M&M: Tractor sales to grow 8% in financial year 2013

Slowing farm income hurts tractor sales, outlook modest for next year too

India’s rural consumption story is coming under pressure. As if a potential tax on diesel vehicles was not bad enough, Mahindra & Mahindra (M&M) on Friday announced it would curtail production of tractors for at least two days every week during March. In a conference call with analysts, the company cited build-up of inventory at the company’s end as the main reason for the production cut. It typically keeps two to three weeks of stock, but since these are taking longer to move, the management decided to cut production days in March to adjust to the new market reality. M&M maintains there is no issue at the retail level and no build-up of inventory at the dealer level.

While M&M was expecting sales to moderate in the second half of FY12 due to a high base effect, a year-on-year contraction in sales took the company by surprise. Tractors accounted for about 40 per cent of revenues in the first three quarters of this financial year, and analysts expect it to fall to 34 per cent in Q4. Tractor sales have grown at a fast clip of nearly 30 per cent since the second half of FY11, as rural incomes steadily increased and farm labour turned expensive. However, since November 2011, the rural story has come under pressure. In February, M&M’s tractor sales contracted by 10 per cent. Analysts say India’s bumper crop production this year has put pressure on prices, which has been the primary reason for tractor sales coming off since November last year.

Besides lower crop prices, there have been certain region-specific issues too, which have hurt the company’s tractor sales. For instance, demand from Andhra Pradesh dipped sharply as a canal was under repair. Similarly, cotton producing areas too have seen a drop in tractor sales as cotton prices corrected from last year’s highs. Given the sharp rise in bad loans in the farm sector, M&M maintained lending is not an issue as far as purchase of tractors is concerned. However, interest rates are a real issue, and going forward if rates start falling, there may be a revival of demand in the second half of FY13. However, the company is expecting tractor sales to grow 8-10 per cent next year. Despite the overhang of a potential diesel tax and muted outlook for tractors, the market is not in a hurry to re-rate the stock just yet.