ICRA expects the tractor domestic volumes to remain weak during FY 2016 (outlook of a decline in tractor volumes (domestic + exports) of about 7- 8% in FY16) and any recovery in volumes is only likely to happen over the medium term. While late precipitation coupled with contingency plans prepared for a majority of districts etc. may help curtail the impact of a deficient rainfall, the short term demand drivers for the domestic tractor industry remain weak.
On the long term front, ICRA continues to maintain a volume CAGR of 8-9% for the tractor industry over the next five years as long term industry drivers remain intact. The government of India (GOI) remains committed towards rural development and agri-mechanization. While penetration in various parts of the country continues to remain low, the replacement cycle has been shortening. This coupled with other factors such as increasing rural wages; scarcity of farm labour as well as long term trend of improvement in MSPs is also likely to aid growth in industry volumes over the long term.
Farm sentiments, which were weakened post the unfavourable kharif harvest in 2014 and significant crop damage caused by bouts of heavy and unseasonal rainfall over parts of the country in Feb-Mar 2015, continue to remain weak following the weak rabi harvest in Q1 FY 2016 and uncertainty regarding the ultimate turnout of the kharif harvest amid the weak performance of the south-west monsoon. The prevailing weak sentiments have led to a dip in the enquiry levels in the domestic market and thereby led to a continued contraction in volumes.
Domestic tractor market sales continue to be sluggish with the industry showing no signs of any recovery so far. After declining by 13.0% during FY15 owing to host of unfavorable factors, the domestic tractor industry volumes have continued to be under pressure, declining for an eleventh consecutive month in August 2015 (21% YOY decline), resulting in a decline of 16.4% YoY in Apr-Aug, FY16. The farm sentiments have been further weakened due to numerous adverse short term demand drivers which include stressed farm cash flows on account of lower Rabi harvest in Q1FY16, a second consecutive year of weak south-west monsoon as well as only a modest increase in MSP’s of various crops.
In addition to weak farm sentiments, a slow pick up in infrastructure activities continues to constrain demand arising for haulage purposes. Although the domestic demand has remained weak, a recovery in demand from U.S. coupled with increasing exports to other destinations such as Turkey and Algeria have aided volume expansion in exports. With the contribution of exports to the industry volumes (domestic + exports) remaining low, the industry sales volumes have however mirrored the declining trend in domestic volumes.
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