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Farm Income May Drive Tractor Sales Volume 10-12% This Fiscal : Crisil
This growth is expected to be driven by higher farm income despite the COVID-19 pandemic, and the demand growth is expected to be particularly strong in the southern and western parts of India given higher kharif sowing and a copious monsoon, both of which are crucial for these regions
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Domestic tractor sales volume should recover faster than expected with the industry estimated to grow 10-12 per cent in the current financial year against earlier projection of one per cent de-growth, ratings agency Crisil said on Wednesday.
This growth is expected to be driven by higher farm income despite the COVID-19 pandemic, and the demand growth is expected to be particularly strong in the southern and western parts of India given higher kharif sowing and a copious monsoon, both of which are crucial for these regions, Crisil said in a release.
In April-September, tractor industry volume was up 12 per cent year-on-year, with the southern and western regions witnessing almost 45 per cent and 13 per cent demand, respectively, it said.
The ratings agency also said a higher volume and improved product mix will drive expansion in operating margin of tractor makers, which may see a 100-200 basis points increase, thereby supporting their credit profiles, Crisil said.
A good monsoon and higher crop production generally support farm incomes and provide a fillip to tractor demand, said the rating agency, adding in the just-past rabi season, crop production surged a significant seven per cent year-on-year.
This is reflected in the strong pick-up in tractor sales volume in the second quarter of this fiscal despite a sharp de-growth in the first quarter due to pandemic-related containment measures, it said.
Tractor volumes may continue to grow for the rest of this fiscal given good crop prospects over the medium term and timely government interventions as good rains in June have facilitated early sowing and boosted kharif acreage, said the release.
Further, a well-distributed and nine per cent above-normal monsoon season have meant reservoir levels surging to their highest in five years. That is a good augury for the upcoming crop seasons, it added.
“Strong upsurge in government spending on agriculture in the first six months of this fiscal, and an around four per cent increase in minimum support price for marketing year 2020-21, should boost farm incomes. That may help sustain the growth momentum in tractor volume,' said Gautam Shahi, Director, CRISIL Ratings.
Also, tractor demand for use in agriculture, which accounts for two-thirds of total demand, is expected to significantly outpace commercial-usage demand, which is linked to economic activity, it said, adding this is expected to materially improve the volume share of 41-50 horsepower tractors to around 52 per cent this fiscal from around 49 per cent last year.
“Higher utilisation and better product mix will crank up the operating margins of tractor makers by 100-200 bps to around 17 per cent this fiscal. That along with a healthy balance sheets (with debt to equity ratio at around 0.1 time on average) and robust liquidity (around Rs 11,000 crore as on March 31, 2020) will support credit profiles,' said Naveen Vaidyanathan, Associate Director, Crisil Ratings.
In the road ahead, the spread of the pandemic, especially in rural areas, and whether it leads to further containment measures, will be a monitorable, Crisil said.