Tractor makers buck the slowdown
Prospects of a normal monsoon and an expanded government food programme are helping in a modest recovery
Manufacturers of cars and commercial vehicles may be staring at an uncertain future, but tractor makers are looking to ride a rising market. Where almost every other segment of the automobile industry is contracting, tractor industry executives expect volumes to increase 5-10 per cent starting September to March. Although April saw sales slow owing to the lockdown, May saw a 5 per cent jump, year-on-year (YOY), according to the Tractors Manufacturers’ Association.
These are modest numbers to be sure, but still hopeful at a time when the economy is expected to shrink and given that tractor volumes had dropped nearly 10 per cent a year ago on the back of falling rural incomes ( see chart: Tractor and traction).
The tractor industry accounts for about 5 per cent of total automobile retail sales.
In fact, the tractor industry has beaten street expectations comprehensively. Year-on-year growth in domestic sales in May for Mahindra, with a 39.1 per cent market share, was 2 per cent, while Escorts (11.6 per cent market share) reported only a 0.5 per cent drop and Sonalika (12 per cent) reported a healthy 20 per cent jump.
Industry and analysts say the recovery is much faster than original expectations of low, single digit growth to contraction and is likely to continue owing to robust crop production, good price realisations (because of increase in the minimum support price) and forecasts of a normal monsoon.
Ramesh Iyer, vice-chairman and managing director of Mahindra & Mahindra (M&M) Financial Services and the group executive board member, said major agricultural producers are showing rising demand in Uttar Pradesh, Punjab, Madhya Pradesh and parts of Maharashtra and Rajasthan.
“It’s farm driven. We still don’t see haulage applications or a contracting segment buying tractor big time yet,” he added. Transport and haulage account for about half the function of a tractor in rural areas.
Capacity utilisation levels are also increasing. For example, M&M’S capacity utilisation is close to 80 per cent, and Sonalika also touched the same level and expected to touch 100 per cent in the next one or two months.
During an investors’ call, Escorts management said May production was at 20 per cent of the normal single -shift capacity. The situation with its suppliers is improving rapidly, and it should be able to progressively ramp up production to about 50-60 per cent in June.
T R Kesavan, president, Tractors Manufacturers’ Association, explained that unlike the congested cities, Covid-19 has not affected the rural areas as badly, so agricultural activities continue. Following prognosis of a normal monsoon, NITI Aayog member Ramesh Chand predicted the sector will be insulated from the damaging impact of the pandemic and grow at three per cent in FY21, contributing about 50 basis points to economic growth.
Procurement, too, has started on a much bigger scale because of the drawdown of food stocks owing to the Centre and state governments’ expanded food distribution programmes for the poor during the pandemic. Tractor makers have not been able to take advantage of the kharif season, but expect a bump during harvest in September and this year’s Rabi season.
“Though we will not be able to determine the exact demand levels going forward, the industry will ramp up production through the month as the supply chain opens up,” said Hemant Sikka, president, farm equipment sector, M&M.
Keeping the supply chain moving, in fact, is the big challenge for manufacturers. Labour shortages in factories are looming, and migrant labour, having suffered from eviction in the early days of the nationwide lockdown, are unlikely to be willing to return in a hurry. The top four manufacturers alone employ 30,000-40,000 workers both directly and indirectly.
Shenu Agarwal, CEO of Escorts Agri Machinery, pointed out that sale and repair of heavy machinery was exempted from the lockdown by the Ministry of Home Affairs as early as April 3, 2020, which helped push sales. The timely reopening of banks and non-banking financial companies will further help in near-term demand recovery.
“Although it’s a bit early to say, we are already witnessing pent-up demand coming from the lockdown period, and should help the industry to show growth in June- October,” he said.
In a way, the shortage of migrant labour in some states is also expected to help the agri-equipment industry, considering that the farmer has the cash flow owing to a good Rabi crop and may need to cover the labour shortage for the next crop.
The prospects of the industry in the midst of a general slowdown are deemed strong enough for financial institutions to be willing to extend financing for tractor loans. “Overall, farmers are happy with the money in hand,” added Raman Mittal, executive director, Sonalika Group.
Ankit Suchanti, research analyst at Axis Securities, said that the tractor segment beat expectations comprehensively with flat to positive YOY growth. “We expect tractors to lead the recovery in the coming few months,” he said, which is a slim silver lining in the otherwise dark days ahead.