Tractor Industry Analysis India

Tractor domestic sales to remain flat in the short term; exports to decline

For 2009-10, CRISIL Research projects domestic tractor sales to remain stagnant at their 2008-09 levels. After having grown at 11 per cent in the first half of 2008-09, sales are estimated to have ended at nearly the same levels of 2007-08 due to decline in the second half of the year. The decline, despite of increase in farm incomes, was attributed to reduced bank credit disbursements in response to increase in NPAs (around 15 per cent) by September 2008.

In our previous update, we had projected 2009-10 domestic sales to decline by 7-9 per cent on the back of deteriorating financing situation. However, credit disbursements by public sector banks have recently increased due to decline in NPA provisions (because of farm loan waiver scheme). This along with expected domestic push from players, in order to compensate for export decline, is likely to result in stable manufacturer sales. Retail sales, however, may fall and remain vulnerable to decline in farm incomes or lower growth in agricultural credit. Further, manufacturers are expected to reduce prices by 5-10 per cent in order to induce purchases. Hence, we have revised our forecast to nil growth in 2009-10.

Exports are expected to fall by 8-10 per cent in 2008-09 and by 11-13 per cent in 2009-10; attributable chiefly to the slowing down of the US economy (since more than 50 per cent of Indian exports are to the US). Although Indian players are expanding their export share to Asian and African markets such as Poland and Turkey, US still remains the major contributor. Demand for small tractors, used for hobby farming in the US, are expected to decline in the short term due to reduction in discretionary spending by households owning lifestyle/residential farms.

Total sales are estimated to decline marginally in 2008-09 and 2009-10, due to decline in exports, as 10-12 per cent of total sales come from exports.

                                                                      

Domestic demand projected to grow by 3-5 per cent by 2013-14; exports to grow by 8-10 per cent

We expect domestic sales of tractors to grow at a rate marginally higher than agricultural sector growth over the next 5 years, enabled by the growth in agricultural credit, farm incomes and moderate investments in irrigation systems. Assuming an agricultural GDP growth of 3 per cent per annum, we forecast domestic tractor sales to grow at a CAGR of 3-5 per cent from 2008-09 to 2013-14.

We believe that while states like Punjab and to an extent Haryana and western Uttar Pradesh are near their maximum potential, western and southern states have been moving from stage of low penetration to moderate penetration. We expect states like Andhra Pradesh, Karnataka, Gujarat, Rajasthan, Maharashtra and Madhya Pradesh to record a moderate rate of growth (that is 3-5 per cent) from 2008-09 to 2013-14. States like Assam and Kerala are expected to record more than 5 per cent and highly penetrated states like Punjab, Haryana and Uttar Pradesh are likely to grow at less than 3 per cent during the same period.

Exports from India grew at a CAGR of 19 per cent from 2003-04 to 2008-09E, expected to grow at a CAGR of 8-10 per cent from 2008-09 to 2013-14. Demand would be driven by contributions from markets like Africa, Sri Lanka, Bangladesh, Australia, Turkey, Thailand, etc. and increasing penetration in the existing markets especially the US and Latin America.

CRISIL Research estimates industry sales (including exports) to grow at a CAGR of 4-6 per cent in volume terms to reach a size of 4.3 lakh units by 2013-14. Beyond 2009-10, we assume average realisations to increase by 2 per cent every year in line with product mix shift towards higher horsepower tractors. Consequently, the industry size is expected to increase from Rs 153 billion in 2008-09 to around Rs 215 billion by 2013-14.

Operating margins estimated to remain under pressure in 2008-09; will remain flat in 2009-10

CRISIL Research estimates operating margins of tractor manufacturers to fall by 2-3 per cent in 2008-09. In spite of average price increase of 8-10 per cent during 2008-09, higher raw material prices in the first half of the year and decreasing volumes in the second half led to decreasing operating margins for tractor manufacturers.

In 2009-10, average prices of steel and pig iron, the key raw materials, are likely to be lower by 23-25 per cent and 29-31 per cent, respectively. However, we anticipate tractor producers to cut prices by 5-10 per cent in order to induce domestic demand. As a result, operating margins of tractor manufacturers are estimated to remain flat.