Opinion March 2008

Sections

Executive summary A-1

- Overall demand projected to grow by 5-7 per cent up to 2012-13 A-1
- Most states to grow at moderate rates A-1
- Industry margins to remain under pressure in 2008-09 A-2
- Market concentration on a rise, stronger players to increase their
hold on market A-2
1.0 Demand review A-3
- State-wise review A-6
2.0 Financial profile of the industry A-7
- Industry margins to be under pressure A-7
3.0 Market concentration on a rise A-11
4.0 Demand outlook A-15
- Demand projected to grow by 5-7 per cent up to 2012-13 A-15
- State-wise outlook A-16
- State-wise demand forecast A-20

Charts

Executive summary
01 Projected state-wise growth and size matrix A-1

4.0 Demand outlook

01 Evaluation of states on different variables A-20
02 Projected state-wise growth and size matrix A-20

Figures

1.0 Demand review

01 Volume sales A-3
02 Southern states have gained share at the expense of northern states A-4
03 Higher than 40hp tractors continue to grow faster A-4
04 Exports volumes A-5
05 Region-wise exports A-5
06 Comparing tractor penetration across countries A-6
07 Comparing tractor penetration and past growth rates A-6

Continued…

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-i

…continued

Figures

2.0 Financial profile of the industry

01 Trend in sales volumes A-7
02 Operating margins A-8
03 Capacity utilisation A-10

3.0 Market concentration on a rise

01 Herfindahl index A-11

4.0 Demand outlook

01 Regression of tractor population against agricultural GDP A-16
02 Comparing irrigation intensity and tractor penetration A-17
03 Comparing land holding pattern and tractor penetration A-17
04 Comparing cropping intensity per ha and tractor penetration A-18
05 Comparison agri-credit per hectare and tractor penetration A-18
06 Comparing agri-workers per ha and tractor population per ha A-19
07 Comparing agriculture GDP (Rs '000 per ha) and tractor penetration A-19

Tables

1.0 Demand review

01 Exports growth by region A-5

2.0 Financial profile of the industry

01 Operating margins A-8
02 Debtor days A-9
03 Interest cost A-9
04 Net margins A-9
05 Return on capital employed A-10

3.0 Market concentration on a rise

01 Benchmark for Herfindahl index A-11
02 Industry financials A-12
03 Key success factors A-13

A-ii CRISIL RESEARCH TRACTORS ANNUAL REVIEW

 Executive summary

Overall demand projected to grow by 5-7 per cent up to 2012-13

CRISIL Research projects domestic tractor sales to grow at a CAGR of 5-6 per cent, close to the long term trend
in growth rate, during 2007-08 to 2012-13. The projected rate of growth is considerably lower than the 20 per cent
witnessed during 2002-03 to 2006-07. While agricultural growth will continue to be the major factor that will
drive sales, haulage applications are expected to increasingly support the economics of tractors.

CRISIL Research projects exports to grow at a CAGR of 15-18 per cent from 2007-08 to 2012-13, mainly driven
by exploring markets like Europe and Australia and increasing penetration in the existing markets especially the
US, Africa and Latin America.

Overall, CRISIL Research projects total industry sales to grow at a CAGR of 5-7 per cent by 2012-13.

Most states to grow at moderate rates

CRISIL Research has evaluated all the states on six major demand drivers like irrigation intensity, landholding
pattern, cropping intensity, flow of agricultural credit per hectare (ha), agricultural dependents per ha and
agricultural GDP per ha and has ranked states on the likely growth and size up to 2012-13. We expect most states
to grow moderately or at a low rate during the medium term.

Chart 1: Projected state-wise growth and size matrix

Share in sales
States >1 and <=5 per
>5 per cent <=1 per cent
cent
Growth during 2007-08 to

High ASM, KER

2012-13

AP, KAR, GUJ,

Moderate ORI, WB HP
MAH, RAJ, MP

Low TN, HRY, UP BIH, PJB JK

MP: Madhya Pradesh; KAR: Karnataka; AP: Andhra Pradesh; ORI: Orissa; JK: Jammu and Kashmir

HP: Himachal Pradesh; GUJ: Gujarat; RAJ: Rajasthan; TN: Tamil Nadu; BIH: Bihar; WB: West Bengal
UP: Uttar Pradesh; MAH: Maharashtra; PJB: Punjab; ASM: Assam; HRY: Haryana; KER: Kerala

Source: CRISIL Research

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-1

Industry margins to remain under pressure in 2008-09
Industry margins recorded a significant growth in the past 2 years, primarily due to increasing volumes and better
capacity utilisation. In 2007-08, industry margins declined due to increasing raw material costs and declining
sales. CRISIL Research expects industry margins to remain under pressure in 2008-09 on account of input cost
pressures and slow growth rate.

