Indian Tractor market on the road to recovery

India is the largest producer of tractors in the world, accounting for roughly one-third of the total global production. Tractors have been playing an essential role in increasing agricultural productivity in India, since 1961, when tractor production started in India. The tractor industry volumes have grown at CAGR~10% over the last 4 decades.
In the financial year 2013-14, a record 6.3 lakh units of tractors were sold in India on the back of good monsoons, strong crop output as well as rise in crop prices. However, manufacturers of tractors in India have struggled over the last two years due to muted monsoons. India saw El-Nino occurrence in the last 2 years which led to India receiving sub-normal rainfall – 86% and 88% rainfall in FY16 and FY15 as a % of Long Period Average (LPA). This had a direct influence on the Tractor sales in FY15 and FY16. As per Tractor Manufacturers Association (TMA) data, tractor volumes sold were 5.5 lakh units and 4.9 lakh units in FY15 and FY16 respectively.

In recent times, demand for tractors is derived from both agricultural and non-agricultural activities. About 30% usage of tractors in India is for non-agricultural purposes like sand mines, brick kilns, road making, ferrying passengers etc. To cater to this demand, there has been a shift towards higher horsepower (HP) category tractors- mainly towards 41-50 HP category. Farmers are also upgrading to higher HP segments due to higher productivity from increased usage of implements along with tractors. During the period FY11- FY14, 41-50 HP segment witnessed growth of CAGR~31% in tractor volumes. However during FY14-16, de-growth in the sector was seen across all the tractor segments including 41-50 HP (except >50 HP segment which recorded minor growth).

In Lakh Units FY11 FY12 FY13 FY14 FY15 FY16 CAGR FY11-14 CAGR FY14-16
<30 HP 0.7 0.8 0.5 0.7 0.6 0.5 0% -13%
31-40 HP 2.1 2.4 2.3 2.2 2.0 1.8 1% -10%
41-50 HP 1.4 1.4 2.0 3.1 2.6 2.3 31% -14%
>=50 HP 0.6 0.7 0.4 0.3 0.3 0.3 -19% 3%
TOTAL 4.8 5.4 5.3 6.3 5.5 4.9 10% -12%

Source: Analyst Research

But the financial year 2017 has brought cheer for the tractor manufacturers in the country. Since April 2016, tractor sales have been on an upward trend primarily fuelled by healthy southwest monsoon in 2016. Although the actual rainfall (97% of LPA) was lower than the forecasts of the Indian Meteorological department (106% of LPA); but timely and well-dispersed distribution of showers helped improve Kharif crops production. Sowing area under Rabi crops (winter crops) has also increased due to replenished reservoir levels across various regions. Except North region, the tractor market has seen buoyant growth across most of the large tractor markets. Overall as per ICRA, tractor volumes are estimated to have grown at 14%-16% during FY17. Although in FY18, growth forecast is moderated to single digits (6%-7%) on account of probable formation of El Nino affecting monsoon in 2017.

Recent demonetization move by the government had a short term adverse impact on the rural economy. Cash transactions account for the bulk of domestic tractor sales in rural areas. Single digit growth was recorded even in months of February and March 2017 as the farmers gradually made the transition to using cheques and online payments for making purchases instead of cash. Normalization of cash availability in the rural ecosystem is likely to take some time.

Long term drivers of the tractor industry are intact and the industry is expected to grow at a volume CAGR of 8%-9% over the medium term. India has one of the lowest agricultural yields in the world currently (30% below world average), and increased mechanisation is one of the key ways to improve yields. The penetration of tractors in India is very low (0.8 HP/hectare) in comparison to other developed and developing countries (9.8 HP/hectare in Germany and 4.1 HP/hectare in China). Increasing budgetary allocation of the government towards farm mechanisation and rural development, especially irrigation and crop insurance, will further provide fillip to the industry.

Southern and western states (Gujarat, Rajasthan, Karnataka, Maharashtra) have ample room for growth – with low penetration levels. Growth in matured tractor markets in Northern and Western India is likely to be replacement led. Again, higher HP segments (41-50 HP and >=50 HP) are expected to grow at a faster pace compared to the overall industry. Shift towards the higher HP segment is likely to aid the profitability of sector companies as it generates better margins.

Better agricultural output and increased focus of the government towards rural infrastructure should also increase the repayment capacity of tractor loan borrowers. This should also improve the asset quality in the tractor segment where default levels have gone up and is among the highest across all sectors in the country.