Disparity in sales decline may be due to the different inventory holding strategies
The 7-9% FY20 sales decline estimated for tractors is better than earlier forecasts of a double-digit drop
A good monsoon, albeit delayed, has improved rabi or winter crop estimates for FY20. This bodes well for tractor sales.
A delayed monsoon and erratic spatial distribution had impacted the kharif or summer crop after a gloomy 4-5% decline in rabi crop acreage in FY19. This led to a sudden reversal in the two-year strong upward cycle in tractor sales seen till March 2019.
Between April and August, Mahindra and Mahindra Ltd’s (M&M’s) monthly tractor sales fell 12-18% year-on-year on the back of weak farm income. Even Escorts Ltd showed a similar decline during the period. Both companies make up about two-thirds of overall tractor sales in India. M&M is the market leader with a 40% market share.
However, there is hope in the horizon. “Sales recovery seen from September is likely to continue as water reservoir levels have risen and sufficient soil moisture on the back of adequate monsoon makes way for a bumper rabi crop," says Bharat Gianani, analyst at Sharekhan Ltd.
Still, after two months of sales increase in September and October, the trend was mixed in November. M&M’s sales fell 18% and that of Escorts dipped by 5% year-on-year.
“The disparity in the two firms’ sales decline could also be partially attributed to different inventory holding strategies being followed by the original equipment manufacturers (OEMs)," says Rohan Gupta, assistant vice president (corporate ratings) at Icra Ltd.
To be sure, there was a 12% year-on-year drop in total tractor sales in the first half of FY20. However, the structural factors support tractor demand.
“Irrigation penetration has reduced the risk of demand collapse with monsoon’s failure. Infrastructure spending also leads to an increase in tractor demand as about 30% usage of tractors is non-agriculture based," says a Nomura Financial Advisory and Securities (India) Ltd report.
That apart, tractor financing has been relatively easier in the last few years. So, tractor manufacturers are hopeful of demand recovery from January, which implies a good Q4. Icra says the year-on-year decline in sales is estimated at 7-9% in FY20, lower than the drop in the first half.
Analysts forecast a more gradual U-shaped recovery in the months ahead. “A double-digit decline would indicate weak farm cash flows from the recently harvested kharif crop," says Icra’s Gupta, who adds that the three-four weeks’ inventory on the back of production cuts brings comfort to OEMs. Meanwhile, softer commodity prices should alleviate, at least partially, any margin pressure on companies.
Be that as it may, near-term concerns have risen from rumours in the market of a hike in the goods and services tax (GST) rate in some auto segments including tractors. Industry heads say that coming in the wake of price hikes that typically happen in January, the additional GST burden would be a blow to the already wobbly tractor segment.