Market concentration on a rise, stronger players to increase their hold on market

Market concentration in tractors industry is fairly high, with top two players, M&M (including Punjab Tractors)
and TAFE accounting for 63 per cent of the market in 2007-08 (A-D). Market concentration increased over the
past 3 years due to the acquisition of Eicher Motors’ tractors business by TAFE in 2005-06 and PTL’s acquisition
by M&M in 2006-07.

CRISIL Research expects the key success factors for the players will continue to include diversified product
portfolio, nation-wide distribution strength and cost competencies. CRISIL Research anticipates the relative
ranking of players based on market share to remain stable with increasing polarisation of market position between
stronger and marginal players.

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 1.0 Demand review

2007-08 marks the end of cyclical upturn

Figure 1: Volume sales

400,000
4.8 per cent CAGR for last 10 years
350,000

300,000

250,000

200,000

150,000

100,000

50,000

0
1996-97

1997-98

1998-99

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08 (E)

Domestic sales Exports

Source: CRISIL Research, Industry

Tractor sales are cyclical, as is evident from its historical annual sales pattern. After having touched a high of
255,000 units in 1999-2000, domestic sales of tractors continuously fell till 2002-03, when it touched 158,000
units, due to high channel inventories and poor monsoon. However, sales revived post 2003-04, on the back of
significant growth in agricultural credit and relatively good monsoons. Domestic sales volumes grew at 22 per
cent from 2003-04 to 2006-07 to reach an all-time high of 319,000 units. Export volumes grew at a CAGR of 26
per cent between 2003-04 and 2006-07, to touch 34,000 units in the latter year.

2007-08 marked the end of sales growth momentum, with domestic sales declining by 4-6 per cent as banks
reduced credit disbursements in few states such as UP, Gujarat and Karnataka. Nevertheless, exports grew at a
rate of 25-30 per cent. We expect total sales of tractors to decline by 1-2 per cent in 2007-08.

Rising share of southern states

Improving irrigation facilities, a nearly normal monsoon, good ground water levels, easy availability of credit,
increased player thrust and rising income from custom hiring (non-farm income) on the back of increasing
infrastructure activities stepped up tractor sales in the southern and western states of India. The share of South and
West in total sales rose from 17 per cent and 21 per cent in 2000-01 to 25 per cent and 26 per cent in 2007-08,
respectively. Although northern states continue to dominate domestic demand, their share fell from 51 per cent in
2000-01 to 39 per cent in 2007-08, due to the already-high tractor penetration.

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-3

Figure 2: Southern states have gained share at the expense of northern states

100%
7 8 12 10 12 10 10 9 9 9
10 14 13 14 15
80% 17 20 25 26 25
28 24
26 24 27
60% 21
28
26 26 26

40%

54 55 51 51 50 48
20% 42 39 39 39

0%
1998-99 1999- 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
2000 (A-D)
North West South East

Source: CRISIL Research, Industry

Figure 3: Higher than 40hp tractors continue to grow faster

100% 5 7 8 8 8 10
20 21 21
80% 23 26
27

60%

54 50 51 51
40% 49 46

20%
22 23 20 18 17 16
0%
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (A-D)

Upto 30 hp 31-40 hp 41-50 hp 51 hp and above

Source: CRISIL Research, Industry

The share of over-40 hp tractors in total industry sales has been increasing steadily since 2003-04, and currently
stands at 37 per cent. This transition is attributable to the increasing share of southern and western states, where
higher hp tractors are preferred due to harder soil conditions, as well as rising use of higher hp tractors in northern
states. In addition, the growing share of exports, where >40 hp tractors dominate (64 per cent), has also
contributed to increasing off-take of higher hp tractors.

Exports continue the strong momentum

Tractor exports from India grew at a CAGR of 36 per cent from 2003-04 to 2006-07. Around 70 per cent (in
2004-05) of these exports were to the US, mainly driven by an increase in hobby farming in the country. Exports
to other countries, such as South Asian countries, Malaysia, Turkey and Africa, are estimated to have been
growing fast as well. In 2006-07, over 50 per cent of exports were to non US destinations. In 2007-08, exports had
grown by 33 per cent till December.

