Agri Machineries Technology

In FY’23, domestic tractor sales are projected to drop by half to 4-6%

In FY'23, domestic tractor sales are projected to drop by half to 4-6%

Domestic tractor sales would fall by half to 4-6 percent this fiscal year, compared to a compound average growth rate of 10% since fiscal 2020, owing to repeated normal monsoons.

Nonetheless, falling input prices for steel and pig iron will deliver a 100-200 basis point boost to tractor manufacturers’ operating margins, according to Crisil Ratings.

Therefore, net cash-positive balance sheets will sustain excellent credit profiles in the future.

Tractor sales volume will reach a new high in fiscal 2023 as farm attitude stays positive following another successful monsoon — the primary driver of farm revenues — and an increase in the Minimum Support Price for the 2022-23 market season.

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According to Naveen Vaidyanathan, Director at Crisil Ratings, tractor volume growth in the coming fiscal year will be led by both farm and commercial markets.

The 5% increase in MSP for wheat for the current rabi crop, the largest in the last four fiscals, will boost farm incomes, he said, while the government’s infrastructure push and increased building activity will drive commercial demand.

Demand is strong

Tractor volume will be supported by replacement demand, which represents for 60% of total volume. Tractors have an average lifespan of 6-8 years. Record sales in fiscal years 2017 and 2018 predict solid replacement demand in fiscal year 2019.

To be sure, there are dangers associated with this forecast. Extremely high temperatures followed by unusual rainfall in portions of northern and central India during the last month have fuelled fears of a poor rabi harvest this year.

Weather forecasters have also raised the possibility of an El Nino event in July-August this year, which might result in below-normal rainfall.

While reservoir levels above average would bring some relief, uncertainty could persist. The El Nino effect caused a monsoon shortfall in fiscal 2015 and 2016, affecting farm revenue and causing tractor volume drops of 13% and 10%, respectively.

Margin reduction

While the monsoon will become apparent in the following months, falling commodity prices might bring some relief on the profitability front.

Also Read | Tractor output surpasses 1 million in 2022 for the second year in row

According to Nitin Bansal, Associate Director at Crisil Ratings, high input prices have caused tractor makers’ operating margins to decrease from a decadal high of 22% in fiscal 2021 to 15% in fiscal 2023, despite subsequent price increases.

However, he stated that steel and pig iron prices, which account for 90% of the total raw material cost of tractors, have softened in recent months and may fall by 6-12% next fiscal year due to lower coal prices. According to him, this should assist raise the operating margin to 16-17%.

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