Crisil Scales Down Three Tractor Firms

Credit Rating Information Services of India (Crisil) has lowered the ratings on debt instruments of three major tractor companies -- Mahindra & Mahindra (M&M), Eicher and Tractors & Farm Equipment (Tafe).

While the rating of debt instruments of M&M and Tafe have been lowered a notch from AAA to AA+ and AA+ to AA, respectively, that of Eicher has been lowered from AA- to A.

Analysts see this as a major blow to the tractor companies, which are already battling in an industry that is on the decline with lowered margins due to increased competition.

The rating agency said in a release that the lowered rating was a result of the increasing risk content of the tractor businesses of these companies.

This risk escalation is due to the steady increase in competitive pressures in the industry due to the slowdown in demand growth against capacity surpluses and heightened pressures of product design and development due to the entry of global players.

The ongoing difficulty in the tractor market has hit smaller players, such as Eicher, harder than the others due to increasing sales push by stronger players such as M&M and Punjab Tractors, the release added.

While Escorts' profits have been significantly supported by its non-tractor business income and M&M's profits have been depressed due to the slowdown in the utility vehicles business, Punjab Tractors' profits have shown significant resilience, Crisil said in the release.

Auto analysts said the current market conditions are largely a result of the larger companies' earlier initiatives to push higher volumes, in spite of low demand. This has ballooned the inventory levels of the leading companies, in some cases as much as three months of inventory.

They said the two largest players -- M&M and Punjab Tractors -- have been able to strengthen their grip on the market in spite of the adverse market conditions by pushing higher volumes. However, due to increased market activity, their margins have suffered. On the other hand, the others have lost out, they added.

During 2000-01, the net profit of the five top tractor companies has declined by 43 per cent, to Rs 318 crore from Rs 562 crore in the previous fiscal, while their net sales declined 5.5 per cent to Rs 6,958 crore.