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Figure 4: Exports volumes

40000 70.0

35000 60.0

30000
50.0
25000
40.0
20000
30.0
15000
20.0
10000

5000 10.0

0 -
1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2006-07(A-

2007-08(A-
D)

D)
Exports Growth

Source: CRISIL Research, Industry

Figure 5: Region-wise exports

(per cent)
100%
90%

80%
70%
60%

50%

40%

30%
20%

10%
0%
2004-05 2005-06 2006-07

N. America Asia Africa S. America Europe Australia

Source: CRISIL Research, DGFT

Table 1: Exports growth by region

(per cent) 2005-06 2006-07
Africa 188 107
Asia 87 10
Australia 550 246
Europe 133 227
N. America 24 -4
S. America 106 -9
Grand Total 53 21
Source: CRISIL Research, DGFT

India catching up in terms of tractor penetration, but lags behind in average hp

Tractor penetration in India has grown steadily post-green revolution in the 1970s. Between 1971 and 2007,
tractor population is estimated to have risen from 0.19 million to 3.2 million units (presuming an average tractor
life of 15 years). To gauge the penetration level in India, we have compared the same with other countries that
have similar attributes. These countries were selected using the following two parameters:

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-5

1. Tractor population of the country
2. Arable area (defined by the FAO as land under temporary crops, temporary meadows for moving or for
pasture, land under market or kitchen gardens and land temporarily fallow)

Figure 6: Comparing tractor penetration across countries

Tractor penetration (arable area) (2005)

45

40

35
(per thousand hectare)

30

25

20

15

10

US
Pakistan

World
Brazil
Russia

Australia

China

Argentina

India

Canada
Mexico

Iran
Ukraine

Turkey
Source: Food and Agriculture Organisation

According to Food and Agriculture Organisation, tractor penetration in India in 2005 was estimated to be around
16 units per 1,000 hectare of arable land, whereas the world average was around 20 units per 1,000 hectare of
arable land. According to CRISIL Research estimates, tractor penetration in India is 21 units per 1,000 hectare of
arable land in 2007. However, given use of higher hp tractors in US and western Europe, India’s hp per hectare
may be lower than some of the peer countries.

State-wise review
We have compared state-wise tractor penetration (tractor population as proportion of net sown area) and growth
during the last 5 years to assess past trends and potential demand. There is a moderate negative correlation
between growth and level of penetration, suggesting higher growth in states with lower tractor penetration and
vice-versa.

Figure 7: Comparing tractor penetration and past growth rates

5-year CAGR (per cent)
Correlation = -0.5
40 KER

30 TN

AP
20 ORI MAH KAR
WB GUJ
RAJ
ASM
10
HP HRY
JK
UP
-
- 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80
BIH
MP PJB
(10)

(20) Tractor penetration

Source: CRISIL Research

A-6 CRISIL RESEARCH TRACTORS ANNUAL REVIEW

 2.0 Financial profile of the industry

Industry margins to be under pressure

The tractor industry is moderately capital-intensive in terms of long-term capital requirements, but more capital-
intensive in terms of short-term (working) capital requirements. Industry margins have improved significantly in
the past 2 years, mainly because of increasing volumes and better capacity utilisation. In 2007-08, margins have
been under pressure due to increasing raw material costs and declining sales volumes.

2007-08 marks the end of cyclic upturn in volume sales

The tractor sector, which grew at a CAGR of 22.6 per cent from 2003-04 to 2006-07, has recorded a downfall in
volumes in 2007-08. Nevertheless, the average realisation per unit has increased due to the three price hikes
effected during the year. Out of the total increase in average realisation around 35 per cent can be attributed to
change in mix and around 65 per cent to the rise in prices. The increase in raw material prices was passed on to
end users in the form of higher prices.

Figure 1: Trend in sales volume

400000 120

350000
100
Units sold and average realisation (Rs)

300000
80
250000
(Rs billion)

200000 60

150000
40
100000
20
50000

0 0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08P

Average realisation Volume sales Value sales (Rs billion)

P: Projected
Note
Industry aggregates includes PTL, TAFE, Escorts, ITL and M&M Ltd.
Source: CRISIL Research

Operating margins decreased in 2007-08 after increasing for 4 consecutive years

The tractor segment’s operating margin (PBIT as a percentage of net sales), which has historically been a function
of the capacity utilisation level and raw material costs, has been increasing since 2003-04. The improvement is the
result of enhanced capacity utilisation to meet the growing demand.

