Tractor sales in Indian domestic market may grow 10%-12% in the current financial year (FY 2020-2021) on the back of the satisfactory monsoon and strong rural income. As per a report by research and report agency Ind-Ra, tractor sales volume has increased 10% during the April-September period, as compared to the same period a year ago.
The report also claims that a solid rabi crop harvest and an expected good harvest of kharif, clubbed with higher kharif acreage will aid in the spurring demand and sales for the tractors in the remaining period of the current financial year. The surge in minimum support price (MSP) for kharif crops and increased budgetary allocation under the MGNRES are boosting rural income, which will further help in higher tractor sales, claims the research and rating agency.
Not only in FY21, but FY22 will also register higher tractor sales volume at a high single to low double-digit rate on account of four consecutive good crop harvests, which will translate into higher cash flows for the farmers. Around 80% tractors sold in Indian domestic market are used in the agriculture sector and the tractor sales move in tandem with the agricultural GVA.
Despite the nationwide lockdown for two months starting in April 2020 in a bid to curb the spread of Coronavirus pandemic in India, the agricultural activities were least impacted, as it comes under the essential commodities. As Ind-Ra also says, the spread of Covid-19 has been limited in rural areas, thus not impacting the labour force and overall production levels.
As per the report, higher tractor sales will be aided by the agricultural sector growth than the overall economy for the second consecutive year in FY21. As it forecasts, the agriculture sector will grow at 3.5% YoY in FY21, compared to 4% in FY20.
FY21 marked adequate monsoon
During the 1st June and 30th September 2020, India recorded above normal rainfall of 109% of its long period average. This was higher than the Indian Meteorological Department’s (IMD) prediction of 102% for 2020. Except the Northeast Indian states, all other regions of the country have received higher than normal rainfall.
The total area sown under the kharif crops has increased by around 4.8%, as on 25th September 2020. This would add to incremental demand for tractors across the country. Though the water level in 123 reservoirs on 22nd October 2020 was 2.3% lower YoY, it was 19.7% more than average of past 10 years, which is likely to support Rabi crop production in 2021.
Easy finance availability
Tractor financing in India is largely done by the non-banking finance companies (NBFC), while bank lending is mostly availed by the large farmers. While for banks, tractor financing falls under priority sector lending, even NBFCs are willing to lend due to a longer installment period for the asset class than for most other types of loans and good crop during the current season. Improved farm income should also help to lower delinquency levels, thus improving the asset quality.
As the report claims, driven by the increasing income levels in the agricultural sector, farm equipment loans as a percentage of total loans increased to 12.3% in the first half (April-September) of FY21 as compared to 11.3% in H1 of FY20, for the top two lenders in the segment. With the total disbursements for these lenders witnessed a significant YoY decline in the second quarter of FY21, the farm equipment disbursements increased by 5%-10%.
Supply chain disruption issue resolved
With the gradual reopening of the economy and the simultaneous spurring demand, most of the OEMs are currently operating at over 90% production capacity. Also, the OEMs are increasing their shift numbers and optimising supply chain to improve the output level. The supply chain issues that impacted certain OEMs productions during July-August 2020, seem to have subsided. With an expected strong demand during the festive season, the OEMs now ramping up production to raise their inventory levels.
The lower dependency on imported components compared to other segments like passenger vehicles, commercial vehicles, and two-wheelers have also helped the tractor OEMs amid the Covid-19 lockdown.
Muted demand from non-agricultural sector
According to industry experts, around 20% of total tractors sold in India are used for non-agricultural purposes, especially in the construction and infrastructure segments. In this segment, the demand for higher horsepower tractors have been increasing for the last couple of years.
As the pandemic has resulted in prolonged halt in road and construction activities, demand for tractors were adversely impacted. However, with the gradual reopening of the economy, the demand is picking up. Hence, the demand for tractors from the non-agricultural sector is expected to remain muted in FY21.