India Tractors - Money Control - Moneycontrol.com

27 March 2012

India Tractors The growth story continues…. continues

Mayur Milak

(+91 22 ) 4096 9749

mayurm@dolatcapital com [email protected]

1

Executive summary Why did we do a follow-up report on tractors NOW ? h

The tractor industry has grown at a CAGR of ~12% during last five years. After a splendid performance, during the last two to three years, the Indian tractor industry is believed to head for a slow-down , we believe otherwise and hence our stance to buy b i into tractor at this hi juncture. j

Our takeaways: h

There is an increasing lack of cheap farm labour due to migration to urban areas, leading to more mechanisation. F h Further, f farm i income h has grown at a CAGR off 12.8% 12 8% during d i l last fi five years. We W expect this hi growth h to sustain i going i forward, which will continue to boost tractor sales.

h

Contrary to popular belief, rainfall does not affect tractor sales directly. Other factors such as higher farm income, availability of water (irrigation facilities), cheaper and more easily available finance, successful implementation of government schemes (NREGA) and higher MSP are the key drivers for growth in tractor sales.

h

We expect tractor demand to grow by 11-12%, going forward.

h

All key drivers are in place and adequate availability of water is expected with a forecast of regular and timely rainfall.

Our top top-pick: pick: M&M h

M&M has always been a leader in the farm equipment sector. After acquiring Punjab Tractors Limited (PTL), it has further consolidated its position as the No.1 player in the country.

h

Historically, M&M tractors have outperformed the tractor industry during the last six years.

h

With a market share of almost 41%, 41% we believe the company is well poised to take advantage of the growth in the tractor segment.

h

Land fragmentation (bifurcation of property and formation of nuclear families) is a major deterrent to tractor growth, but the new offering from M&M, ‘Yuvraaj’, targets this issue.

2

Highlight: Mahindra Yuvraaj vs the bulls Cost analysis Total cost of a pair of bulls: Basic cost: - Rs75,000 - One One-time time payment Average life - 8 years Per-year cost - Rs 9,375 Maintenance cost - Rs 4,000 Fodder cost - Rs24,000 , Cost per year - Rs37,375 The Yuvraaj: Basic cost Average life Per-year cost Maintenance cost Diesel cost Cost per year

- Rs165,000 - One-time payment -12 years - Rs13,750 - Rs 8,760 - Rs15,000 - Rs37,510

3

Contents Introduction: Indian agriculture and tractors.............................................................................................................................. tractors 5 Tractor penetration in Indian farm households ……………………………………………………………………………………………………….. 6 The future………………………………………………………………………………………………………………………………………………………..7 Background………………………………………………………………………………………………………………………………………………………8 I di Indian tractor t t market: k t Sales S l (including (i l di exports……………………………………………………………………………………………………….. t 9 Indian tractors: Exports………………………………………… ……………………………………………………………………………………… ..10 Indian tractor market: Market share …………………………………………………………………………………………………………………… 11 Indian tractor market: Segment-wise sales……………………………………………………………………………………………………………. 13 Indian tractor market: State-wise sales………………………………………………………………………………………………………………… 15 Current trends in farm mechanisation…………………………………………………………………………………………………………………. 17 Key requirements for tractor growth………………………………………………………………………………………………………………….….18 Factors affecting tractor sales……………………………………………………………………………………………………………………………..19 -Rainfall…………………………………………………………………………………………………………………………………………………………19 -Farm income…………………………………………………………………………………………………….…………………………………............ 20 -Interest rates………………………………………………………………………………………………………………………………………………….21 -Tractor financing…………………………………………………………………………………………………………………………………………….22 -Greater credit allocation……………………………………………………………………………………………………………………………………23 Company profiles Mahindra & Mahindra Limited………………………………………………………………………………………………………......................... 24 Escorts Limted………………………………………………………………………………………………………………………………………………..36 Tafe Limited………………………………………………………………………………………………………………………………………………….. 40 John Deere Pvt Ltd…………………………………………………………………………………………………………………………………………..41 ITL………………………………………………………………………………………………………………………………………………………………..42 Appendix : Agricultural and irrigated area in India…………………………………………………………………………………………………..43 Appendix : Global agri-commodity price movement…………………………………………………………………………………………………. 44 Appendix : Minimum support prices (wheat, rice, sugar)…………………………………………………………………………………………...45

4

Introduction: Indian agriculture and tractors h Highlights of the Indian agricultural sector ƒ Has always been a key sector of India’s economy ƒ Currently contributes ~18% of Indian GDP ƒ Accounts A t for f ~10% 10% off India’s I di ’ exports t ƒ Second largest producer of rice and wheat in the world ƒ Largest producer of pulses ƒ Fourth largest producer of coarse grains ƒ Second largest producer of vegetables, groundnuts and fruits ƒ Current average growth rate: 2.8%

h Highlights of the Indian tractor industry ƒ The Indian tractor industry has developed over the years to become the largest tractor market in the world. ƒ From just about 50,000 units in the early eighties, the size of the tractor market in the country has grown to over 600,000 units. ƒ Increased use of tractors for haulage and non-agricultural non agricultural applications. applications ƒ The opportunities are still huge considering the low farm mechanisation levels in the country, when compared to other developed economies across the world. ƒ After a splendid performance during the last two to three years, the Indian tractor industry is believed to head for a slowdown , which we believe is a myth. y

5

Tractor penetration in Indian farm households

46.2% Large Farmers >20 acres 1%

21.9%

Medium Farmers

82mn farm households

5-20 acres 17%

Small Farmers 2.5-5 acres 19%

1.2%

Marginal Farmers