Indian Tractor Sector in Covid time | Top Stocks in Tractor Industry

Top 2 Stocks in Tractor Segment

Introduction

Tractor Segment would be the first to recover among entire Auto Sector, driven by pent-up demand and positive rural sentiments due to healthy Rabi output and expectation of good Monsoon. Lets do the Tractor Segment analysis and see which are the top 2 stocks in Tractor Industry.

Tractor Segment Analysis – First to Recover Among Entire Auto Sector

Indian Tractor Industry Volume Growth YoY

• After forging ahead with strong double digit growth for three consecutive years, the domestic tractor industry suddenly lost steam in the financial year FY20.
• The declining volume growth is mainly due to :
  1. Sagging rural income
  2. Unpaid and discontinued subsidies and
  3. The simultaneous attack of COVID-19 pandemic
• The Indian tractor market declined by almost 13% to 7.09 Lakh units in the FY20, even lower than earlier expected drop of 5-7%.
• Whereas in FY19, the Tractor Industry volume growth was 10% with a record high sales at 7.9 Lakh units, the highest volume in last 5 years (since FY16).

• In April and May 2020, there has been a loss of volumes due to lockdown amid COVID pandemic. The most of this loss would recover in the coming months.
• Thus, in FY21 Tractor volumes to witness a single digit de-growth (around 5%).And thereafter, the tractor volume is expected to report a strong growth at around 20% for FY22.
• What are the key drivers for this expected recovery in Indian Tractor industry?

Key Drivers of Expected Recovery in Indian Tractor Industry in FY21

1. Pent-up Demand

• What is Pent-up Demand?
  • Pent-up Demand is a situation in which demand of a product/service rises very steeply, usually following a period of subdued spending.
  • Consumers tend to hold off or postpone making purchases during a current COVID-19 uncertainties since last 3 months,. This postponement of purchasing decision is building up a backlog of demand.
  • When the signs of recovery emerge, this pent-up demand is released at one shot with the increased spending and purchases by consumers that were hold-off temporarily.
• In current COVID outlook, pent-up demand is an accumulation of the last 45-60 days of demand coming at one shot and starting to look good.
• Thus, the Tractor industry volumes are expected to recover sooner than other Auto segments, led by pent-up demand from farmers.

2. Positive Rural Sentiment

• The healthy Rabi Crop output, which is a key driver of Agri Demand built a positive rural sentiment.
• Tractors are connected to the most essential Agri output.

• Moreover, Rural markets and the Agriculture is expected to witness the least COVID impact.
• In addition, Government’s Agri Package announcing the Structural Reforms to Boost Farmers Income is a crucial contributing factor boosting rural sentiments.
• Positive outlook for rural demand – Positive Harvesting Activities, Better Rabi sowing.
• This growth momentum would continue even amid COVID on continuing resilience of agriculture and allied activities.
• Higher reservoir levels are also supporting customer sentiments.

3. Expectation of Good Monsoon

• As per Indian Meteorological Dept. – IMD’s projections, India is likely to receive average monsoon rains in 2020. Monsoon rains are expected to be 100% of a long-term average.
• The positive Monsoon outlook is raising expectations of higher farm output in India, which is reeling from a coronavirus lockdown.
• This good Monsoon expectation expected to augur well for Rural demand ahead.

4. Easing of Lockdown due to COVID pandemic

• 50% of the Tractor Dealers resumed Operations. The currently available Stocks is in excess of 30 days.
• As directly linked to the Agriculture Sector, most Tractor OEMs have received permission for restarting plants.
• So, these Tractor OEMs are working to ramp up Production Levels to meet the pent-up demand expected to release soon.

Top 2 Stocks in Tractor Segment

1. Escorts Ltd

• Here, Escorts Ltd is one of our top picks in the Tractor Industry. The detailed analysis of Escorts Ltd is coming soon at our Stock Subscription.
• The current market share of Escorts is around 12% for FY20.
• The company is on the path of improving its market share in domestic tractors ahead, mainly driven by :
  1. Continuation of Escorts’ aggressive marketing efforts
  2. Expanding Reach in South & West Region – Focus on network expansion
  3. Success of its dual-brand strategy – Farmtrac and Powertrac series

2. Mahindra & Mahindra Ltd

• We are also positive on Mahindra & Mahindra Ltd due to large exposure to rural demand and inexpensive valuations.
• Its current Price to Earnings Ratio = 13.7, whereas Historical Average PE Ratio is in the range 16-20.
• Mahindra & Mahindra is currently a market leader in Indian Tractor Market with around 40% market share for FY20.
• Both are virtually debt-free companies, which is a very positive factor in driving their Operating Profit Margins ahead.