Agriculture and Tractor

The tractor manufacture breeded a bear galvanic pile(prenominal) 28. 3% harvest-festival in gross sales playscripts during 2009-10, thereby ending the phase of cyclical subject field that had pul take down tractor sales during the preceding two days (200709). Significantly, the revival of 2009-10 happened despite the drought deal conditions in m all(prenominal) States during the kharif1 season dampening sentiments.The key factor enabling the pick up ontogeny of 2009-10 was intemperate c kickoffnish liquidity, which in turn was uphold by several factors, including high minimum support price (MSP) for trains greater ability of farmers to make capital purchases (including the usage of Kisan Credit Card which atomic number 18 increasely being used to part-finance tractor purchases) enhanced employment opportunities (with artless employment schemes being implemented by the G oernment of India) an improved credit environment and continuance of fill-in demand.These facto rs apart, non- rude use of tractors (for haulage in construction and infrastructure projects) continued to increase, benefiting tractor demand. Also, with infrastructure projects and rural employment schemes increasing employment opportunities, availability of labour for awkward activities continued to decline, persuading even farmers with medium-sized land holdings to either rent or purchase tractors. On a orbital basis, the feat of the eastern, Federal and Hesperian parts of the country was big-chested during 2009-10 in terms of tractor demand, while that of the southern region was moderate.A severe growth in tractor volumes, albeit on a low dismount-ranking, was witnessed in the eastern States, including Bihar, Orissa and Jharkhand, which had a good paddy crop. Tractor volumes in the northern and western regions in like manner reported strong growth during 2009-10, especially in the second half (H2) of the year, benefiting from a low base (H2, 2008-09) and a satisfact ory kharif crop in whatever States. The southern region reported moderate performance in terms of tractor demand (growth of 11. 9% in 2009-10), being impacted largely by the de-growth in Andhra Pradesh (AP)a key southern marketwhere rainfall was unsystematic in 2009-10.However, in Karnataka and Tamil Nadu, higher MSPs for rice along with some revival of interest of public sector banks (PSBs) in tractor financing led to strong tractor sales volumes. Historically, tractor demand has been fairly volatile, being influenced by cyclical trends, availability of finance, and crop patterns (monsoon). subsequently four years of strong growth during 2003-07, the fiscal years 200708 and 2008-09 both reported a fringy decline in tractor sales volumes, largely reflecting cyclical corrections.In addition to the cyclical dips, during H2, 2008-09, the constancy also had to oersee with the 1 Kharif season in India is during the south-west monsoon (June-October) ICRA rate gasconade Tractor Ind ustry An ICRA Perspective liquidity crunch, which pushed up interest place, even as financiers resorted to more(prenominal) stringent lending norms in the face of rising non-performing assets (NPAs). However, the spotlight improved during 200910 as credit availability improved on the strength of greater liquidity in the banking system.While tractor financing has traditionally been done by PSBs, of late, private banks and non-banking finance companies (NBFCs), despite their higher interest rates vis-a-vis the PSBs, deplete been able to increase their perceptivity of this market on the strength of faster contribute processing and use of more liberal credit norms. Overall, with tractor demand being closely linked to agricultural output, growth in farm mechanisation and farmers remuneration, the semipermanent demand drivers for the industry remain robust.The currently low levels of tractor penetration in India, strong administrational focalise on availability of finance for hus bandry automation tools and on rural development, increase in the use of tractors for nonagricultural purposes, and the growing emphasis on tractor exports augur s advantageously up for the industry. Background Chart 1 Annual Trends in Tractor Sales Volumes Chart 2 Monthly Trends in Tractor Sales Volumes Source Industry, ICRAs estimates Source Industry, ICRAs estimates The tractor industry reported a compounded one-year growth rate (CAGR) of over 20% in volume terms during the period 2003-07.The long up-cycle in demand was supported by several factors, including excise duty exemptions on tractors (2004-05), thrust on rural development, improved availability of finances for tractor purchase, and low interest rates. The growth also came on a low base, with the preceding three fiscal years (2000-03) having witnessed a prolonged phase of volume correction. The cyclical correction during 2000-03 had been aggravated by the build-up of channel inventory with the major(ip) players having pushed aggressively for larger sales.In contrast to this phase of cyclical slowdown, the one that happened during 2007-09 was less severe, with volumes declining by near 3%, despite the intermittent tightening of the liquidity office during H2, 2008-09. The demand slowdown during H2, 2008-09 also impacted the profitability of the original equipment manufacturers (OEMs), that is, the tractor manufacturers, because of the high price inventory they were carrying. However, the billet improved on the cost structure front in H1 2009-10 with the softening