Tractor industry: Over the hump? - Views on News from Equitymaster

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Tractor industry: Over the hump?

Apr 21, 2004

Backed by strong demand inducing factors such as attractive finance schemes and strong economic growth, the auto industry (includes cars, U.Vs and multi purpose vehicles) has registered a healthy jump of 32% in sales in FY04 on a YoY basis. However, the tractor industry has been a disappointment. Owing to indifferent monsoons in the year leading upto FY04 and a decline in government buying due to piling up of food grains, the industry volumes have witnessed a steady decline since FY00. But as we have been maintaining since February 2003, the industry is coming out of the trough.

As is evident from the chart above, while the industry volumes grew at a CAGR of around 10% for the five-year period leading upto FY00, it suffered a similar decline over the next three years on a CAGR basis. The drop in sales was even steeper in FY03, where it suffered a fall of around 23% over the previous year.

Since the fortunes of the industry are predominantly linked to the health of the agriculture sector, a drought like condition in the major states of MP, Rajasthan, Gujarat and Southern region in calendar year 2001 and a drought all over India in calendar year 2002 affected the industry sales. Moreover, with nearly 65 m to 75 m tonnes of food piling up in government godowns, it led to a squeeze in purchasing, thus resulting into lesser income in the hands of rural populace. Also, on account of low recoveries of debt, the banks became skeptical of lending to farmers and this led to a marked decrease in the availability of credit. All these reasons led to a lower demand for tractors and impacted industry sales.

However, starting 2QFY04, volumes have been on the rise. With 32 of the 36 meteorological divisions receiving normal to excess rainfall, the agricultural production has improved significantly and grew by a strong 17% on a YoY basis, during 3QFY04. Moreover, the buffer stocks available with the government have also come down by 30 m tonnes and stood at a 35 m tonnes level as of June'03. This will lead to higher procurement and will help in driving up the farmer's income.

The positive impacts of these favorable factors have already begun to trickle in. During the period April-Feb' 04, the industry sales have witnessed a rise of nearly 8% on a YoY basis. Moreover, if the inventory levels with M&M, one of the leading players in the industry is any indication then things are beginning to look up on this front as well. According to the company, the inventory with the dealers as of 31st Jan 2004 stood at 1,852 tractors, lower by around 74% from the FY02 levels and 55% from the FY03 levels.

The long-term scenario also looks promising. As can be seen from the table below, the tractor density in the country per thousand hectares of land is not only lower than the developed world but also lower than the world average. Moreover, still only 10% of the current villages account for majority of tractor population, and 70% of our villages still do not have a tractor.

 Tractor density/000' hectaresAvg HP/hectare
India12.40.4
Developed nations32.12.6
World17.41.4

While there is little doubt over the potential of the sector in the country, government agencies and policymakers are also trying their best to convert this potential demand into an actual one. On the financing front, the interest rates have come down from 12%-16% range to a much more affordable 11.5%. Also, apart from district co-operative banks, commercial banks and private sector banks have started offering credit to this sector.

On account of the above factors, it is being felt that barring a few short-term blips, the long term prospects of the industry look good and the annual demand for tractors is expected to touch the 2.7-2.9 lakh per year mark by FY07 from the current 1.7 lakh per year levels. But not all tractor stocks are attractive for retail investors even with a three-year perspective. To that extent, caution has to be exercised.

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