Domestic tractor sales will halve to 4-6 per cent this fiscal on a higher base of compound average growth rate of 10 per cent recorded since fiscal 2020 on the back of successive normal monsoons.

However, softening prices of inputs such as steel and pig iron will provide a 100-200 basis points respite to the operating margin of tractor makers, says Crisil Ratings.

Further, net cash-positive balance sheets will continue to support strong credit profiles.

In fiscal 2023, tractor sales volume will hit a record as farm sentiment remains healthy after another good monsoon — the key driver of farm incomes — and increase in Minimum Support Price for the 2022-23 market season.

Naveen Vaidyanathan, Director, Crisil Ratings says riding on a high base, tractor volume growth next fiscal will be driven by both farm and commercial segments.

The 5 per cent increase in MSP for wheat for the ongoing rabi crop — the highest in the last four fiscals — will improve farm incomes, while the government’s infrastructure push and higher construction activity will drive commercial demand, he said.

Healthy demand

Replacement demand, which accounts for 60 per cent of volume, will also support tractor volume. Tractors typically have a lifecycle of 6-8 years. Record sales in fiscals 2017 and 2018 foretell healthy replacement demand next fiscal.

To be sure, there are downside risks to this expectation. Unusually high temperatures followed by unseasonal rainfall in parts of northern and central India in the past month have raised concerns of a weaker rabi harvest this year.

Weather agencies have also flagged the rising probability of an El Nino event in July-August this year, which could lead to below-normal rainfall.

While above-average reservoir levels would provide some respite, uncertainties could persist. The El Nino effect had led to a shortfall in monsoon during fiscal 2015 and 2016 impacting farm incomes and leading to tractor volume declines of 13 per cent and 10 per cent, respectively.

Fall in margin

While a clearer picture on the monsoon will emerge in the coming months, easing commodity prices should provide respite on the profitability front.

Nitin Bansal, Associate Director, Crisil Ratings said high input prices had led to tractor makers’ operating margin fall for the last two fiscals from a decadal high of 22 per cent in fiscal 2021 to 15 per cent in fiscal 2023, despite successive price hikes.

However, he said prices of steel and pig iron, which together account for 90 per cent of the total raw material cost of tractors, have eased in the past few months and may decline by 6-12 per cent next fiscal, driven by softer coal prices. This should help improve operating margin to 16-17 per cent, he said.

Related Topics