Tractor sales may slow further on poor rains

Mumbai: Tractor manufacturers are concerned that a failure of the June-September monsoon could lead to sales declining in the coming months, with high loan rates, less disposable income in the face of a slowing economy, and weakened buying sentiment taking a toll on the market for the farm vehicles.

Sales fell 5% to 125,689 units in the first three months of 2012 from a year ago, according to industry lobby Tractor Manufacturers Association.

Moreover, tractor sales in the world’s largest market for such implements expanded a mere 2.5% in the quarter ended June, dragged down by market leader Mahindra and Mahindra Ltd’s (M&M’s) volumes, according to industry estimates.

Tractor makers that saw double-digit expansion in sales in the June quarter are worried about growth in the September quarter if the monsoon doesn’t recover.

Any persistent rain deficiency could have a severe impact as other enabling factors for tractor sales have dried up, said Bishwambhar Mishra, chief executive (tractor and farm mechanization division) at M&M.

Between 1997 and 2003, there was a correlation between good rainfall and robust tractor sales, according to Mahantesh Sabarad, senior vice-president at domestic brokerage firm Fortune Equity Brokers (India) Ltd. This link is less definite after that. In fiscal 2010, for instance, despite the rainfall being below average (at 21.8% below the long period average, or LPA), tractor sales grew 26.9%.

According to the India Meteorological Department, the cumulative deficit in rainfall on 9 July was 25%. As opposed to the norm of 240.3mm at the end of this period, the cumulative rainfall was 180.9mm. For the country as a whole, seasonal rainfall during this year’s monsoon has been 22% below LPA up to 11 July.

Explaining the reason for the weakening of the link, Sabarad noted that close to 35-40% tractors are now deployed for non-agricultural functions such as construction, and ferrying goods and people, among other things. The government has also been swifter in reacting to drought-like situations and doles out special incentives, loan waiver schemes, subsidies, etc., to support farmers in untoward situations.

While M&M’s Mishra acknowledged that the deficit in rainfall is indeed worrying, he refused to speculate on the impact on tractor sales if conditions remained unchanged. The tractor market leader sold 56,500 units in the three months to June, compared with 57,500 units a year ago.

Among other factors, Mishra attributed the contraction in sales to farmers having less cash in hand. “In the last three years, input costs have doubled to 50%, thereby adversely impacting disposable income,” he said.

S. Sridhar, chief executive (agri-machinery group) at Escorts Ltd, said, “The recovery in sales will get impacted if the rain situation doesn’t improve.”

Should the current situation continue, overall tractor sales could decline by as much as 3%, he said, and added, “We do not see sales turning the corner for another two quarters for the industry if the situation persists.”

Domestic sales at Escorts, India’s third largest tractor maker, expanded 11% to around 16,000 units in the quarter ended 30 June.

International Tractors Ltd, maker of the Sonalika brand of tractors, saw sales increase 11% to 15,500 units in the June quarter from a year ago.

A.S. Mittal, vice-chairman of International Tractors, said he expects industry sales to be hit if the rains don’t improve.

Besides a weak monsoon, other factors will also weigh on tractor demand.

The minimum support price for crops has seen a compounded annual growth of 15% in the last three years and it’s unlikely to climb further as the government has been trying hard to rein in inflation, said Umesh Karne, an analyst at brokerage firm Brics Securities Ltd. This, he said, has impacted buying power.

Moreover, according to him, weaker sales are also a function of the cyclical trend seen in tractor sales. Tractor sales had three years of good growth; typically, these become sluggish in the fourth year, Karne said.

Some tractor makers are hesitant to take a call on sales trends.

Tractors and Farm Equipment Ltd, the second largest in the pecking order, saw its domestic tractor sales climb 13% to 33,000 units in the June quarter from 29,000 units a year ago. A senior company official, who didn’t want to identified, said, “While it is true that monsoon rains have been deficient, tractor sales are driven by a number of other factors such as credit availability, etc. It could be a little premature to comment on the impact of monsoons on tractor sales.”

S. Bridget Leena in Chennai contributed to this story.

shally.s@livemint.com