Demand uptick on the back of firm crop prices to bolster tractor stocks

Higher rabi output, no BSVI impact and firm crop prices are positives

While December volumes for tractor makers were a mixed bag, brokerages believe that the outlook for tractor makers is positive. Mahindra and Mahindra reported a 4 per cent year-on-year volume uptick for December, while Escorts sold 10 per cent fewer tractors in the month. 

While tractor sales for the first nine months of FY20 for M&M and Escorts are down by up to 10 per cent, demand is expected to improve on expectations of better Rabi output and firm crop prices. The government too has increased its food grain production target by 6 million tonnes to 291 million tonnes for FY19-20 crop year (July to June) given the high reservoir levels, improved acreage and favourable monsoons. Mitul Shah of Reliance Securities expects the reversal of the current tractor down cycle in the second half of FY21. Positive trends related to farm mechanisation, alternate usage of tractors (transportation, construction) and government support are expected to continue, he adds.

Tractor companies such as M&M too are positive on the near-term trend. The better Rabi output and crop prices, should according to Rajesh Jejurikar, President - Farm Equipment Sector, Mahindra & Mahindra be aided by government thrust on irrigation, rural infrastructure and agriculture sector. 

Compilesd by BS Research Bureau

Jigar Shah and Vikram Ramalingam of Kim Eng Securities prefer tractors within the auto space as compared to other segments be it passenger vehicles, commercial vehicles or two wheelers. Unlike others, tractors are not mandated to adopt BSVI emission norms and thus are not affected by the disruption. 

Within the tractor space they prefer Mahindra & Mahindra. Expectations of a better crop in March quarter of FY20 would revive demand helping M&M which has a 41 per cent share of the tractor market. Further, the company which derives three-fourths of its earnings from high margin tractors, trades at an attractive core valuations of 8 times FY20 price to earnings estimates. Other research houses, however, believe that Escorts, being a pure play tractor maker would benefit the most from the revival in the tractor segment. Margin expansion across its segments and higher cash flows are the other positives for the stock.