With multiple tailwinds helping them, tractor makers Mahindra and Mahindra (M&M) and Escorts are set to post strong sales in FY18. Reduction in goods and services tax (GST) rate for tractor parts and fertilisers, normal monsoons, farm loan waivers and steps to boost the rural economy would translate to higher demand for tractors. The sector, which posted an 18 per cent growth in FY17 to 5.82 lakh units, would need to grow at 9 per cent to overcome the record of 6.34 lakh units in FY14. On the back of a 12 per cent growth, Credit Suisse analysts, Jatin Chawla and Vaibhav Jain, expect the sector to cross the peak industry sales of FY14 in the current fiscal. While M&M has forecast a tractor volume growth of 10-12 per cent for the sector, ICRA expects the sector to grow at 9-10 per cent in FY18.
Subrata Ray, Senior Vice President and Group Head, ICRA believes that a healthy monsoon precipitation coupled with healthier reservoir levels, excluding southern region, is likely to support farm cash flows in the current fiscal. With this, an expectation of improvement in non-farm income, supported by the government’s thrust on rural spending, infrastructure creation and irrigation spending, is likely to help the domestic tractor industry record a healthy volume growth, he adds.
A key trigger is the farm loan waivers announced by various state governments, say analysts. The last time farm loan waiver took place in 2008, tractor sales grew 21 per cent annually in the following three years. Analysts at Credit Suisse say that growth accelerated in the months following the disbursement of money by the government, albeit supported by strong agricultural prices during that time. The state governments that have announced and are likely to give concessions to farmers account for 65 per cent of tractor industry's sales. The three biggest states by sales are UP, Madhya Pradesh and Maharashtra. Lower fertiliser costs, loan waivers, better harvest supported by robust crop prices is expected to leave the farmers with higher disposable income in the coming months, which should rub off positively on tractor companies.
After the strong showing in the last three months, average sales of Escorts increased by 27 per cent year-on-year and M&M’s by 22 per cent, However, analysts say, wholesale sales in June was an aberration with M&M posting a 9 per cent growth and Escorts' sales down 17 per cent. Escorts management indicated that the lower sales were due to inventory de-stocking ahead of GST and they expect the sales impact to be made up in the September quarter. Their confidence comes from strong domestic sales at the retail level of Escorts tractors, which were up 12 per cent. M&M’s farm equipment president, Rajesh Jejurikar, too, is confident of an improved market sentiment and expects a good agricultural output on the back of a healthy spread of monsoon and a good sowing in progress across the country.
While the M&M stock continues to trade at reasonable levels, Escorts has run up significantly over the last year and investors should await further corrections to take an exposure to it.