Faster recovery in tractor sales to help Mahindra & Mahindra, Escorts2 min read . Updated: 02 Jun 2020, 10:45 PM IST
One constraint investors need to keep track of is related to financing. A large part of tractors are purchased through loans
Farm equipment manufacturers are seeing faster recovery in sales. Mahindra & Mahindra Ltd (M&M) posted a 2% growth in tractor sales in the domestic market in May, while leading manufacturer Escorts Ltd reported just a 0.5% decline in tractor sales during the month.
However, both saw a sharp fall in exports, perhaps because of logistics challenges and shutdowns in various overseas markets due to the coronavirus outbreak. Even so, the two tractor makers have fared much better than auto firms such as Maruti Suzuki India Ltd and Hero MotoCorp Ltd, which reported 82-88% slump in domestic sales last month. Commercial vehicle makers like Ashok Leyland Ltd posted a 90% fall in domestic sales.
M&M’s passenger and commercial vehicles business was also hit. Combined auto sales of the firm comprising passenger vehicles, commercial vehicles, and three-wheelers plunged 79% in May, reflecting the impact of the prolonged lockdown to contain the spread of coronavirus.
However, timely relaxation of restrictions for farm activity and the rural sector helped M&M and Escorts post a recovery in May. Both companies had reported a 83-87% fall in domestic tractor sales in April. Retailers in rural areas have also faced less restrictions than their counterparts in urban areas as covid-19 is less prevalent there. There has been a notable improvement in sales of fertilizers and agrochemicals, according to the financial results and management commentaries of other agriculture inputs suppliers such as Coromandel International Ltd, Rallis India Ltd, and UPL Ltd. The rabi crop sowing last season was better than the previous year and crop losses were also limited due to fewer weather disturbances. The prediction of a normal monsoon this year and the increase in minimum support prices bode well for the kharif crop season and farm investments.
“The IMD’s (India Meteorological Department’s) second forecast of a well-spread normal monsoon, along with healthy reservoir levels, is likely to help sustain the momentum in agri-related investment," JM Financial Institutional Securities Ltd said in a note on 2 June. The demand for tractors is relatively stable, according to channel checks by analysts. “We believe the tractor segment should be the key beneficiary of rabi harvests, high government procurement of wheat, expectations of normal a monsoon and the sharp 70% jump in Mahatma Gandhi National Rural Employment Guarantee Act allocation by the government. Thus, we see upside risks to our tractor industry volume estimates of -15%/+25% in FY21/22F," Nomura Research said in a note on 2 June.
One constraint investors need to keep track of is related to financing. A large part of tractors are purchased through loans. Any risk aversion by financiers can constrain sales. However, all said, tractor manufacturers are certainly in a better place than the rest of the automobile industry.