Industry Risk Score : Automobiles - Tractors

India which is the largest producer of tractors in the world, accounts for roughly one-third of the global production. Tractor production in India started in 1961 and has played a pivotal role in increasing agricultural productivity. Further, the state of the industry assists in gauging the condition of rural economy in the country. Demand for tractors is derived from both agricultural and non-agricultural activities. The usage of tractors for non-agricultural purposes, such as sand mines, brick kilns, road making, and for ferrying passengers in rural areas, has been rising. To cater to this demand, there has been a shift towards higher horsepower (HP) tractors, mainly 40-50 HP. However, with major demand coming from the agricultural sector, the 30-50 HP segment accounts for 80% of the tractor sales in the country.

The tractor sales registered ~10% y-o-y growth in FY19 reaching to 8.8 lakh units from ~8.0 lakh units in the previous year. Despite the rise in sales, the growth was constrained in FY19 as weak sentiments in the later part of the year led to sales slipping into negative in February and March 2019 over previous year. Sales were also affected as weak demand from the southern and western part of the country affected demand.

The country’s tractor industry is organised and consolidated. During FY19, more than 80% of the market share was accounted by players such as Mahindra & Mahindra (M&M), the largest tractor maker in India, TAFE, Escorts and Sonalika. Over the fiscal, a shift was witnessed with small tractor players’ increasing their market share.

Government spend on agriculture, farm loan waivers and minimum support prices (MSPs) has played a significant role in fuelling the demand for tractors. The need to increase mechanised farming and crop yield should continue to help the tractor industry in maintaining the growth curve. Prices of tractors are expected to remain stable on the back of stable input prices.

Key Risks & Attributes

• Outlook on agriculture sector
• Climatic conditions and monsoons
• Volatility in raw material (steel and aluminium) prices
• Changes in excise duty structures

In India, seasonal usage of the tractors coupled with small land holdings and high capital investment has shied away farm mechanisation beyond the reach of small and marginal farmers. Despite adoption of farm mechanisation witnessing an increase in India, the growth has been concentrated to specific regions. Overall, the pan-India penetration of tractors is below the international levels. The average tractor density in India is about 12.4 tractors for 1,000 hectares, while the world average is 17.4 tractors and that in the US is way ahead at 32.1 tractors.

During FY19, the tractor sales registered ~10% y-o-y growth reaching to 8.8 lakh units from ~8.0 lakh units in the previous year. Despite the rise in sales, the growth was constrained in FY19 as weak sentiments in the later part of the year led to sales slipping into negative in February and March 2019 over previous year. Sales were also affected as weak demand from the southern and western part of the country affected demand.

The exports market too presents an opportunity for growth in the sector. The segment has been witnessing rising trend over the past few years. Over the years, OEMs have continued to take initiatives by expanding their geographies and launching products tailored for specific markets, and is likely to support demand going ahead.

As mentioned above, current low levels of tractor penetration in the country coupled with strong governmental focus on availability of finance, and on rural development is likely to drive the overall growth of the tractor industry. This presents a strong demand potential for the industry. Scarcity and increasing cost of labour and cattle have boosted the demand for mechanised farming, translating into demand for tractors. However, sales remain unpredictable due to their strong linkage with untimely and irregular rainfall.

Acuité expects that apart from the traditional demand pertaining to farm-mechanisation, application of tractors in non-agricultural activities too will drive demand.

The competitive intensity in the country’s domestic tractor market is high among players, despite subtle changes in players’ market share over the past few years. The country’s tractor industry is organised and consolidated. During FY19, more than 80% of the market share was accounted by players such as Mahindra & Mahindra (M&M), the largest tractor maker in India, TAFE, Escorts and Sonalika. Over the fiscal, a shift was witnessed with small tractor players’ increasing their market share.

M&M has maintained its lead position in the industry with the largest domestic market share for FY19 on the back of strong branding, pan-India presence and availability of financing options. Amongst the top players, Tractors & Farm Equipment Limited (TAFE), is also a major player in the industry, although it losing market share during the year on account of aggressive competition and new launches by competitors. Escorts benefited from enhanced management focus and improved product portfolio post new launches. Domestic players command 75% market share of the Indian tractor industry. International players such as John Deere, CNH Industrial India and Same Deutz-Fahr India have a smaller market share despite a presence of 12–15 years. The industry is capital intensive, and costs involved in branding, distribution network and spare parts availability act as key entry barriers.

Going forward, the change in market shares would be driven by increasing pace of new product launches, high customer expectations on performance and quality, and greater marketing push by OEMs to introduce products in niche segments, efforts to expand into untapped geographic segments and horse-power categories.

Acuité believes that the tractor industry will continue to witness competition coupled with having a concentrated market structure.

Iron and steel scrap are the basic raw materials used in manufacturing tractor chassis. Though easily available, the key input costs are highly volatile. Other raw materials and components include plastic fibre, silicon dust for mould manufacturing, battery, engine and transmission. Cost of other raw materials (such as plastic) is linked to the demand-supply situation and crude oil prices.

Other major input related risks that manufacturers have to deal with, are related to inventory and supplier management, employment of skilled workforce and provision of adequate capital. The industry requires huge investment in fixed and working capital for purchase of heavy machinery and components.

Acuité believes that owing to the dependence of the industry on a variety of raw materials and their associated costs, it poses risk to the tractor industry.

The Indian tractor industry is not subject to intense government regulations. However, government initiatives for the farmers, agriculture sector and rural economy, in general, play a major role in improving the performance of the industry. Government action towards improving the rural economy through measures like doubling the farm income by 2022, increasing spend towards irrigation, direct farmer income support through different schemes, increasing mechanisation on the farm fields and also continuous focus on rural road construction will help in the strong growth of tractor sales.

Tractor loans come under priority sector lending. MSPs set by the government impact the demand for farm equipment and tractors, and such hikes in lending encourage and enable farmers to increase spending on tractors for generating higher output.

Acuité believes that the industry is exposed to favourable government initiatives towards farmers over the medium to long term.

As the Indian farming industry gains momentum, demand for technically superior tractors has been growing. Traditionally, tractors were simple and were used only for basic tasks in the field; however, increase in demand from other industries calls for greater focus on research and development in the tractor industry.

OEMs are continuously focusing on improvement of technology and launching technologically advanced features in tractors in terms of power, comfort, safety, etc. With evolving regulatory requirements and foray of international OEMs, the domestics OEMs are investing in developing new and advanced technology to compete efficiently with the international OEMs. The industry is moderately susceptible to changes in technology. OEMs are launching new products across HP segments to cater to the growing domestic and export markets. However, with replacement cycle of tractors at 8–10 years, the risk of technology obsolescence is low.

Acuité believes the industry is relatively safe against rapid technology upgradation and product replacement, and will remain a key monitorable going ahead.

Industry financial performance risk score

Operating Margin
(Marginally favorable)

Interest Coverage Ratio
(Favorable)

Return on capital employed
(Marginally favorable)

Debt/ Equity
(Favorable)

GCA days
(Marginally unfavorable)

Note: The industry financial performance risk score is provided on a 6-point scale