Tractor makers set for record FY18
Farm loan waiver, lower duties and normal monsoon should help them beat FY14 sales of 634,000 units
Tractor makers Mahindra and Mahindra (M&M) and Escorts are set to post strong sales in FY18, as reduction in the goods and services tax (GST) rate for tractor parts and fertiliser, a normal monsoon, farm loan waivers and steps to boost rural economy would translate to higher demand. The sector, which saw 18 per cent growth in FY17 to 582,000 units, would need to grow at 9 per cent to cross the FY14 record of 634,000 units. Credit Suisse analysts Jatin Chawla and Vaibhav Jain expect the sector to cross the FY14 figure this financial year, on the back of a 12 per cent growth. While M&M has forecast a tractor volume growth of 10-12 per cent for the sector, ICRA expects 9-10 per cent growth in FY18.
Subrata Ray, senior vicepresident and group head, ICRA, believes healthy monsoon precipitation and healthier reservoir levels (excluding the south) are likely to support farm cash flows this financial year. Coupled with expectation of improvement in non-farm income, supported by the government’s thrust on rural spending, infrastructure creation and irrigation spending, this is likely to help the tractor industry record healthy volume growth, he adds.
A key trigger, analysts say, is the farm loan waivers announced by various state governments. Earlier waiver was in 2008; tractor sales grew 21 per cent annually the next three years. Analysts at Credit Suisse say growth accelerated in the month, following the disbursement of money by the government, albeit supported with strong agricultural prices. The state governments that have announced and are likely to give concessions to farmers account for 65 per cent of tractor industry sales. Lower fertiliser costs, loan waivers and a better harvest, supported by robust crop prices, are expected to leave farmers with higher disposable income in the coming months.
After the strong showing in the past three months, which saw Escorts’ average sales grow 27 per cent year-on-year and M&M’s by 22 per cent, wholesale sales in June, analysts say, were an aberration with M&M posting a 9 per cent growth and Escorts' sales down 17 per cent. Escorts management indicated the lower sales were due to inventory de-stocking ahead of GST, and they expect the sales impact to be made up in the September quarter. Their confidence comes from strong domestic sales at the retail level of Escorts tractors, which were up 12 per cent. M&M’s farm equipment president, Rajesh Jejurikar is also confident of an improved market sentiment. He expects a good agri output, on the back of a healthy spread of the monsoon and good sowing in progress across the country. While the M&M stock continues to trade at reasonable levels, Escorts has run up significantly over the past year and investors should await further corrections before buying.