Agriculture and Tractor

The tractor constancy describe a hearty 28. 3% harvest-time in gross sales volumes during 2009-10, thereby destination the cast of cyclical correction that had pul conduct down tractor sales during the preceding ii years (200709). Significantly, the revival of 2009-10 happened scorn the drought a identical conditions in m any press outs during the kharif1 season moistening sentiments.The key factor enabling the demand offset of 2009-10 was strong country liquidity, which in turn was sustained by several(prenominal) factors, including higher(prenominal) stripped-down support price (MSP) for restricts greater ability of elevateers to make cash purchases (including the physical exercise of Kisan Credit Card which atomic number 18 increasingly being employ to part-finance tractor purchases) deepen workout opportunities (with folksy employment schemes being implemented by the giving medication of India) an change credit environment and continuance of replacement demand.These factors apart, non- artless use of tractors (for tie in construction and foundation projects) continued to attach, hiting tractor demand. Also, with infrastructure projects and rural employment schemes increasing employment opportunities, approachability of aim for agricultural activities continued to pass up, persuading even out off farmers with average-sized land holdings to either rent or purchase tractors. On a sphereal basis, the performance of the east, northern and western parts of the country was squ ar-shouldered during 2009-10 in ground of tractor demand, while that of the grey component was obtain.A strong branch in tractor volumes, albeit on a low base, 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 besides report strong maturement during 2009-10, especially in the second half (H2) of the year, benefiting from a low base (H2, 200 8-09) and a satisfactory kharif crop in whatsoever States. The grey region reported hold performance in term of tractor demand ( increase of 11. 9% in 2009-10), being impacted largely by the de-growth in Andhra Pradesh (AP)a key southern commercializewhere rainfall was unsystematic in 2009-10.However, in Karnataka and Tamil Nadu, higher MSPs for rice along with more or less revival of interest of public heavens banks (PSBs) in tractor funding led to strong tractor sales volumes. Historically, tractor demand has been fairly volatile, being influenced by cyclical tr windups, availability of finance, and crop patterns (monsoon). After four years of strong growth during 2003-07, the fiscal years 200708 and 2008-09 both reported a peripheral decline in tractor sales volumes, largely reflecting cyclical corrections.In addition to the cyclical dips, during H2, 2008-09, the manufacturing also had to love with the 1 Kharif season in India is during the south-west monsoon (June-Oc tober) ICRA rating Feature Tractor Industry An ICRA stead liquidity crunch, which pushed up interest grade, even as financiers resorted to more stringent lending norms in the face of locomote non-performing assets (NPAs). However, the occurrence mendd during 200910 as credit availability improved on the strength of greater liquidity in the banking system.While tractor backing has traditionally been through with(p) by PSBs, of late, private banks and non-banking finance companies (NBFCs), despite their higher interest rates vis-a-vis the PSBs, have been able to increase their perceptiveness of this market on the strength of faster loan processing and use of more open-hearted credit norms. Overall, with tractor demand being closely linked to agricultural outturn, growth in farm mechanisation and farmers remuneration, the long demand drivers for the effort reside robust.The currently low levels of tractor penetration in India, strong G all everyplacenmental decoct on a vailability of finance for agriculture mechanization tools and on rural growing, increase in the use of tractors for nonagricultural purposes, and the growing emphasis on tractor exports pre normal tumesce for the diligence. Background map 1 Annual Trends in Tractor gross sales Volumes Chart 2 Monthly Trends in Tractor Sales Volumes Source Industry, ICRAs estimates Source Industry, ICRAs estimates The tractor industry reported a compounded annual growth rate (CAGR) of all over 20% in volume terms during the period 2003-07.The long up-cycle in demand was supported by several factors, including excise affair 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 in ventory with the major(ip) players having pushed aggressively for bigger sales.In contrast to this phase of cyclical slowdown, the one that happened during 2007-09 was less severe, with volumes declining by slightly 3%, despite the intermittent tightening of the liquidity situation 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 situation improved on the cost structure front in H1 2009-10 with the demulcent of goodness prices preparing the ground for the industry to earn higher profitability margins.The cartridge in volumes also set abouted the overhead expenses for the tractor manufacturers, boosting their profitability. While the OEMs did not 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 accept ed practice in the industry given that once prices are lowered it is difficult to raise them subsequently. However, during H2 2009-10, the tractor majors change magnitude the prices with the reversal of commodity prices and the discounts have also come down. ICRA rating Services scalawag 2 ICRA order FeatureChart 3 Trends in Profitability Margins of Select Players Tractor Industry An ICRA post Source Company releases, ICRAs estimates refers to Profit before Interest and assess (PBIT) and volume in the tractor plane section Capacity utilisation in the tractor industry had hit a low during 2002-03, following large capacity additions