The rain gods have cast a shadow - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

The rain gods have cast a shadow

Dec 2, 2000

India is the world's largest tractor market with a volume of 0.3 million units per annum. The total tractor population is 2.4 million. There are currently 12 tractor manufacturers in the country, with top 6 accounting for 96 percent of the total industry share. Tractors are used in rural India not only for agricultural purposes but also for haulage of goods and people. These additional uses of tractors provide the farmer with other forms of supplementary income. The tractor industry has been facing tough times in the recent past. In the last three years agricultural production has been erratic resulting in a low 2 percent growth in the tractor industry from fiscal year 1998 to 2000. Since the past few years unfavourable monsoons have lead to lower rural incomes. The fall became more evident in the fourth quarter fiscal year 2000 as un-remunerative prices of agricultural produce in certain states, resulted in a further decline in demand of tractors. On the supply side, manufacturers flooded the markets with their products resulting in high inventory levels with dealers.

Tractor market growth rates
Last 25 years 9.1%
Last 15 years 8.2%
Last 10 years 8.2%
Last five years 10.2%
Last one year 1.6%

The current financial year started with drought conditions in the states of Gujarat and Rajasthan. The current year's monsoons do not augur well for the rest of the year as they have resulted in deficit rainfall in certain states and flooding in some others. All these have added to decline in tractor offtake by 11.9 percent for the first half of fiscal year 2001 (1HFY01). In the current year agricultural production is estimated to grow by a lowly 0.9 percent. Though the scenario on inventory levels has started to ease out recently, the tractor industry is expected to close the year with a negative growth rate.

This negative trend in the industry has spurred many players to adopt a strategy known as 'advancing'. In this, the manufacturer gives the tractor on a trial basis with no immediate down payment. The amount is to be collected at a later date. Following this concept, Mahindra & Mahindra, has taken away a large chunk of the tractor market share. Its market share went up from 27 percent in the 1HFY00 to 33 percent in 1HFY01. However, the fear of bad debts hangs over manufacturers as the fortunes of this industry are linked to the vagaries of monsoons.

M & M's market share improves
(%) 1HFY00 1HFY01
M & M 27.4% 32.9%
Escorts 19.0% 16.9%
PTL 19.0% 18.2%
Massey 17.0% 11.4%
Eicher 7.1% 6.5%

In terms of horse power (HP), the 30-50 HP segment accounts for over 70 percent of the total tractor market in fiscal year 2000 (FY00). Though this segment has been fairly stagnant in the past few years, all major tractor manufacturers have their presence here. The other segment's which have done well in terms of higher volume growth are the 21-30 HP and the 41-50 HP segment. In FY00, the 21-30 HP segment grew by 15 percent YoY (year on year), while the 31-40 HP segment fell by 3 percent YoY.

In the 21-30 HP segment, Eicher which has a large presence in this segment is facing rough times due to the hike in excise duty in this segment from 8 percent to 16 percent in the current fiscal year.

31-40 HP has lost some ground
(% of total composition) FY99 FY00
21-30 HP 23 26
31-40 HP 58 55
41-50 HP 16 16
51 and above HP 4 4

Despite the current scenario, India's tractor industry has reasons to look forward to. The total arable land in India is 166 million hectares. Of this, about 83 million hectares have around 10 million holdings. Assuming even half of these holdings start owning tractors, the total tractor population will double from current 2.4 million to 5 million.

The penetration of tractors on an average is 10 per thousand hectares, as compared to the world average of over 40 per thousand hectares. This underlines the potential of increasing tractor sales in India. Given the fact that bank finance is available on a priority basis for the agricultural industry, farmers have no problem in getting loans for buying tractors. What is required is adequate purchasing power in the hands of marginal farmers, who have smaller holdings.

South tractor sales up
  FY00 FY99
North 44.0% 44.0%
South 13.0% 9.0%
East 7.0% 7.0%
West 34.0% 38.0%

Perhaps it was this potential that attracted foreign companies like Deere & Co., Ford New Holland and Renault to the Indian tractor scene. They entered the higher horse power segments of 50 HP and above, where demand was low. Also, their products were expensive by Indian standards. As a result, they were unable grab market shares. Indian players were more familiar with rural conditions and had better distribution reach. The foreign players are slowly realising their mistake and are entering the mid sized segments, but their performance is still not significant.

Bottomline, the long term prospects of the tractor industry look bright considering that India is an agrarian economy. Though in the short term the farmer's need to pray to the rain gods to improve the current state of the agricultural sector.

Regionwise market share
FY00 North South East West
PTL 22.0% 15.0% 20.0% 17.0%
M&M 21.0% 47.0% 27.0% 26.0%
TAFE 11.0% 21.0% 16.0% 24.0%
Escorts 26.0% 6.0% 15.0% 17.0%
Others 20.0% 12.0% 22.0% 17.0%


Equitymaster requests your view! Post a comment on "The rain gods have cast a shadow". Click here!

  

More Views on News

TATA MOTORS DVR Share Price Up by 5%; BSE AUTO Index Down 0.2% (Market Updates)

Sep 30, 2020 | Updated on Sep 30, 2020

TATA MOTORS DVR share price is trading up by 5% and its current market price is Rs 63. The BSE AUTO is down by 0.2%. The top gainers in the BSE AUTO Index is TATA MOTORS DVR (up 5.2%). The top losers are APOLLO TYRES (down 0.1%) and MRF LTD. (down 0.3%).

ESCORTS LIMITED at All Time High; BSE AUTO Index Up 0.5% (Market Updates)

Sep 30, 2020 | Updated on Sep 30, 2020

ESCORTS LIMITED share price has hit an all time high at Rs 1,337 (up 1.7%). The BSE AUTO Index is up by 0.5%. Among the top gainers in the BSE AUTO Index today are ESCORTS LIMITED (up 1.7%) and BOSCH (up 0.1%). The top losers include CUMMINS INDIA and MRF LTD. (down 0.4%).

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE AUTO


Sep 30, 2020 (Close)

MARKET STATS