Monsoon leg-up may take tractor sales to all-time high if FY18

Tractor sales are set to touch a new peak of over 6.5 lakh units this fiscal year given the prospects of a normal monsoon, declining interest rates and farm loan waivers in some key states, says a report.
Sales had risen 18 per cent last fiscal year on good rains and despite note ban, after declining more than 10 per cent in 2015 and 2016 when the monsoons played truant, Crisil said in a report today.
Yet at 5.8 lakh units, last year volume was lower than 2014 suggesting some pent-up demand may manifest given the conducive conditions.
The Indian Meteorological Department has predicted a normal monsoons season this year and so far, rainfalls have been well-distributed with cumulative rains at 102 per cent of the long period average.

"While the cascade of good tidings from weather to farm to farmer is on, there is another structural positive to note, which is that average tractor penetration is very low at 20 per 1,000 hectare. This underlines the kind of headroom for growth over the long term," the report says.
Additionally, the farm loan waivers in Maharashtra, Punjab, UP, Tamil Nadu and Karnataka which account for over a quarter of domestic tractor sales, will put money in the hands of the farmer. This, along with declining credit cost will support sales. The increase in minimum support price will also help.

Data suggests that loan waivers can also offset the adverse impact of bad monsoons on tractor sales.

For example, the waiver announced by the Central government in fiscal 2009 had led to 30 per cent growth in tractor sales in 2010, which was a deficient monsoon year. And the 2010 momentum continued through 2011 and 2012 because of normal monsoons.
In the longer term, there are other tailwinds, too such as a doubling of budgetary allocation for irrigation, expansion of crop insurance coverage, sharper focus on mechanisation, and increasing usage of tractors beyond tilling and haulage.
As a result, the credit outlook for largest tractor makers like Mahindra and Tafe with a combined market share of 65 per cent, is positive.

With capacity utilisation in the industry at 60 per cent, companies can easily address surge in demand without fresh capex, the report notes.
In the very near-term, the extent of farm loan waivers and the spatial and temporal distribution of rains will be key monitorables, the report concludes.