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Tractors: Short-term concerns - Views on News from Equitymaster
 
 
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  • Dec 13, 2002

    Tractors: Short-term concerns

    It has been a downhill road for the tractor sector over the last three years. This is not only due to poor monsoon but also because of the manufacturers own undoing. We analyse the performance of the tractor industry in the current fiscal and its future growth prospects.

    Industry volumes declined by 10% in the first half of the current fiscal to 81,300 units. Historically, the first half of a fiscal year contributes to around 45%-47% total tractor sales. If we were to analyse the performance of top four tractor majors viz. M&M, Escorts, Punjab Tractors and TAFE, competition is clearly eating into their market share. The aforesaid majorsí that cumulatively held 83% market share in 1HFY02 has seen significant erosion in the first half of the current fiscal (72%).

    The top fourÖ
    (% market share) 1HFY02 1HFY03
    M&M 29.0% 30.4%
    Escorts 15.8% 9.9%
    Punjab Tractors 23.8% 16.0%
    TAFE 14.8% 16.1%
    Total of the above 83.3% 72.4%

    While manufacturers like Punjab Tractors and Escorts have resorted to a de-stocking exercise in order to safeguard margins, MNCs like John Deere and New Holland have started to make an impact. Among the big four, Punjab Tractors and Escorts have lost the maximum share in the pie. While M&M posted good volume growth in 1HFY03, we expect the company to end the fiscal year with a 10% decline in volumes. M&Mís performance in the tractor segment has always been erratic.

    Factually speaking, the downturn in the sector is just a continuation of the trend that started way back in FY98. Over the last three years, the sector has been mired by dismal performance of the agricultural sector. Almost four consecutive years of less than average monsoon for the period of June-September has had a significant impact on rural income. As high as 72% of the Indian population rely on agriculture for income and this has added to the woes of tractor manufacturers. It should be remembered that tractor demand is directly correlated with the performance of the agricultural sector.

    The current year growth prospects are not promising either. Consider the following facts. The mid-term economic review released by the Finance Minister suggests that atleast 14 states in the country are witnessing a drought-like situation due to poor rainfall. According to CMIE, the deviation is significantly higher for select regions including East Uttar Pradesh (-24%), West Uttar Pradesh (-21%), South interior Karnataka (-44%), Punjab (-36%), Tamil Nadu & Pondicherry (-45%), West Rajasthan (-71%) and East Rajasthan (-60%).

    What is the significance of this huge deviation from normal rainfall? Of the country's total food grain production in FY01, Uttar Pradesh contributed to as high as 27% of total food grain output in FY01. Given the large deviation in rainfall in UP, the impact is likely to be significant. Given this backdrop, CMIE expects the country's food grain production for FY03 to decline by 5% to 200 MT in FY03 as compared to 211 MT in FY02.

    What is the way forward? We expect tractor demand to remain lackluster on various counts. Apart from poor monsoon, there has been excess inventory build-up in the sector with fresh capacities coming at a time when demand has been hard to come by. With as high as 100,000 units still in the dealer pipeline, we expect the tractor industry to post a 20% fall in volumes in FY03. However, given the fact that the industry has grown at 2x GDP for the period between FY92-98, there could be a sharp reversal in trend and we may see an adjustment to the mean over the long-term (3-5 years). Moreover, the current penetration levels of 10 tractors/1,000 hectares are significantly lower than 45/1,000 hectares in the developed markets. Overall, we are positive on the tractor sector.

     

     

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