Sales slump forces firms to rethink rural plans

Mumbai: Demand for tractors and motorcycles have collapsed in rural India, and companies are seeking government support for the troubled farm sector that sustains about three-fifths of the nation’s population. Farm equipment and motorcycle makers, meanwhile, are redrawing their investment plans and slashing costs in response.

Tractor sales, a barometer of the state of India’s rural economy, declined 20% in the first half of the current fiscal, according to data compiled by lobby group Tractor Manufacturers Association (TMA).

The decline is the sharpest since 2003, a year when India faced a severe drought.

With the demand for goods, including motorcycles and farm equipment, plunging in rural markets, companies are in no rush to make new investments.

This may, among other things, put a large part of the burden of kick-starting the investment cycle on public expenditure and further delay a revival in India’s economic growth. Rural income has been hit by a second straight year of deficient monsoon and lower-than-expected increases in the government-set floor prices for farm output.

Tractor demand, according to an official at one of the tractor firms, has collapsed because of the poor monsoon rain, lower minimum support price of crops, and the crisis facing the sugarcane industry.

“There is more to it than the monsoon. The steps taken by the government to dispel the crisis in the agri-sector will need to be closely watched,” this person said, requesting anonymity.

Motorcycle makers too have been hit by the slump in rural income.

Sales declined 4.06% year-on-year to 5.36 million units in the six months ended 30 September, according to Society of Indian Automobile Manufacturers (Siam), the industry lobby.

The drop was primarily led by cheaper, entry-level motorcycles (those with an engine displacement of 100cc to 110cc).

Six out of 10 motorcycles sold in India belong to this category.

“There’s no demand. There is fear and scarcity, which is holding back the consumers,” said Pradeep Lokhande, founder of Rural Relations, a rural marketing firm.

The rural distress has even affected firms that sell low-value products, such as soaps and detergents.

Hindustan Unilever Ltd, for instance, had to cut prices of its Lux soaps and Surf detergents and increase spending on advertising and promotions to stoke rural demand.

As agriculture suffers, the biggest impact will be on rural demand, according to an 8 October report by ratings firm Crisil Ltd. This is especially true for automobile sales. Sales plunged sharply in the current fiscal in segments with high rural focus, and the trend has continued, or even amplified, this year, in certain segments such as motorcycles, tractors and utility vehicles, said the report.

Rural incomes, which have already been dented because of falling wage growth has come under further pressure due to consecutive monsoon shocks, the report added.

With no visibility on when the rural market will revive, some companies have started to reassess their investment plans and are also undertaking cost-saving measures. To be sure, these decisions also hinge on the installed capacity of individual firms and their exposure to the rural market.

Tractor maker Escorts Ltd has put on hold all new model introductions and expansion plans, said S. Sridhar, chief executive at Escorts Agri Machinery, in an interview last week. The company has also adopted tight cost control measures to balance the impact of slowing sales. Even top company officials, including Sridhar, are flying economy class during official tours to save money.

Times such as these offer an opportunity to cut flab and “identify growth vectors”, said Sridhar, adding that Escorts has been focusing on tractors that can also be used for haulage or load-carrying purposes.

Escorts’ sales in the domestic market declined 17.7% to 25,842 units in the six months ended 30 September, according to TMA data.

Among the motorcycle firms, market leader Hero MotoCorp Ltd, which has the maximum exposure to the rural market, with its every second motorcycle being sold there, is adjusting its business plans to the new reality.

In a post earnings conference call with analysts on 21 October, Hero’s chief financial officer Ravi Sud said that the company has scaled down the initial production capacity at its upcoming facility in Gujarat from 1.2 million units earlier to 750,000 units now.

Hero has also deferred some of its capital expenditure plans. According to its earlier plan, the company was to spend ₹ 3,000 crore in 2015-16 and 2016-17. Some of the spending, Sud said, will now spill over to 2017-18.

Hero’s rural sales in the quarter ended 30 September declined 8% from a year earlier. Tepid motorcycle sales dragged down earnings during the quarter.

Honda Motorcycle and Scooter India Pvt. Ltd (HMSI) also saw a 15% decline in rural sales in the first half of the current fiscal, said Yadvinder Singh Guleria, vice-president of sales and marketing at HMSI. There hasn’t been any growth in the farm sector, which has adversely impacted disposable incomes, he said, adding that the kharif crop could further worsen the situation.

Demand for four out of 10 motorcycles in the entry-level segment sold by HMSI comes from rural India.

Tractor market leader Mahindra and Mahindra Ltd’s officials declined to comment, citing the mandatory silent period ahead of its quarterly earnings likely to be announced next month.

Sales at the maker of Arjun brand of tractors contracted 21% to 102,121 units in the first half of the fiscal.

Mallika Srinivasan, chairman and chief executive at the second-largest tractor maker Tractors and Farm Equipment Ltd (TAFE), wasn’t available for comment.

The decline in sales in the first half of the fiscal for TAFE was at 21.2%.

Subrata Ray, analyst at ICRA Ltd, said he expects tractor sales to turn positive in the fourth quarter of the current fiscal largely because of the low base. Still, tractor sales for the full year will decline by 8-10%, he added.

“It’s high time that the government does something for the farmers,” said A.S Mittal, vice-chairman and managing director of International Tractors Ltd, which sells the Sonalika brand of tractors.

The Hoshiarpur, Punjab-based company, the third largest, saw its sales drop 16.7% to 30,209 units in the first half of the fiscal year.