Industry Risk Score : Automobiles - Tractors

Executive Summary

India is the largest producer of tractors in the world, accounting for roughly one-third of the global production. Tractor production in India started in 1961 and has played a huge role in increasing agricultural productivity. 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 agriculture sector, the 30-50 HP segment accounts for 80% of the tractor sales in the country.

The Indian tractor industry registered ~17% growth in production (approximately 6.91 lakh units) in FY 2016-17 and ~13% growth in FY 2017-18, after negative growth of 15% and 7% in FY 2014-15 and FY 2015-16, respectively. Tractor sales are fairly dependent on timely and regular rainfall. Since April 2016, tractor sales have been on an upward trajectory, primarily, fuelled by healthy southwest monsoons.

The Indian tractor industry is organised and consolidated. In FY 2016-17, the top five players accounted for around 75% of the market share. Despite stiff competition, the companies have managed to maintain their margins at 9–10%, primarily, driven by government policies and good monsoon coupled with good agriculture output.

Government spend on agriculture, farm loan waivers and minimum support prices (MSPs) have 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
  • Volatility in raw material (steel and aluminium) prices
  • Changes in excise duty structures
  • Rural road and infrastructure related construction activity

Demand & Supply Scenario


In India, seasonal usage, small land holdings and high capital investment for purchase has kept farm mechanisation, including tractor usage, beyond the reach of small and marginal farmers. Even though the adoption of farm mechanisation has been increasing in India, the growth has been concentrated to specific regions. Overall, the pan-India penetration of tractors is below the international levels. The tractor density in India is about 16 tractors for 1,000 hectares, while the world average is 19 and that in the United States is 27. 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.

The Indian tractor industry registered ~17% growth in production (approximately 6.91 lakh units) in FY 2016-17 and ~13% growth in FY 2017-18, after negative growth of 15% and 7% in FY 2014-15 and FY 2015-16, respectively.Over a longer term, the industry has shown a volume growth of 7.5% CAGR in the past 4 decades. The exports, however, have been subdued due to low global demand for tractors. The weak demand in global markets may be attributed to fall in crop prices across various markets, thus, leading to lower scope for capital investment towards farm equipment.

Some of the key factors supporting the domestic demand for tractors are:

Recent initiatives by government favouring agricultural sector such as MSP for a wide range of crops which is expected to augur well for farmer’s incomes. Some of the other reasons include,

  • Increased use of tractors for non-agricultural purposes such as in sand mines, brick kilns, road making and for ferrying passengers in rural areas, driven by the growth in infrastructure and real estate sectors
  • Increased avenues of financing for farmers especially from banks/ NBFCs with a focus on rural segment
  • Government’s focus on availability of finance for agriculture mechanisation tools and increasing irrigation potential

The Indian tractor industry is segmented into less than 20 HP, 20-30 HP, 30-40 HP, 40-50 HP and greater than 50 HP categories. The lower HP tractor segment (<20 HP) contributes to 4-5% of the domestic volume, while the 30-50 HP segment accounts for 80% of tractor sales in the country. Further, the 40-50 HP segment is the most preferred segment, which accounts for almost 50% of the industry. To cater to the demand of use of tractors for non-agricultural purposes, there has been a shift towards HP tractors - mainly 40-50 HP.

The preference towards medium HP tractors can be attributed to both suitability of these tractors to a large addressable geographic region and their affordability vis-a-vis higher HP tractors. In line with the demand, most original equipment manufacturers (OEMs) have a majority of their product portfolio in medium HP categories.

Acuité expects that a favourable monsoon (as predicted by the Indian Meteorological Department) boosting rural income, farm loan waivers and wider application of tractors for non-agricultural activities will drive the demand for tractors in the medium term, leading to double-digit growth.

Nature & Extent of Competition


The Indian tractor industry is organised and consolidated. It comprises ~20 companies and is dominated by domestic players. Mahindra & Mahindra has maintained its lead position in the industry with 40-45% domestic market share (FY 2017-18) on the back of strong branding, pan-India presence and availability of financing options. John Deere has continued to gain market share and the only OEM in India to record growth in FY 2015-16 and FY 2016-17, Amongst the top players, Tractors & Farm Equipment Limited (TAFE), ,lost market share 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.

