Check this out if you are looking to invest in tractor companies

resr 5paisa Research Team 22nd June 2022 - 10:32 am
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If there is one category of automobiles that has truly shrugged off the impact of the pandemic, it is the tractor segment. While two-wheelers, three-wheelers and commercial vehicles at large are yet to return to pre-pandemic volume levels, passenger cars and tractors have moved forward compared to the period before Covid-19.

Sales growth of passenger cars has been partly muted by a shortage of chips but tractor sales have been growing at a robust pace. In May, tractor makers such as Mahindra & Mahindra and Escorts sold a total of 52,487 tractors. This is more than three times the number in the year-ago period and over five times the number in May 2020.

If we compare the numbers to May 2019, sales have grown by a third, according to the Federation of Automobile Dealers Associations (FADA).

Wholesale volumes, too, grew at a robust pace at 47%. This was supported by a low base last year when the second wave of the pandemic swept through much of north India. Healthy rabi procurement and better price realisation helped, too.

While the industry volumes are expected to remain steady, supported by forecast of a normal monsoon and expectations of stable farm cash flows, the price hikes by original equipment manufacturers due to hardening raw material prices may constrain industry volumes.

Even as concerns have been raised regarding a decline in yields and final estimates on the back of the severe heat wave, the government’s third advance estimate indicates an overall healthy production of rabi crops at 159.6 million tonnes.

However, the high base and increase in cost of ownership necessitated by raw material cost hardening may lead to tractor industry volumes growing modestly in low single digits (0-4%) in the year ending March 31, 2023, according to rating and research agency ICRA.

On the plus side, tractor makers continue to maintain strong credit profiles. Despite concerns of hardening commodity costs, which are likely to exert pressure on margins, credit profiles of the OEMs are expected to remain robust, aided by low debt, healthy cash and liquid investments and limited investment plans.

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