Tractors: Growth on track

Fall in M&M’s November sales is due to seasonality, not broader slowdown

After November sales data for auto companies came in, analysts put their heads together to see if there was a larger trend in Mahindra and Mahindra's 45 per cent drop in its tractor sales. The company's sales grew by 30 per cent month-on-month to 31,838 units in October, but fell 45 per cent in November to 17,527. Sharekhan's auto analyst Deepak Jain believes the month-on-month drop in volumes has more to do with the fact that October was a busy month and saw two festivals bunched together. So, it's not reflective of a demand slowdown. So far, tractor sales have seen a 20 per cent year-to-date growth in FY12, compared to a compound annual growth rate (CAGR) of 17 per cent over FY08-11. Analysts say the sales growth is expected to continue.

Undoubtedly, there are issues as far as credit flow to the farm sector is concerned, given that farmers are selling output below minimum support prices as there isn't much buying support from the Food Corporation of India. Also agri-credit is slowing down as non-performing assets have started rising. Analysts claim there is little co-relation between credit flow and tractor sales. Despite this, demand for tractors is likely to remain stable over the coming years as credit flow is not linked to tractor demand. Since 1973, the industry has clocked a CAGR of 8.6 per cent. According to Emkay Global, tractor demand is far more stable than demand for cars or commercial vehicles. Since 1973, tractor industry has registered a CAGR of 8.6 per cent. The brokerage argues that given that tractor penetration is relatively low in India (19 per 1000 hectare and five per 1000 agricultural people), this will come to support tractor demand. In India, over 48 per cent of the population depends on agriculture. Unlike other countries, this figure has not fallen.

Shortage in farm labour has also acted as a key catalyst for tractor demand. Tractors are no longer a luxury for the rich farmers, but a tool for better cost management. Also lack of restriction in usage has spurred additional demand for non-farm use. This has reduced replacement age of tractors to eight years from the earlier 12 years. In case there is extensive farm and non-farm usage, the replacement age stands even further reduced to five years. Analysts are expecting the industry to register a strong growth of 12.5 per cent CAGR over FY11-14, with an upward bias. Even if there is a slowdown in demand and a credit crunch, Emkay believes a growth of eight per cent is possible in FY13.