Over the last few months, just like a long-incubating infection, the causes of India’s automobile slowdown have been coming to the fore. The unavailability of financing, waning millennial demand as a result of the rise of shared mobility, new emission norms, and the government’s push towards electric vehicles, added to the pressures of a weakening economy. The first-quarter earnings of almost all auto companies bear testimony to that. Subsequent monthly sales numbers don’t show any major improvement either. A conversation with the vice-president of the automobile dealers association on July sales suggested that sellers are hopeful, but not certain, of the festive season bringing about higher sales.
One sub-segment of the automotive space has the appearance of being an outlier to these trends, tractors. Here’s why. For a financier in the rural market to meet a target of Rs 20 lakh of disbursement to the rural consumer, getting three farmers to buy a tractor on loan is simpler than hunting for scores of farmers to buy seeds/nutrients/etc on loan. The BS-VI emission norms don’t apply to tractors. So for the next six months, there’s unlikely to be pressure to raise pricing due to emission-related revamps. And electric tractors are a while away in India.
So will tractors avoid the disruption that other auto verticals are facing? And will the business cycle for tractors see a revival sooner than others?
There’s reason for caution before jumping to that conclusion. While most of the changes mentioned earlier may not affect the tractor market, there are other forces at play that are unique to the segment.
At Nature’s Mercy
Consider the impact an erratic monsoon can have on the rural economy and, as a result, eventual demand. The onset of the 2019 monsoon was delayed by a few weeks, and there were also fears of a shortfall in the overall rainfall. That would have meant a delayed demand-offtake among those who would have kept the fields tilled awaiting rains. Then came the floods of July and August that have had a severe impact across major states – from Karnataka and Kerala to Maharashtra, Madhya Pradesh, and Gujarat. this is bound to have damaged houses, farms, local enterprises, and the regions’ infrastructure.
All of this is likely to impact rural demand for the foreseeable future.
Once dipping into a downturn, the tractor sector isn’t one to bounce back right away. The current automobile down-cycle has completed two to four quarters across segments. The tractor slowdown has lasted for about two quarters so far. Jefferies finds that tractor down-cycles have lasted an average of 11 quarters – but that is off a wide range, from five to 22 quarters. A few of these have been rather sharp, clocking 8-12 percent compounded annual de-growth.
Base Effect
Adding to the pressure of a possible longer downcycle is the fact that the tractor industry is coming off a high base. Tractors witnessed double-digit growth in each of the last three years. By FY19, the pace had slowed to growth of 10.24 percent. 8.78 lakh tractors had been sold in India in the last fiscal, far more than the sales in any other major market around the world in a comparable period. India became the world’s largest tractor market in 2016, and has kept growing.
Meanwhile, the extent of arable and cultivated land in India is not very different from that in China, and the United States. Yet, the number of tractors sold is much higher. Only some of that can be explained by fragmented land parcels and lower tractor power/capacity. To register growth on such a high base won’t be easy.
During the April-June 2019 quarter, tractor sales declined 14.6 year-on-year, and sluggishness is expected to continue in the current quarter (Q2FY20), due to high inventory build-up during the previous quarter. As a result, even the traditionally-strong ‘September-November ‘post-monsoon’, festive season’ period may see a lull. The discontinuation of subsidy schemes in key southern regions has already impacted nearly 10 percent of tractor sales. An uncertain demand scenario and the flood fury would only exacerbate that slowdown.
‘Uber for Tractors’
We began with the premise that the underlying dynamics of the tractor market offered a buffer to some of the storm winds swirling around the automobile sector, not all. While financing, emission-related changes, and the move to electric may not be concerns, the same can’t, potentially, be said about shared mobility.
Just last week, India’s Agriculture Ministry announced that it has developed a farm equipment rental app, akin to an ‘Uber for Tractors’, that connects farmers to around 30,000 custom hiring centres, and over 1 lakh pieces of farm equipment. In March 2016, Mahindra & Mahindra launched Trringo, a tractor and farm equipment rental business. A few other global players have been running pilot projects as well, in some parts of the country. In time, this may well impact tractor sales the way Uber and Ola are now disrupting car sales.
Market View
Market experts that BloombergQuint has been speaking to recently say that the broader view on automobiles and tractors is likely to change only when the economy witnesses a sustained revival. In the interim, a GST cut could change sentiment in the short-term.
The two major tractor players, M&M and Escorts, are trading near 52-week lows. M&M, whose operations span the entire range of the automotive space, currently trades at approximately 11.6x earnings, much lower than the 10-year average of 15.5x and is at a level from where it has traditionally bounced back.
Escorts, on the other hand, even after correcting 46 percent, is still trading at 12.3x earnings, very close to its 10-year average of 12.9x, and not close to the support levels it found in past cycles.
So while the monsoon might appear to have turned ‘favourable’, and any requirement to move by the government to nudge the market toward lower horse-power tractors may be still over a year away, study the tractor market’s dynamics in detail before trying to catch a falling knife.
Niraj Shah is Markets Editor at BloombergQuint.
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