorded a compounded annual growth rate of 8% over the last 15 years.

    Tractor majors rev up

    The prospects for the tractor industry too have brightened over the years. Subsequent governments in recent years have initiated efforts to improve the standard of living in rural areas. The measures to accomplish this involve access to cheap credit, better irrigation and infrastructure, fertilisers and pesticides and high yielding variety of seeds. All these factors aim at increasing the per capita incomes in rural areas and this is expected to have a direct impact on the demand for tractors. Added to this are measures initiated to increase the amount of arable land (currently estimated to be 170 million hectares) in the country. This too should help in driving up the demand for tractors.

    That the tractor market in India offers a lucrative opportunity to various players is evident in the international interest shown in this sector. John Deere, New Holland and SAME are entering the Indian market, either on their own or through joint ventures. The domestic players too have been getting aggressive to tap the boom in the tractor market. The aggregate domestic capacity is expected to grow 15 percent in financial year 2000 to over 382,000 units.

    The tractor industry has had a dream run over the last decade. However, things may get murky in the coming years. The prime concern stems from the sharp build up of capacities in the domestic industry. This is likely to lead to deterioration in margins as manufacturers slug it out to maintain/gain market share.

    Added to this is the presence of foreign companies. This will further intensify competition as these companies look at gaining a foothold in the market. As international players have an edge in terms of technology, domestic players could find themselves at a disadvantageous position.

    Finally, the biggest concern pertains to the success of the monsoons in the coming years. A failure of the same could create a supply glut in the market as demand collapses. This could have fatal consequences for the industry.

    The tractor manufacturers need to hedge their performance in the domestic markets. This could be achieved by targeting the export market. The export market is however very competitive and skewed towards larger tractors and this could pose a challenge for the domestic players. Nonetheless, a successful venture in the international markets could provide a much-needed hedge to the domestic players.

     

     

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