Stable outlook for tractor industry, limited Covid impact on demand: Icra

Ratings agency, Icra on Friday said it continues to maintain a stable outlook for the tractor industry, with the impact of the pandemic and accompanying lockdowns on the demand prospects expected to be relatively limited.

The lockdowns aimed at containing the spread of Covid-19 pandemic have significantly impacted demand sentiments across consumer segments, and is expected to lead to a sharp contraction in the country's GDP in financial year 2021, Icra said in a release.

In the midst of all this crisis, an expectation of growth in agricultural output remains a silver lining, and is expected to result in healthy cash flows for the farming community, this, in turn, will be favourable for the tractor industry, it said.

Noting that the outlook for the Kharif season also remains favourable, the rating agency said that in line with Indian Meteorological Department's forecast of a normal monsoon (102 per cent of Long Period Average), after a timely onset, monsoon progress has remained healthy and has covered the entire country in a timely manner.

Benefitting from favourable moisture conditions, seasonally high reservoir levels, and adequate availability of labourers (across most regions), Kharif sowing has been progressing well (up to around 19 per cent till July 24,), said the release.

These factors coupled with various agri-focused initiatives of the government are expected to support farm cash flows and tractor industry volumes, it added.

The lockdown measures undertaken in view of the Covid-19 pandemic had hampered tractor industry volumes significantly in March and April. However, aided by healthy Rabi cash flows across regions, there has been a sequential improvement in tractor sales ever since," said Rohan Kanwar Gupta, assistant vice president at Icra.

In June, the industry recorded a 22 per cent growth in wholesale volumes and 10 per cent growth in retail volumes, Gupta said adding that OEMs have ramped up production over the past two months and are gearing up for healthy sales for the rest of the year.

While uncertainty continues to exist in relation to the time taken for the pandemic to subside, Icra continues to maintain a stable outlook for the tractor industry, it said.

The healthy Rabi cash flows coupled with normal monsoon expectations are expected to help the industry record growth in volumes between 2-4 per cent (estimated) in the financial year 2021 while the overall capacity utilisation level in the industry is expected to remain at moderate levels of 60-65 per cent, the release stated.

Despite expectations of some margin pressure, the operating margins for most Original Equipment manufacturers (OEMs) in the tractor industry are expected to remain at moderate to healthy levels (around 13-14 per cent) aided by soft commodity prices, with RoCE (Return on capital employed) being even more superior," Gupta said.

In line with Icra's stable outlook on the industry, the credit profiles of OEMs are expected to remain healthy, supported by limited debt, healthy cash and liquid investments and limited investment plans, Gupta added.