Tractor domestic volumes report positive growth in 2016-17

Tractor volumes in domestic market have reported a positive growth trajectory during the fiscal 2016-17 (growth in volumes of 18.2% in 10 months from April 2016 to January 2017 on a YoY basis) fuelled by favourable farm sentiments as southwest monsoon performance remained healthier as compared to previous two fiscals. This was stated in a report  on “Indian Tractor Industry” by ICRA.

While the monsoon performance augured well for kharif production, it also replenished reservoir levels that supported rabi sowing despite weak winter monsoons. The growth momentum witnessed a pause in November, 2016, with demonetisation causing cash crunch resulting in a decline in monthly volumes by 13% (YoY basis). After the minor blip, however, domestic volumes have recovered, with the industry volumes growing by 8% and 6% respectively in December 2016 and January 2017 respectively (YoY basis). In February, 2017 also, leading tractor OEMs have reported a healthy growth in domestic volumes, pointing to continuation of growth momentum for the domestic industry.

Tractor exports growth, which moderated in FY2016, remained weak during the FY2017 (2016-17) as well; the weak demand in the global markets has led to near stagnant volumes in 10months of  FY2017. Although OEMs have continued to take initiatives to enhance their distribution networks in various geographies and launched products tailored for specific markets, the weak demand in the global markets constrained export volumes.

M&M maintain market leadership; TAFE has lost market share

Competitive intensity in the domestic tractor market remains high; although there have been subtle changes in market share over the past few years, the market structure has remained largely similar. M&M continues to maintain its market leadership status, constituting 44% of the total domestic industry volumes in 9 months of FY2017. The company has gained market share across all regions, benefiting from strong brand recognition, financing support from captive and pan India presence. TAFE, the second largest player, has lost market share across various markets over the past two years, owing to aggressive product launches by competition.

Escorts, the fourth largest tractor manufacturer in the country, has gained market share across most regions, benefitting from enhanced management focus and improved product portfolio post new launches. The company’s weak presence in the Southern region has however hindered market share gains at a pan India level. John Deere, which was the only OEM to record a growth in volumes in FY2016, has continued to gain further market.

Sustained demand at a pan-India level; select pockets of Northern region however continues to struggle

The southern region has outpaced growth across all others regions on a consistent basis over the past three years, with the growth being led by a robust demand in states like Andhra Pradesh, Tamil Nadu and Karnataka, on account of government support programmes and better rural sentiments which helped maintenance of growth trajectory in some of these states even in November 2016 (in the immediate aftermath of the demonetisation). Notwithstanding strong growth, a weak northeast monsoon with drought like conditions across several states in the region has kept reservoir levels low, and thus, remains an area of concern. The eastern region continues to report strong volume growth in the current fiscal, albeit on low base, benefitting from various government initiatives to boost farm mechanization.

There has been a recovery in demand in the central and western regions led by improved farm sentiments on account of estimates of improved crop production and resulting farm cash flows. The northern region continues to lag the pan-India growth; while Uttar Pradesh, the largest tractor market in the region, has recorded healthy growth, other key markets such as Rajasthan and Punjab continue to struggle, as a result of weak haulage and replacement demand respectively.

Advance estimates indicate healthy increase in crop production; El Nino formation possibility remains a concern

The performance of south west monsoon was healthier and relatively widespread than past few years; a healthy monsoon helped improve farm sentiments and has led to estimates of an improvement in crop production. After weak crop production for two consecutive years, there was an uptick in rabi production of wheat, oilseeds and pulses in April 2016; the Second Advance Estimates of crop production released in February 2017 indicated a healthy increase in crop production for both kharif and rabi seasons. If the final estimates are similar, then farm cash flows are expected to mark a healthy improvement over previous fiscals

As per Australian Bureau of Methodology, there is a moderate possibility of El Nino formation towards the fag end of the monsoon season; although initial estimates have generally ruled out a significant impact of the same on rainfall precipitation, the impact of the same on south west monsoon and consequently crop production would remain critical.