From M&M to Escorts, tractor makers hitch a ride on farm machinery

A saturated tractor market and increasing mechanisation provide the momentum

Last week, the Nanda family-owned Escorts Ltd signed a multi-layered deal with Kubota Corp, global agriculture equipment major, that will take the Osaka, Japan-headquartered shareholding to 53.50 per cent. It was a sign of a major shift in the nature of the agri-machinery business.

Once the deal is complete, Escorts and Japan’s oldest tractor maker, Kubota, will firm up a plan for the next six to seven years. Part of the plan is to diversify the product range in a big way, including expanding the farm machinery section, which currently forms a small part of the business. Kubota will also use the cash reserve to set up a state-of-the-art global R&D centre, Bharat Madan, chief financial officer, Escorts, said in an investor call last week.

This is not an isolated strategic move either. Earlier this month, in a post-earnings call with the media, tractor market leader Mahindra and Mahindra (M&M) said over the next five years, it envisages its farm mac­hinery market share to jump from the current 10 to 30 per cent. This will translate into a 10x growth with a revenue of Rs 4,000 crore from domestic business and Rs 1,000 crore from exports. This does not include farm machinery revenue thr­o­ugh its global subsidiaries.

“The potential for farm mac­hinery is huge given the moderate share that organised players have in the domestic ma­r­ket. Also, India accounts for only $1 billion in the $100 billion global farm machinery sector,” said Hemant Sikka, president—farm equipment sector, Mahin­dra and Mahindra. The domestic industry today is at Rs 5,000 crore. If it expands at a co­mp­ound annual gro­wth rate (CAGR) of 18 to 20 per cent, it will ex­ceed Rs 12,000 crore by 2027, he added.

In short, having reaped the benef­its of robust tractor sales year after year for more than a decade-and-a-half, tractor makers are now sowing the seeds for expanding the farm machinery business, a segment that has remained largely confined to the unorganised players and has been relatively untapped. Increasing mechanisation at the farms, which, in turn, is being led by a shortage of lab­our, is set to propel the growth of the farm machinery.

In many ways, India’s farm equipment and machine mark­et is unique and presents a contrarian picture when compared to other markets of the world.

Here is how: At the end of the 2020-21 financial year, tract­or penetration in India, the wor­ld’s largest market by volu­me, in­creased to 45-50 units per tho­usand hectares, which is hi­gher than the world average of 30 units per thousand hectares.

It has been advancing at a CAGR of 10 per cent for the past 15 years and is now expected to moderate to 5-6 per cent, according to a recent report by HDFC Securities.

Farm machinery is a broad category that includes equipment such as harvesters, trans-planters, straw reapers and so on as well as implements such as cultivators, harrows and plo­ughs. Globally, companies in the farm equipment sector draw half their reve­nue from the non-tractor business but in India, the reven­ue share is disproportionately skew­ed tow­ards tractors with close to 90 per cent share coming from them, said He­m­al Thakkar, direct­or at Crisil Research.

“The market is highly fragmented and landholdings are much smaller compared to other markets of the world, deterring the buyers to invest in mechanised equipment,” he added.

Close to 85 per cent of culti­v­able land is less than 2 hec­t­ares, he pointed out. But this is set to change as a new generation in the farming community is keen to mechanise as farm labour becomes scarce and expensive, he pointed out.

To ride on the opportunity, M&M is setting up a dedicated facility just for farm machines at Pithampur in Madhya Prad­esh. The facility would go on stream next fiscal. As part of the plan, M&M will launch 15 products in the farm machinery space over the next four years. These will include products that are tractor mounted or tractor trailed and those that are self-propelled.

“It is what it is around the world and as we’ve often said in the past, India is tractorised but not mechanised. And there is a big opportunity ahead for us as leaders to drive that pace of mechanisation,” Rajesh Jejurikar, executive director, auto and farm equipment, M&M, told investors.

In addition to M&M and Escorts, other tractor makers, including global players John Deere, Case New Holland, Sonalika Tractor, among others, are also sprucing up their farm mechanisation portfolio.

Large organised firms have been eyeing this space for some years now but haven’t been able to make much headway, said an analyst at a domestic brokerage. With the tractor market slowing down, they have little choice, he said. The farm machinery segment, he pointed out, has been tough to penetrate bec­a­use of the small landholdings and the scattered nature of the market. “Manufacturers have been trying to figure out a way they can offer a solution that can be put to varied needs. Given the multiple crop cycles and each crop requiring a different machine or implements, offering a compact product or machine has been a challenge,” he said. For this very reason, companies that come up with a frugal, cost-effective product will do well, while others will remain on the fringes.

“With the right kind of pro­ducts at the right price point, we believe this whole industry can be organised,” said M&M’s Sikka. The company will draw from its experience in the tractor market and also from its international subsidiaries, he added.