Ease in commodity prices will make the tractor makers earnings before interest and tax (EBIT) margin resilient despite lower volume retail.
Tractor industry is going to witness a de-growth in sales by 5-7% in FY20, according to a Crisil report.
Weak growth in rural income, moderation in rural infrastructure spending, higher channel inventory and the effect of a high base will lead to de-growth in tractor sales volume by 5-7% in FY20 from an all-time high of 8.78 lakh units in FY19, the report said .
The tractor industry is heavily dependent on rural incomes and monsoon. “Rural incomes were impacted towards the second half of last fiscal because crop production was flat after two years of 5-6% growth and farm profitability declined due to weak pricing. Consequently,rural wage growth was lower at 3-4% compared with an average 6% in the preceding two fiscals.” Lower growth in rural infrastructure due to reduction in spending also impacted the non-farm tractor demands in the recent months.
However, the report also mentioned that the sharp improvement in the progress of south-west monsoon in the past few weeks would drive the tractor demand in the second half of FY20. It has already brought down the deficiency from 19% of the long period average (LPA) as on July 24 to a surplus of 1% of the LPA on August 28.
Gautam Shahi, director, Crisil Ratings,said, “The likelihood of a normal monsoon this fiscal has increased with the rains catching up in the last few weeks. This augurs well for farm income and tractor demand. Additionally, the recent Budget announcements for agriculture and allied activities,loan waivers in some states and hike in minimum support prices for kharif crops along with rural development initiatives of the government are likely to push sales.”
Ease in commodity prices will make the tractor makers earnings before interest and tax (EBIT) margin resilient despite lower volume retail. Correction in prices of steel and pig iron by 7-10% between April and July in FY20 would help to mitigate the impact of discounts being offered by tractor makers in order to push sales. Steel and pig iron accounts for 90% of the raw material costs.
Crisil mentioned in the report that long-term growth potential of the tractor industry remains healthy but an immediate revival in sales remains contingent on an improvement in purchasing power in rural markets.