Players in the Tractor industry are constantly working towards retaining or increasing market share and margins through new product launches, greater marketing efforts, introducing products addressing niche segments and expansion into untapped geographic segments and various engine power categories. However, the market structure has remained largely comparable with modest changes in market share, mostly linked to demand trends in specific geographies.

Going forward, the domestic tractor industry is expected to remain consolidated. 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 have a concentrated market structure and continuous need for investment in marketing and innovation.

Input Related Risk


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, transmission, driveline, wheel rims, sheet metal fabrication and seats, among others. Cost of other raw materials (such as plastic) is linked to the demand-supply situation and crude oil prices.

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 the dependence of the industry on a variety of raw materials and their associated costs pose moderate risk to the tractor industry in terms of input costs.

Regulatory Risk


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’s focus on agriculture was visible in Union Budget 2018, which emphasised on availability of institutional credit to the agriculture sector and announced implementation of MSPs for all crops.

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. Union Budget 2018-19 proposed a target of Rs. 1,100,000 crore for farm credit during FY 2018-19. The government has decided to continue the Interest Subvention Scheme and increased the total allocation for rural, agriculture and allied sectors to Rs. 1,87,223 crore.

Acuité believes that the favourable government initiatives towards farmers and farm loan waivers will boost the demand for tractors over the medium to long term, despite the marginal increase in tractor prices.

Technology Risk


As the Indian farming industry gains momentum, demand for technically improvised 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. 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 that in the medium term, the industry faces low risk on account of technology upgradation and product replacements.

Operating Margin


In terms of net sales, the tractor industry witnessed a decline from FY 2014-15 to FY 2015-16. However, net sales picked up sharply from FY 2015-16 to FY 2016-17. Though the median EBITDA margins dropped from 10.35% in FY 2014-15 to 9.31% in FY 2016-17, the overall pick up in sales reflects a favourable position. Dependence on the agriculture sector, high competition and volatility in raw material/ input costs are the key variables.

Interest Coverage


With limited leverage and improving income levels, overall interest coverage performance was highly favourable, with an average of 5.4 times during FY 2014-15 to FY 2016-17.

Return on Capital Employed


The industry had a RoCE ratio of 14.88% in FY 2014-15, which dropped to 1.13% in FY 2015-16 and recovered to 7.17% in FY 2016-17. The ratio remained neutral during FY 2014-15 to FY 2016-17, at an average of 7.73%. RoCE of Tractor companies is impacted by the high working capital cycle and the capital-intensive nature of the business.

Debt / Equity


The debt-equity ratio of the tractor industry moved from 0.12 times in FY 2014-15 to 0.07 times in FY 2016-17. On an average, during the period, the tractor industry showed a highly favourable debt-equity ratio of 0.10 times. The industry median was at 0.07 times in FY 2016-17, indicating limited reliance on borrowed funds.



The tractor industry presented a neutral performance in terms of liquidity profile. Gross current assets stood on an average at 228 days for FY 2014-15 to FY 2016-17. The industry’s performance declined in this aspect from 182 days in FY 2014-15 to 242 days in FY 2016-17.

Industry Financials and Industry Average

Fact Sheet (As on Year Ended March 31st)SUM Unit 201703 201603 201503
Net Sales Rs. Cr. 8,709 7,637 9,168
OPBDIT (Excl. NOI) Rs. Cr 781 653 819
Depreciation Rs. Cr. 164 158 149
PAT Rs. Cr. 477 421 546
Net Cash Accruals Rs. Cr. 640 579 695
Networth Rs. Cr. 5,760 5,240 4,890
Total Debt Rs. Cr. 424 562 675

Average Unit 201703 201603 201503
EBITDA Margin % 9.3 9.9 10.4
PAT Margin % 3.9 2.5 3.5
ROCE % 7.2 1.1 14.9
Interest Coverage Times 9.8 1.9 4.5
Debt to Equity Times 0.07 0.1 0.12
GCA Days Days 0.33 0.37 2.79

The entities considered in the static pool are as under:

  1. CNH Industrial (India) Pvt. Ltd.
  2. Escorts Ltd.
  3. Indo Farm Equipment Ltd.
  4. Mahindra Gujarat Tractor Ltd.
  5. Same Deutz-Fahr India Pvt. Ltd.
  6. Standard Corporation India Ltd.
  7. VST Tillers Tractors Ltd.

IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating ‘High Risk’ and 6 indicating ‘Highest Safety’. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable


Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial advisers or investors independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.



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