Ind-Ra: Tractor Sales Growth to Moderate in FY19, After a Record High in FY18

India Ratings and Research (Ind-Ra) expects tractor sales to reach a record high this fiscal, crossing the peak achieved in FY14 (696,828 tractors). The agency estimates a yoy growth rate of 14%-15% in FY18. The rate would moderate in FY19. During April 2017 to January 2018, the industry has already recorded strong volume growth of 16.6% with total domestic volumes sales of 659,170 tractors.

The growth in sales is attributed to two consecutive years of normal-to-good monsoons, improved crop production, easy availability of credit to farmers and increasing use of tractors in non-agricultural sectors. The sector benefits from low penetration of tractors in India. Ind-Ra however believes the growth rate could moderate in FY19, primarily due to the strong base built over the last two years (FY17 and FY18), along with the uncertainty over rainfall as it is a rare possibility to have three consecutive years of a good monsoon.

Tractor sales' dependency on monsoon is evidenced from the 10% and 9% yoy drop in industry volumes in the years of inadequate monsoon, i.e. FY15 and FY16, respectively, while the cumulative revenue of the top four industry players (around 85% of the total market) fell 3% and 11% yoy. Immediate Challenges: Central Statistics Office's (CSO) advance estimates suggest gross value added of 'agriculture, forestry and fishing' would fall to 2.1% in FY18 (FY17: 4.9%), primarily due to the uneven spread of rainfall leading to lower kharif and rabi crop yield and affecting farmers' cash generation. Higher delinquencies for tractor loans also show the continued stress in the agricultural sector. As around 45% of the total tractor sales are financed through organised channels, loan delinquency rightly represents the average credit profile of a farmer; which might worsen in case of inadequate monsoons in FY19, thus impacting the additional demand for tractors.

Timely Execution of FY19 Budget Measures Hold the Key: The Union budget FY19 showcased strong support to the agricultural and allied sectors through a total allocation of INR638 billion (12.8% up above the revised estimates for FY18) and various other measures. However, Ind-Ra believes that timely implementation of these measures is important to lead to a steady increase in the demand for tractors and other farm equipment in the medium term.

Some states provide around 25% subsidy on the average value of tractors, which goes up to 70% in Assam.

Demand from Non-Agricultural Sectors: Tractors especially of higher tonnage are increasingly being used in non-agricultural segment particularly construction and infrastructure. About 20% of the tractors are used for non-agricultural use. The government's thrust on roads and highways development as seen in Bharatmala project would also be positive for the higher tonnage tractor segment and the players therein.

Impact on Ind-Ra rated Credits: Both Mahindra and Mahindra Limited (M&M; 'IND AAA'/Stable) and Escorts Limited ('IND A+'/Positive) recorded tractor volume growth of 18% and 17.5%, respectively, in the 10 months ended January 2018, in domestic markets, in line with the industry growth. In 9MFY18, M&M's farm equipment segment's revenue grew 16% yoy while Escorts' increased 16% yoy. In 9MFY18, margins expanded around 435bp for M&M farm equipment segment and 670bp for Escorts over FY16. Ind-Ra believes M&M would continue to leverage its leading market position and presence across all product segments while Escorts would benefit from its new product launches across segments.

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