Operating margins of the industry have fallen in 2007-08. Decreasing sales and lower capacity utilisation,
combined with increase in raw material costs, have brought about this decline.

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-7

Figure 2: Operating margins
(per cent) (per cent)
20.0 80

70

15.0 60

50

10.0 40

30

5.0 20

10

- 0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08P

Capacity utilisation (RHS) Operating margin - PBIT(LHS)

P: Projected
Note
1. For calculating capacity utilisation and PBIT margins we have considered capacity, production and financials of M&M, PTL, ITL & TAFE.
2. Operating margins for 2007-08 do not include TAFE and for 2006-07 do not include ITL.
Source: CRISIL Research

Table 1: Operating margins

PBIT margin (per cent) 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08P
Escorts Ltd 18.3 -12.3 18.7 7.2 3.2 -
Mahindra and Mahindra Ltd 7.3 8.8 9.3 11.1 13.6 13.3
Punjab Tractors Ltd 11.6 10.1 12.7 18.3 11.7 8.5
Tractors & Farm Equipment Ltd 6.6 6.7 8.4 12.2 12.6 -
International tractors Ltd 12.7 12.8 17.1 16.3 - -
Industry 8.8 9.2 10.8 13.3 13.0 12.4
P: Projected
Note
1. Industry aggregates includes PTL, TAFE, ITL and M&M Ltd.
2. Figures for 2007-08 do not include TAFE and for 2006-07 do not include ITL.
Source: CRISIL Research

Operating margins increased for both Mahindra & Mahindra and TAFE in 2006-07, whereas it declined for
Punjab Tractors Ltd. Raw material costs of Mahindra & Mahindra decreased by around 400 basis points and
TAFE’s selling and distribution and other expenses declined by around 150 basis points, leading to higher
operating margins for both players. PTL’s margins fell sharply because of a huge 634-basis-points increase in its
raw material costs.

Debtor days and interest costs decline in 2006-07

Conscious efforts by industry players to lessen their receivables have yielded the desired outcome of reduced
debtor days. This, in turn, has helped prevent the piling up of inventories at the dealer’s end. Certain players have
also undertaken the process of inventory correction, which has again reduced the working capital blocked in
inventories. Interest costs have shown a varied trend across players.

A-8 CRISIL RESEARCH TRACTORS ANNUAL REVIEW

Table 2: Debtor days
2003 2004 2005 2006 2007
Escorts Ltd 141 74 59 47 -
Mahindra and Mahindra Ltd 47 28 21 22 21
Punjab Tractors Ltd 272 259 215 216 209
Tractors & Farm Equipment Ltd 157 112 52 31 27
International Tractors Ltd 52 45 44 45 -
Note
Overall financials have been considered in the absence of tractor
specific details of companies having other businesses.
Source: CRISIL Research

Table 3: Interest cost

2003 2004 2005 2006 2007
Escorts Ltd 1,343.4 1,584.0 1,672.4 957.9 -
Mahindra and Mahindra Ltd 1,159.0 769.3 302.4 269.6 198.0
Punjab Tractors Ltd 142.5 140.0 129.7 131.1 73.0
Tractors & Farm Equipment Ltd 162.6 144.7 69.7 117.2 128.6
International Tractors Ltd 19.6 8.7 12.1 51.4 -
Note
Overall financials have been considered in the absence of tractor specific details of companies
having other businesses.
Source: CRISIL Research

Net margins moved in the same direction as operating margins

The net margins of the tractor industry were in line with the operating margins. They increased for both Mahindra
& Mahindra and TAFE and fell for Punjab Tractors Ltd.

Table 4: Net margins

(per cent) 2003 2004 2005 2006 2007
Escorts Ltd 3.1 -28.4 3.1 1.1 -0.2
Mahindra & Mahindra Ltd 3.9 6.9 7.8 10.6 10.8
Punjab Tractors Ltd 7.5 6.7 7.3 12.8 7.8
Tractors & Farm Equipment Ltd 3.3 3.5 5.0 7.3 7.9
International Tractors Ltd 10.3 10.8 12.8 11.4 -
Note
Overall financials have been considered in the absence of tractor specific details of companies
having other businesses.
Source: CRISIL Research

Declining sales and increasing pressure on margins can lead to decreasing RoCE
The RoCE of major players in the tractor industry rose in 2006-07 in accordance with improvement in operating
efficiency and asset turnover. However, it is estimated to decline in 2007-08 due to low operating efficiency.

CRISIL Research does not expect an increase in the sector’s fixed capital requirements. Any significant capacity
addition in the medium to long term is also unlikely.

