The domestic tractor volumes continue to chart a growth story in the current fiscal, with the volumes expanding by 19.4% during April-February FY2018 (on a Y-o-Y basis). As per an ICRA note, while the growth in Agriculture Gross Value Added during FY2018 is projected to moderate from previous years’ levels, partly on account of decline in crop yields following an uneven monsoon precipitation, the tractor industry’s volume growth has showed no signs of slowing down, with favourable crop cycles, on the back of two consecutive near normal monsoons, leading to an improvement in farm cash flows. Additionally, increased haulage demand from usage of tractors in construction activities, as investments in infrastructure creation picked up across country, coupled with various Government of India’s (GoI’s) support programmes, has supported demand to an extent. While there continues to exist variations in growth across regions, a majority of the regions have recorded a moderate to healthy growth in volumes, helping the industry volumes touch a new peak (on pan India basis) in the current fiscal.
Says Ms. Anupama Arora, Vice President and Sector Head, Corporate Sector ratings, ICRA Ratings, “The GOI’s continued thrust on promoting rural development and farmer welfare in the Union Budget continues to augur well for the farm sector, with the budget laying significant emphasis on the government’s endeavour to double the farmers’ income by FY2022. The success achieved in implementation of a mechanism to ensure healthy minimum support prices to farmers, would remain critical in helping protect the interests of the farmers and reduce vulnerability to commodity cycles. The focus on creating rural infrastructure through continuation of enhanced allocation to irrigation, roads, and other infrastructure, also bodes well for an improvement in the rural economy over the medium to long term and successful implementation of the various initiatives is likely to result in sustainable benefits to the farm community. This will support tractor’s demand.”
Even as an improvement in non-farm income through deployment of tractors for commercial use is expected to continue to support the demand for tractors going forward, the financing availability, a key demand driver, is expected to remain healthy over the short to medium term, led by a relative moderation in delinquencies in the asset class for various non-banking financial institutions.
While the Indian Meteorological Department (IMD) is yet to come out with a forecast for the monsoon’s performance, as per early estimates, the possibility of El Nino conditions developing in time to adversely impact the monsoon precipitation remains low; if the forecast holds, a third consecutive normal south-west monsoon augurs well for the farm community. ICRA expects the tractor industry growth to moderate in FY2019 (growth in volumes of 6-7%), given the high base attained in the current fiscal. As the profitability of Original Equipment manufacturers in the tractor industry remains linked to industry demand, the operating margins for the various manufacturers are expected to remain at healthy levels, with benefits from economies of scale on account of expanding volumes helping offset the impact of an expected hardening in raw material prices. In the absence of any significant capital expenditure plans, the credit profile of the entities in the industry is also expected to remain healthy.
“Over the long term, ICRA continues to maintain a long term CAGR estimate of 8-9% for the industry, with the long-term industry drivers for the industry continue to remain intact. The government of India (GOI) remains committed towards rural development and agri-mechanization, a critical component in improving the state of agriculture in the country. This coupled with other factors such as increasing rural wages and scarcity of farm labour is likely to aid growth in industry volumes over the long term,” adds Ms. Arora.
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