and a volume slump. After that, capacity utilisation improved steadily, that carry oned moderate at nigh 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, most tractor manufacturers would not need to make any world-shaking capital investments in building capacities. As discussed, the domestic tractor industry has to cope with demand volatility on account of cyclical trends and the strong linkages it has with agricultural production and monsoon rains. Many of the industry players have thus diversified into cerebrate products, including generator engines and cranes, besides focusing more on exports, to gain whatever 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 across Europe, Asia and Africa for future exports. Industry Trends by Region The biggest markets for the tractor industry include States exchangeable Uttar Pradesh (UP), Andhra Pradesh (AP), Madhya Pradesh (MP), Rajasthan, and Maharashtra, which together accounted for somewhat 50% of the total tractor sales in India during 2009-10. The tractor industry witnessed a strong y-o-y growt h of 28. 3% during 2009-10, with most of the States reporting positivistic 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 quells 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 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 few shifts, farmers also received compensation for the Governments science of select land patches (adjoining h ighways), which increased the availability of cash with them. Feedback from industry players ICRA valuation Services rogue 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) in general on the back of high sugarcane 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 relation backly 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 acco unt of deficient rains and in equal to(predicate) financial backing availability. In the eastern region, tractor 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 reluctant 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 historicly, has shown sustained growth over the last hardly a(prenominal) 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 d uring 2009-10a growth rate of 35. 7% over the previous fiscalbenefiting particularly from the strong performance that Maharashtra, 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 healthful 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 assist by irr egular monsoons. The other big market in the southern region, Karnataka, reported growth of 74% in tractor volumes in 2009-10 mainly 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 m arket is the 41-50 HP range, which accounts for around 23% of the total industry volumes. This segment grew by around 10% during 2009-10, thereby underperforming the growth in overall tractor volumes (around 19%) that year. The main reason 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-Term 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 faci lities). Tractor penetration in India is low at around 13 tractors per 1,000 hectares as against the global average of 19 and the US average 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 celestial sphere 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 much(prenominal) 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 transnational 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 spender, Mahindra and Mahindra (M&M), has acquired Yancheng Tractors, the stern 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. lookout station Tractor sales are expected to remain healthy in fiscal 2010-11, given the good rabi crop this time around, the continuing firmness in the prices of agricultural products, and the healthy monsoons anticipated during the coming kharif season.Moreover, improving farm mechanisati on 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 intensity 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 shortage 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. Overall, 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 building 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 allot of around 41. 1%, followed by Tractors and Farm 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 Limited (8. 9%). During the last few years, the industry has seen some desegregation with M&M acquiring Punjab Tractors (PTL) and TAFE acquir ing 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 prospects of the Indian tractor industry are highly dependant on Government policies for the agriculture sector. Historically, most tractor sales are through 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 mechanics 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 agric ultural production. Better irrigated States like Punjab and Haryana have a high tractor density (over 100 per 1,000 hectares), while States like Rajasthan, Gujarat, Himachal, 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 expanded 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 Re gion-wise securities industry Shares of Various Players The market shares of the top four players in the Indian tractor industry did not change much during 200910 in comparison 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 internationalist 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 ( bps) 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 bps 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 xcl 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 increased 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 swain of Moodys Investors Service CORPORATE OFFICE Building No. 8, 2nd Floor, hover A DLF Cyber City, Phase II Gurgaon 122 002 Tel +91 124 4545300 autotype +91 124 4545350 electronic mail 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 Fax +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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