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-9

Table 5: Return on capital employed
(per cent) 2002-03 2003-04 2004-05 2005-06 2006-07
Escorts Ltd 12.5 -14.6 27.1 15.4 -
M&M 11.9 21.7 26.0 31.4 28.6
International Tractors Ltd 43.3 43.0 53.5 38.0 -
Punjab Tractors Ltd 12.9 13.5 21.0 27.8 18.2
Tractors & Farm Equipment Ltd 10.6 12.1 19.3 27.7 29.3
Note
Overall financials have been considered in the absence of tractor specific details of companies
having other businesses.
Source: CRISIL Research

Figure 3: Capacity utilisation

(per cent)

140

120
Capacity utilisation rate in 2006-07

100

80

60

40

20

0
Escorts HMT ITL M&M NHI JD PTL TAFE Industry

Note:
NHI: New Holland India, ITL:International Tractors Limited, JD: John Deere, PTL: Punjab Tractors Limited
Source: CRISIL Research

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 3.0 Market concentration on a rise

The intensity of competition in the Indian tractor industry has moderated in the past few years and is expected to
remain modest in the short-to-medium term. This has been an outcome of high sales growth in the past 3 years,
higher capacity utilisation, no imminent new player entering the market and increased market concentration.
Market concentration increased partly due to TAFE’s acquisition of Eicher Motors’ tractors business in 2005-06
and intensified further in 2006-07 with PTL’s acquisition by M&M, which is reflected in a healthier Herfindahl-
Hirschman Index (HHI). For the purpose of comparison, we have bifurcated HHI values into the following three
categories:

Figure 1: Herfindahl index

2,400

2,200
Herfindahl-Hirschman Index

Increase in market
2,000 concentration

1,800

1,600

1,400

1,200

1,000
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (A-
D)

Source: CRISIL Research

Table 1: Benchmark for Herfindahl index

Index value Concentration in the industry
0-1000 Low
1000-1800 Moderate
1800 and above High
Source: CRISIL Research

The trend in HHI over the last few years indicates that there was a decline in the index from 2000-01 to 2003-04,
indicating growing competition during the period. However, from 2004-05, the index has moved upwards
indicating increased market concentration and reduced competition in the industry. After M&M’s acquisition of
PTL, only four major players constitute the tractor industry and competition among them is relatively moderate.

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-11

Table 2: Industry financials
Units 2002-03 2003-04 2004-05 2005-06 2006-07
Selling cost as a percentage of net sales per cent 4.4 5.2 5.0 4.8 5.7
PBIT margins per cent 7.8 8.8 10.5 13.3 12.8
Net profit margins per cent 4.7 6.8 7.8 10.4 10.1
RoCE per cent 12.9 20.1 26.0 31.0 27.6
Debtor days days 95 64 51 48 39
Inventory days days 23 19 22 24 22
Asset turnover times 2.0 2.4 2.9 3.3 3.4
Source: CRISIL Research

Going forward, CRISIL Research expects market concentration to remain fairly high. We expect that the key
differentiations among players will continue to include diversified product portfolio, nation-wide distribution
strengths, and finance tie-ups to support sales and cost competencies. CRISIL Research anticipates the relative
ranking of players based on market share to remain stable with increasing polarisation of market position between
stronger and marginal players.

A-12 CRISIL RESEARCH TRACTORS ANNUAL REVIEW

Stronger players to increase their hold on the market

Table 3: Key success factors

Industry M&M TAFE Escorts PTL ITL
I Product strengths
Share in industry sales (April - December 2007-08)
below 30 hp 16% 37% 29% 16% 4% 8%
31-40 hp 46% 31% 32% 9% 10% 10%
41hp and above 38% 24% 8% 19% 6% 9%

II Regional strengths
Share of sales in following regions in
company's domestic sales (April - December 2007)
High growth states 1% 20% 16% 20% 4% 19%
Moderate growth states 65% 31% 23% 14% 9% 10%
Low growth states 19% 27% 24% 17% 9% 10%

Share of exports in total sales 12% 8% 10% 7% 0% 4%

III Cost efficiency

Capacity utilisation rate (2006-07) 68% 66% 89% 52% 43% 121%
Debtor days (2006-07) 21 27 47 209 45
Raw material as a percentage of net sales (2006-07) 76% 65% 75% 75% 78% 77%
Indirect cost as a percentage of net sales (2006-07) 19% 21% 13% 23% 16% 10%
Overall cost efficiency Strong Moderate Moderate Weak Moderate