of commodity prices preparing the ground for the industry to earn higher profitability margins.The pickup in volumes also lowered the overhead expenses for the tractor manufacturers, boosting their profitability. While the OEMs did non lower the listed sales price of tractors, the benefit of lower steel prices was passed on to the end customers via discounts. This is an accepted cause in the industry given that once prices are lower ed it is difficult to raise them subsequently. However, during H2 2009-10, the tractor majors increase the prices with the reversal of commodity prices and the discounts have also come down. ICRA Rating Services scallywag 2 ICRA Rating FeatureChart 3 Trends in get aheadability Margins of Select Players Tractor Industry An ICRA Perspective Source Company releases, ICRAs estimates refers to Profit before Interest and Tax (PBIT) and volume in the tractor piece Capacity utilisation in the tractor industry had hit a low during 2002-03, following large message additions and a volume slump. After that, capacity utilisation improved steadily, but remained moderate at some 50% during 2008-09. In 2009-10, the tractor volume growth has helped the OEMs improve their capacity utilizations however, there is still excess capacity in the industry.Thus, over the medium term, close tractor manufacturers would not need to make any significant capital investments in building capacities. As discus sed, the domesticated tractor industry has to cope with demand volatility on account of cyclical trends and the strong linkages it has with agricultural intersection and monsoon rains. Many of the industry players have thus diversified into related products, including generator engines and cranes, besides focusing more on exports, to gain some insulation against the volatility in domestic tractor demand.As for tractor exports, while a major part of that currently goes to USA, the OEMs are now exploring various other markets crosswise Europe, Asia and Africa for future exports. Industry Trends by Region The biggest markets for the tractor industry include States like Uttar Pradesh (UP), Andhra Pradesh (AP), Madhya Pradesh (MP), Rajasthan, and Maharashtra, which together accounted for rough 50% of the total tractor sales in India during 2009-10. The tractor industry witnessed a strong y-o-y growth of 28. 3% during 2009-10, with most of the States report positive growth during the year.Chart 4 Trend in Tractor Sales across regions Chart 5 Trend in Tractor sales across States Source Industry, ICRAs estimates Source Industry, ICRAs estimates The northern region be the largest tractor market in India with sales of around 1,67,000 units as of 2009-10. This region reported a growth rate of 35. 7% in volume sales in 2009-10 over the previous(prenominal) fiscal, with the key contributors including UP, Punjab, Haryana and Rajasthan. The northern region benefited from higher MSPs (for crops), limited availability of labour (forcing higher mechanisation), and increasing non-agricultural use of tractors.Additionally, increased infrastructure development activities (especially highways) led to appreciation in land values and use of tractors for non-agricultural purposes. In some cases, farmers also received compensation for the judicatures acquisition of select land patches (adjoining highways), which increased the availability of cash with them. Feedback from indust ry players ICRA Rating Services varlet 3 ICRA Rating Feature Tractor Industry An ICRA Perspective suggests cash purchases (including purchases using Kisan Credit Card) in some northern States increased to 35-40% of the total tractor volumes in 2009-10 from 10-15% in the past.Tractor volumes in UP grew by 42. 7% during 2009-10, with H2, 2009-10 reporting particularly strong growth (around 51% y-o-y) generally on the back of high sugar cane prices for the kharif crop and improved irrigation facilities. In the case of Punjab, tractor volumes remained strong for the fifth straight year in 2009-10 (y-o-y growth of 42%). In Rajasthan however, growth in tractor volumes was comparatively subdued in 2009-10 (around 24% y-o-y) as compared with the figure for the northern region as a whole.Tractor sales in Rajasthan were especially low in H2, 2009-10 versus H1, 2009-10, due to lower kharif output on account of deficient rains and inadequate financing availability. In the eastern region, trac tor volumes continued to report strong growth in 2009-10, albeit on a small base, and went up by 53. 8% over 2008-09, being driven mainly by the higher MSPs announced for paddy. Within the region however, many financiers remained loath to finance tractor purchases in some States like Bihar. Nevertheless, in Bihar, tractor volumes grew 66% over 2008-09 to around 29,000 units in 2009-10, thereby accounting for over 50% of the totalsales in the eastern region. The Bihar market, where tractor penetration had been low historically, has shown sustained growth over the subsist few years and become one of the important markets for the tractor industry. Overall, in the eastern region, growth in tractor volumes is expected to moderate, going forward, as the benefit of a low base get diluted gradually. The western region reported sales of around 92,000 tractor units during 2009-10a growth rate of 35. 