AUTOPOINT Healthy rise in farm credit and income to push mechanization levels in the agriculture sector CARE Research

August 05, 2011 Analytical Contact: Ms. Revati Kasture - Head Industry Research revati.kasture@careratings.com (D): +91-22-6754 3465
The Government of India is committed towards increasing the production and efficiency levels in the agriculture sector and has recognized improvement in farm mechanization is one of the important factors that would push the efficiency levels in agriculture. The movement called Green Revolution started in1960, laid down significant steps towards development of

agriculture sector that included concessional credit for

Mr. Vishal Srivastav Team Leader Auto Sector vishal.srivastav@careratings.com (D): +91-22-6754 3448

buying tractor, which consequently boosted tractor demand. Furthermore, rise in the awareness levels, substantial improvement in agricultural credit

disbursements combined with increase in the income levels has fuelled the growth in tractor demand. CARE

Mr. Kunal Maheshwari Analyst kunal.maheshwari@careratings.com (D): +91-22-6754 3437

Research estimates that the overall tractor population has increased from around 0.15 million units in 1970 to around 4.2 million units in FY11 and its penetration level has increased from around one tractor per thousand hectares in 1970 to around 29 tractors per thousand hectares currently. Chart: Tractor penetration

5.0 4.0
Units (in mn)

35

30
25

3.0
2.0 1.0

20

15
10 5

0.0
FY81 FY91 FY01 FY11
FY71

Tractor population (LHS) Penetration per thousand hectares (RHS)

Source: CARE Research Estimates

Tractors drove mechanization levels in the industry The rise in tractor penetration also improved the mechanization levels significantly in agriculture sector. CARE Research estimates the share of mechanical and electric power in overall power used in agriculture sector has increased from 83 per cent in FY01 to 86 per hectare in FY06 and further is estimated to have increased to around 90 per hectare in FY11. The share of tractors in mechanization devices which is the

primary driver influencing the rise in mechanization in agriculture sector has increased from around 48 per cent in FY01 to around 60 per cent in FY11. Proportion of mechanical and nonmechanical power sources in agriculture
2.0 1.5

Trend in power contributed by tractors

1.20
1.00

Kw/hectare

Kw/hectare
FY72 FY76

1.0 0.5

0.80

0.60
0.40 0.20

0.0

FY82

FY86

FY92

FY96

FY01

FY06

FY11E

0.00
FY11E

FY92

FY72

FY76

FY82

FY86

FY96

FY01

Non-mechanical Power

Mechanical Power

Source: Power Availability in Indian Agriculture, 2000 CIAE Bhopal, Agricultural Research Data Book 2003, IASR New Delhi and CARE Research estimates

Tractor industry continued to remain buoyant in FY11 After surpassing hiccups in FY09, the tractor industry was back on the roll in FY10 registering a strong growth of 31 per cent. The growth momentum continued in FY11 as the industry observed a healthy rise of around 22 per cent in its domestic unit sales. Healthy monsoons in most parts of the country, rise in minimum support price (MSP), favorable farm credit scenario coupled with shortage of agricultural labourers owing to the rise in employment opportunities in rural areas through National Rural Employment Guarantee Act (NREGA) led this growth. Chart: Trend in tractor domestic sales
0.60 35% 30% 25% 20% 15% 10% 5%

0.50

Units (in mn)

0.40 0.30 0.20 0.10

0% -5% -10%
FY05 FY06 FY07 FY08 FY09 FY10 FY11

0.00

Tractor sales (LHS)

Source: CMIE and CARE Research

Growth (RHS)

FY06

Western India to drive industry growth Improving irrigation facility and good monsoons in the last 4-5 years have boosted agriculture produce and consequently tractor demand in Western India. Maharashtra was among the highest growing tractor market during the last five years. CARE Research foresees the high growth momentum to continue in the western region as Maharashtra and Gujarat are expected to witness a healthy growth scenario in the coming 4-5 years. Low penetration levels, increased farm income and increasing demand from infrastructure activities would drive this growth. During the last 2-3 years the demand, in the Southern regions have been adversely affected by floods in Andhra Pradesh (AP) and Karnataka which are the two major tractor markets in Southern India. However, CARE Research believes that the lower penetration levels combined with rising coverage of non-banking financial companies (NBFCs) in agriculture credit would lead to improvement in credit availability and thus boost the tractor demand during the next five years. Historically, the northern region has dominated the tractor demand. Punjab, Haryana and Western UP have the highest tractor penetration levels in India. However, during the last two years, floods resulting in crop loss have subdued the demand growth to some extent in this region. CARE Research expects growth in tractor demand to slow down in these regions in the next 4-5 year period. Eastern UP, which is among the largest agriculture belts in India is expected to drive northern India sales owing to low level of penetration. CARE Research foresees the replacement demand, increased infrastructure activities and shortage of farm labourers owing to creation of various alternative employment opportunities through NREGA to push the tractor demand in Northern regions at moderate levels in the next 5-year period. Chart: Region-wise tractor penetration (tractors per thousand hectares)
80
70

Har Pun

60
50

40
30

UP

North

Bh AP

TN

Guj
MP J&K Utt Jar East Kar Chh Ass Ker

20
10

South

Raj Mah West

India average

Him

Or
WB

Expected growth scenario next 4-5 years

Low

High

Low

High

Low

High

Low

High

Source: CARE Research

Note: Har: Haryana, Pun: Punjab, UP: Uttar Pradesh, MP: Madhya Pradesh, J&K: Jammu and Kashmir, Utt: Uttarakhand, Him: Himchal Pradesh, Bh: Bihar, Jar: Jharkhand, Or: Orissa, WB: West Bengal, Chh: Chhattisgarh, Ass: Assam, TN: Tamil Nadu, AP: Andhra Pradesh, Kar: Karnataka, Ker: Kerala, Guj: Gujarat, Mah:Maharashtra, Raj: Rajasthan

Investments of around Rs1,800-2,000 crore are expected in next 2-3 years Strong recovery in tractor demand during FY10 & FY11, after a bleak performance in FY09, raised the utilization levels of all the key players considerably in FY11. Gauging the huge opportunities in the domestic market, almost all major tractor manufacturers have announced expansion plans for the next 2-3 years. It is estimated that around Rs1,800-2,000 crore has been lined up towards investments in capacity expansion and product development in the next 2-3 year period. CARE Research foresees the industry growth levels to come down from the current levels as the utilization rates are expected to drop for the next two years. However, modest rise in domestic sales coupled with healthy export growth would be able to maintain the utilization rates at healthy levels.

Demand would continue to shift towards higher HP tractors CARE Research estimates, large tractors (greater than 41HP) would continue to drive industry growth and register a rise of around 11-12 per cent during FY11-FY16 period. Continued buoyancy in southern and western markets due to lower penetration levels and increasing demand from non-agriculture application would drive this growth. Midsize tractor segment (31-40HP) which dominates industry demand is expected to witness marginal growth of around 3-4 per cent on CAGR basis, while the demand for small tractor segment (less than 30HP) is estimated at a CAGR of 5-6 per cent during FY11-FY16. Cannibalization mainly from large tractor segment is expected to pull down the growth levels of midsize tractor segment in coming years. EBITDA margins to benefit from softening in input cost The growth in the top line of the tractor industry is expected to percolate to bottom line, as margins in FY12 are estimated to witness a marginal rise of around 10-20 bps. Although the rise in input prices kept the industry margins under strain in FY11, CARE Research foresees input prices to marginally soften in FY12, benefiting the industry margins by some extent.