Performance / outcome of above

I RoCE (2006-07) 25.0% 28.6% 29.3% 15.4% 18.2% 27.7%
II PBIT Margins 13.6% 12.6% 3.2% 11.7% 16.3%
III 5 year CAGR in sales 10.0% 12.0% 23.0% 6.0% -6.0% 15.0%
II Change in market share during past 5 years 2.3% 9.4% -3.3% -10.0% 1.9%
II Market share in 2006-07 (till November 2006) 29.3% 22.2% 13.8% 7.7% 9.3%
Note
1. The above shading grades the players on various factors as
Strong

Moderate

Weak
2. Industry figures include figures for M&M, TAFE, Escorts, PTL and ITL
Source: CRISIL Research

In the long run, Mahindra & Mahindra is expected to remain the leader in the tractor industry due to well-
diversified product mix, strong pan India presence, cost-efficient operations and rising global sales. Now, post
acquisition of Punjab Tractors, its leadership has become stronger. In total, it commands a 38 per cent market
share.

After the acquisition of Eicher Motor’s tractor division, TAFE has emerged a strong number two in the industry
with better product portfolio and distribution network (although overlapping may cause some loss of share).
TAFE’s share went up to 28 per cent after its acquisition of Eicher.

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-13

Escorts and International Tractors, with a market share of 14 per cent and 10 per cent, respectively, are expected
to remain strong competitors in the medium-to-long term. International Tractors is expected to maintain its share
as it would not be able to grow at higher than industry growth rate.

Global players like John Deere and New Holland India are likely to provide strong competition to the other well-
established players in the coming years, as they strengthen their Indian product portfolio and distribution network
and remain major exporters.

Smaller players like Force Motors, VST Tillers and HMT are likely to be marginalised further in the long run due
to lack of diversified product portfolio, poor nation-wide distribution network and weakness in cost structure.

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 4.0 Demand outlook

Demand projected to grow by 5-7 per cent up to 2012-13

CRISIL Research projects domestic tractor sales to grow at a CAGR of 5-6 per cent, close to the long term trend
in growth rate, during 2007-08 to 2012-13. The projected growth rate is considerably lower than the near 20 per
cent CAGR witnessed during 2002-03 to 2006-07.

The structural growth drivers for tractor sales continue to be two-fold. Firstly, the growing need for farm power
per hectare and increasing substitution of animate power for various farming operations. Here we believe that
while states like Punjab and to an extent Haryana and western Uttar Pradesh have reached their potential, western
and southern states have been moving from a stage of low penetration to moderate penetration. Increasing finance
penetration, more affordable rates of finance have enabled a large number of farmers to own tractors. At the same
time, economics of tractor operation has improved due to increasing custom hiring for agricultural purpose as well
as other purposes including transport of farm produce, personal transport as well as transport of materials for road
construction and other infrastructure projects. The rise in custom hiring and growing credit reach are likely to
continue to drive penetration. We also expect replacement demand to grow in line with the ownership stock.

However, we rule out significant growth acceleration to continue on two counts, one, because in some states the
gap between current and potential penetration levels has reduced and two, since we believe that problems or
perceptions related to credit quality, or inadequate irrigation will continue to constrain growth in the less
penetrated states.

From a cyclical perspective, we view a significant part of the growth in the past 5 years arising from a recovery
following a sharp decline in 2000-01 and 2001-02. However, across states, sales as well as ownership stock had
significantly exceeded the long term trend by the end of 2006-07. Since we do not expect any structural
acceleration of growth, we expect a reversion in the growth rate trend. Further, channel inventories increased in
2006-07 and may require a correction in the near term.

Hobby farming, new markets to boost Indian exports

CRISIL Research has identified US, Canada and Australia as potential markets for hobby farming based on the
agricultural scenario and population density of each country. These hobby farms require tractors from medium hp
(31-40 hp) segment, which accounts for more than half of the total tractor sales in India.

In the US, hobby farms account for more than 50 per cent of the total farms and the number of urban dwellers
opting for hobby farming has picked up considerably in the last few years. With annual tractor sales in the US
estimated to be around 250,000 units, the US market provides a huge potential (75,000-80,000 tractors based on a
conservative estimate) for Indian exports. Similarly, Canada and Australia are also witnessing an increase in the
number of people taking up hobby farming, which is again likely to boost export volumes of Indian players.
CRISIL Research projects exports to grow at a CAGR of 15-18 per cent from 2007-08 to 2012-13, mainly driven
by exploring new markets like Europe and Australia and increasing penetration in the existing markets especially

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-15

the US, Africa and Latin America. Exports can grow at a higher-than-projected rate if Indian manufacturers are
able to develop higher hp tractors that can cater to markets like Europe, Latin America, etc and the potential from
hobby farming markets is realised fully.