7% over the previous fiscalbenefiting particularly from the strong performance that Maharash tra, Gujarat and MP posted during H2, 2009-10 (55% y-o-y growth over H2, 2008-09).The factors contributing to the strong growth in the region during H2, 2009-10 included a benign base effect, higher crop prices (of sugarcane and cotton in Maharashtra, and of cereals and soyabean in MP), and greater availability of retail finance. The performance of the southern region in terms of tractor sales was relatively modest during 2009-10, with the growth rate being around 11. 9% over the previous fiscal. While most States in the region reported healthy growth, AP, which is the largest tractor market in the south, de-grew by 10. 4% in 200910.The AP market has been undergoing a volume correction since 2007-08, with the preceding four to five years having witnessed a large and sustained volume growth this factor apart, the de-growth of 2009-10 was also aided by irregular monsoons. The other big market in the southern region, Karnataka, reported growth of 74% in tractor volumes in 2009-10 mainl y on the strength of higher MSPs for rice however, volume growth is expected to moderate in 2010-11 because of the base effect. In Tamil Nadu, tractor sales were flat during H1, 2009-10, but the performance improved in H2, 2009-10 mainly because of improved retail financing by the PSBs.Industry Trends by Tractor Horse Power (HP) The Indian tractor market has traditionally been a medium HP market, with 31-40 HP tractors accounting for around 47% of the total industry volumes. In 2008-09, the 31-40 HP category had reported sales of 157,602 tractor units, which was about the same as the previous years figure but lower than the 2006-07 statistic by 7%. In 2009-10 however, this category reported a strong revival, with the volume growing by 22%2 over 2008-09 the revival was led by UP, Karnataka and Madhya Pradesh. The other major segment in theIndian tractor market is the 41-50 HP range, which accounts for around 23% of the total industry volumes. This segment grew by around 10% during 20 09-10, thereby underperforming the growth in overall tractor volumes (around 19%) that year. The main actor for this underperformance was the low growth that the southern region, the biggest market for this segment, reported in 2009-10. 2 The HP wise y-o-y growth rates are based on 9M 2009-10 tractor volumes. Page 4 ICRA Rating Services ICRA Rating Feature Tractor Industry An ICRA PerspectiveThe 51 HP segment of the Indian tractor market also underperformed the industry growth rate in 200910 mainly because of the de-growth in the exports which is a key demand area for these high HP tractors. Some long Demand Drivers for the Industry Low penetration of tractors in Indian agriculture Indian agriculture is characterised by low farm mechanisation, fragmented land holdings, and high dependence on monsoon rains (in the absence of adequate irrigation facilities). Tractor penetration in India is low at around 13 tractors per 1,000 hectares as against the global average of 19 and the US av erage of 29.While this does indicate the relative backwardness of Indian agriculture, it also points to the significant scope that exists for raising tractor penetration, which bodes well for tractor demand over the long term. Government support for the agricultural sector Although agriculture contributes just around 20% to Indias GDP, it provides employment to a large rural population, which is why the sector remains a strong focus area for the Government. The tractor industry benefits significantly from the Governmental focus on agriculture, with measures such as nil excise duty ontractors (even the excise duty on tractor parts has been lowered from 16% to 8%) and inclusion of tractor financing under priority sector lending (by PSBs) serving as long-term demand drivers. Financing of tractor purchase is of great significance for the industry, it being a key demand facilitator. Export of tractors Indian tractor manufacturers have been increasingly targeting the international markets over the last few years. The industry exported a total of around 37,900 tractors during 2009-10, with the USA, Africa, South America, and some Asian countries being the top destinations.The industry leader, Mahindra and Mahindra (M&M), has acquired Yancheng Tractors, the fourth largest tractor manufacturer in mainland China (in terms of FY2008 volumes), to improve its presence in the country. In the developed markets, Indian tractors have a relatively marginal presence, with sales being largely restricted to the hobby farming segment. Outlook Tractor sales are expected to remain healthy in fiscal 2010-11, given the good rabi crop this time around, the act firmness in the prices of agricultural products, and the healthy monsoons anticipated during the coming kharif season.Moreover, improving farm mechanisation levels (with labour availability in rural areas declining), increasing non-agricultural use of tractors, higher credit disbursements for agriculture, and sharper Governmental focus on the farm sector (larger budgetary allocations) are also expected to encourage tractor sales. The industrys profitability is however expected to remain moderate in the medium term, considering the high competitive chroma and low capacity utilisation levels, although larger players could benefit from scale economics.As for margins, while they have seen an improvement in 2009-10, they would remain vulnerable to adverse changes in commodity prices. While some States in the northern region have achieved high levels of tractor penetration and farm mechanisation, on an all-India basis, the penetration remains low, which along with