We conducted a regression analysis of tractor population against agricultural GDP and concluded that there exists
a strong correlation between the two and the same is incorporated in our projections.

Figure 1: Regression of tractor population against agricultural GDP

y = 5017075.21Ln(x) - 62856376.49
2
R = 0.93
4000000

3500000
Tractor population

3000000

2500000

2000000

1500000

1000000
300000 350000 400000 450000 500000 550000 600000
Agri GDP

Source: CRISIL Research

Overall, CRISIL Research projects the total industry volume sales to grow by a CAGR of 5-7 per cent by 2012-
13.

State-wise outlook
We have carried out a state-wise analysis of various factors affecting demand and compared the likely demand
potential from these states.

Sales to grow slowly driven by rising custom hiring and increasing demand for higher farm
power
Growth in tractor volume sales in India has been driven by lesser penetration and rising farm incomes. State-wise
tractor penetration (computed as tractor population per thousand hectares of net sown area) has been heavily
skewed in favour of states like Punjab and Haryana, which were the early beneficiaries of the Green Revolution
during the 1970s. But in the 1990s, other states started catching up with Punjab and Haryana due to improving
irrigation facilities and tangible benefits of farm mechanisation.

In order to derive the potential for fresh demand we have compared the state-wise tractor penetration with the
following different parameters. We have conducted a regression analysis of state-wise tractor penetration with
different parameters by drawing a line of best fit. States above the line are over penetrated while states below the
line are under penetrated.

• Irrigation intensity (Gross irrigated area as proportion of Gross cropped area): Indian agriculture, which
gambles on the monsoons, is predominantly dependent on the rainfall due to poor irrigation facilities

A-16 CRISIL RESEARCH TRACTORS ANNUAL REVIEW

 (irrigation intensity in India was only 40.3 per cent in 2003-04). Irrigation is a key driver of tractor demand as
it ensures the farmer of assured water supply for harvesting. This in turn assures the farmer a fixed source of
income, whereby he can invest in relatively expensive assets like tractors. In order to compare the future
growth potential, we have compared tractor penetration with irrigation intensity across various states.

Figure 2: Comparing irrigation intensity and tractor penetration

y = 0.7887x - 7.8399
2
R = 0.7987
80
PJB
HRY
70

60
Tractor penetration

50

40 UP
TN
30 MP GUJ BIH
20 KAR
MAH AP
HP RAJ
10 JK
ASM ORI
KER WB
0
0 20 40 60 80 100 120
Irrigation intensity (per cent)

Source: CRISIL Research

• Proportion of land holdings above 2 hectares: In India, farm holdings are fragmented, as a huge proportion
of population is dependent on agriculture. Average land holding size per farmer in India is less than 2
hectares. A tractor is a relatively expensive tool for a farmer. Hence, only a few farmers with larger land
holdings can afford a tractor. We have only considered farmers owning over 2 hectares of land as the
addressable market for tractors. In order to compare tractor penetration across states, we have plotted the
proportion of number of more than 2 hectare holdings to the total number of holdings in a state.

Figure 3: Comparing land holding pattern and tractor penetration

y = 0.6047x + 9.2939
R2 = 0.2553
80
PJB
HRY
70

60
Tractor penetration

50

40 UP
TN
30 GUJ
BIH AP MP
20
JK KAR RAJ
HP
10
WB MAH
ORI
KER
0
ASM
0 10 20 30 40 50 60 70

Proportion of land holding above 2 hectares (per cent)

Source: CRISIL Research

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-17

• Cropping intensity (Gross cropped area as proportion of net sown area: Gross cropped area is the sum total
of net sown area cropped once and the area cropped more than once. Higher cropping intensity will mean
better farm incomes and hence the tendency to buy a tractor would be higher.

Figure 4: Comparing cropping intensity per ha and tractor penetration

y = 0.4984x - 45.01
R2 = 0.3014
80
PJB
70 HRY

60
Tractor penetration

50

40 UP
TN
30 GUJ
BIH
MP
20 AP RAJ
KAR
MAH JK HP
10 ORI
KER WB
0 ASM
100 110 120 130 140 150 160 170 180 190 200
Cropping intensity (per cent)

Source: CRISIL Research

• Flow of agriculture credit per hectare of net sown are: Nearly all the tractors are bought on credit.
Availability of credit acts as an important catalyst for creating tractor demand. Hence we have compared
agriculture credit in a state to tractor penetration to assess relative penetration across states.