the current shortfall of farm labour and consequently rising labour costs, may be expected to lead to greater mechanisation and use of tractors.The long-term prospects for the Indian tractor industry hinge on agricultural growth and Government support in areas such as financing availability, tax exemptions, and fiscal stimulus for rural development. Ov erall, ICRA expects the long-term growth rate for the Indian tractor industry to trend around the historical average of 6-8%, supported by increasing tractor penetration. ICRA Rating Services Page 5 ICRA Rating Feature Tractor Industry An ICRA Perspective Annexure I Structure of the Indian Tractor IndustryThe Indian tractor industry has around 13 national players and a few regional players. The industry is dominated by Mahindra and Mahindra (M&M) with a market function of around 41. 1%, followed by Tractors and advance Equipments TAFE, which holds around 22% of the market. The other major players include Escorts (12. 1%), L&T-John Deere (7. 8%), and International Tractors particular (8. 9%). During the last few years, the industry has seen some consolidation with M&M getting Punjab Tractors (PTL) and TAFE acquiring Eicher Tractors.Most of the tractors sold in India are in the 21-50 HP range, with the 31-40 HP category alone accounting for around 50% of this. The long-term prospe cts of the Indian tractor industry are extremely dependent on Government policies for the agriculture sector. Historically, most tractor sales are done on credit even as over the last few years financial institutions, facing an increase in their non-performing assets (NPAs), have resorted to some tightening of credit norms. Also, during 2009-10, there has been a sharp increase in cash purchases, reflecting the rise in disposable incomes in the rural markets.Most of the tractor financing done by banks comes under priority sector lending, a directed-lending mechanism of the Government of India. In terms of volume, India is one of the largest tractor markets in the world, besides China and the USA. The prospects of the domestic industry are highly linked to monsoon rains, which remain a key factor in determining agricultural production. Better irrigated States like Punjab and Haryana have a high tractor density (over 100 per 1,000 hectares), while States like Rajasthan, Gujarat, Himac hal, Tamil Nadu, Maharashtra, Andhra, MP and WestBengal have low levels of tractor penetrationa pointer to the substantial growth potential that the latter set offers. On an all-India basis, tractor penetration remains low at around 13 per 1,000 hectares. Besides being used in farming, tractors find application in activities such as harvesting and irrigation, land reclamation, drawing water and powering agricultural implements. In addition, lately, the tractors are also being used for non-agricultural purposes including haulage in construction and infrastructure projects which has spread out the tractor market.The Indian tractor market, thus, is expected to grow in future and remain one of the biggest tractor markets in the world. Chart 6 Trend in State wise market share Source Industry, ICRAs estimates Annexure 2 Region-wise securities industry Shares of Various Players The market shares of the top four players in the Indian tractor industry did not change oft during 200910 in c omparison with 2008-09. M&M remained the market leader with around 41. 1% market share, followed by TAFE with a market share of around 22%, Escorts with around 12. 1%, and International Tractors (ITL) with around 8. 9%.ICRA Rating Services Page 6 ICRA Rating Feature Tractor Industry An ICRA Perspective Chart 7 Movement in Regional Market Shares of Select Players 2009-10 vs. 2008-09 (bits per second) Source Industry, ICRAs estimates M&M remains particularly strong in the southern region (50. 4% market share during 2009-10). However, L&T John Deere (LT-JD) was able to increase its market share in the region by around 250 bits per second in 2009-10, mainly at the expense of M&M (market share down by one hundred forty bps) and Escorts (down by 140 bps).In the western region too, LT-JD performed well in 2009-10, increasing its market share by 190 bps, even as TAFE lost market share by around 90 bps there. In the northern region, where M&M has been traditionally weak, the company increas ed its market share by 140 bps during 2009-10, even as ITL and Escorts lost market shares by around 90 bps and 60 bps respectively, there. In the eastern region, M&M was able to raise its market share by around 140 bps in 2009-10 at the expense of Escorts and TAFE.ICRA Rating Services Page 7 ICRA Rating Feature Tractor Industry An ICRA Perspective ICRA Limited An Associate of Moodys Investors Service CORPORATE line Building No. 8, 2nd Floor, Tower A DLF Cyber City, Phase II Gurgaon 122 002 Tel +91 124 4545300 facsimile machine +91 124 4545350 Email emailprotected com, Website www. icra. in REGISTERED OFFICE 1105, Kailash Building, 11th Floor 26 Kasturba Gandhi Marg New Delhi 110001 Tel +91 11 23357940-50 facsimile machine +91 11 23357014Branches Mumbai Tel. + (91 22) 24331046/53/62/74/86/87, Fax + (91 22) 2433 1390 Chennai Tel + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Fax + (91 44) 2434 3663 Kolkata Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad Tel +(91 40) 2373 5061/7251, Fax + (91 40) 2373 5152 Pune Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231 Copyright, 2010 ICRA Limited. 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