Figure 5: Comparison agri-credit per hectare and tractor penetration

y = 0.0014x + 9.1112
2
R = 0.3769
80
PJB
HRY
70

60
Tractor penetration

50

40 UP

30 BIH TN
MP GUJ
20 RAJ AP
JK
KAR
MAH
10 ORI
ASM WB HP
KER
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Agri-credit (Rs per ha)

Source: CRISIL Research

• Number of agriculture workers per hectare of net sown area: Availability of agriculture workers during
harvest time is crucial for farming. Lesser availability of agriculture workers will persuade farmers to opt for
tractors. In order to compare availability of agri-labourers with tractor penetration, we have regressed total
number of agriculture workers per hectare of net sown area with the tractor penetration across states.

A-18 CRISIL RESEARCH TRACTORS ANNUAL REVIEW

Figure 6: Comparing agri-workers per ha and tractor population per ha
y = -0.0035x + 26.13
2
R = 0.0074
80
PJB
70 HRY
Tractor penetration

60

50

40 UP TN

30 MP
BIH
GUJ AP
RAJ
20 KAR
HP JK MAH
10 ORI
KER WB
0 ASM
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000
Agri-workers per ha

Source: CRISIL Research

• State-wise agri-GDP (Rs ‘000) per hectare of net sown area: We have compared tractor penetration across
states with agricultural GDP per hectare of net sown area across various states.

Figure 7: Comparing agriculture GDP (Rs '000 per ha) and tractor penetration
y = 0.0008x + 19.426
2
R = 0.0089
80
PJB
HRY
70

60
Tractor population

50

40 UP TN
BIH
30
MP
RAJ GUJ
20 AP
KAR
10 MAH JK
ORI WB HP
ASM KER
0
0 2,000 4,000 6,000 8,000 10,000 12,000
Agri- GDP per ha (Rs '000)

Source: CRISIL Research

Comparison of tractor penetration with different variables

Methodology
We have compared the tractor penetration levels on various parameters and concluded that states under penetrated
on four or more variables as under-penetrated. Similarly, states under penetrated on two or three variables are
taken as moderately penetrated and states under penetrated on less than two variables as over penetrated.

The table below indicates states, which are under, over or moderately penetrated on comparison with different
demand drivers.

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-19

Chart 1: Evaluation of states on different variables
Irrigation Proportion of land holding Agriculture Agriculture Overall
intensity above 2 ha credit per GDP per ha conclusion
ha
Andhra Pradesh U M U U U
Assam O U U U U
Bihar U O O O O
Gujarat O U O O O
Haryana O O O O O
HP O U U U U
J&K U M O U U
Karnataka O U U U U
Kerala M U U U U
MP O U O O O
Maharashtra O U U U U
Orissa U U U U U
Punjab O O O O O
Rajasthan O U O U M
Tamil Nadu O O U O O
Uttar Pradesh U O O O O
West Bengal U U U U U
Note
U: Under penetrated
M: Moderately penetrated
O: Over penetrated
ha: hectare area
Source: CRISIL Research

State-wise demand forecast

Based on present penetration levels and the likely changes in major demand drivers such as irrigation, custom
hiring and demand for farm power, CRISIL Research has estimated high/moderate/low growth states up to 2012-
13, and hence, the likely sales (volume terms) by 2012-13.

Chart 2: Projected state-wise growth and size matrix

Share in sales
States
>5 per cent >1 and <=5 per cent <=1 per cent
Growth during 2007-08 to

High ASM, KER

2012-13

AP, KAR, GUJ, MAH,

Moderate ORI, WB HP
RAJ, MP

Low TN, HRY, UP BIH, PJB JK

MP: Madhya Pradesh; KAR: Karnataka; AP: Andhra Pradesh; ORI: Orissa; JK: Jammu and Kashmir
HP: Himachal Pradesh; GUJ: Gujarat; RAJ: Rajasthan; TN: Tamil Nadu; BIH: Bihar; WB: West Bengal
UP: Uttar Pradesh; MAH: Maharashtra; PJB: Punjab; ASM: Assam; HRY: Haryana; KER: Kerala
Source: CRISIL Research

A-20 CRISIL RESEARCH TRACTORS ANNUAL REVIEW