Opinion

Sections

March 2008

1.0 2.0 3.0 4.0

Executive summary - Overall demand projected to grow by 5-7 per cent up to 2012-13 - Most states to grow at moderate rates - Industry margins to remain under pressure in 2008-09 - Market concentration on a rise, stronger players to increase their hold on market Demand review - State-wise review Financial profile of the industry - Industry margins to be under pressure Market concentration on a rise Demand outlook - Demand projected to grow by 5-7 per cent up to 2012-13 - State-wise outlook - State-wise demand forecast

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Charts
Executive summary Projected state-wise growth and size matrix

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4.0 Demand outlook 01 Evaluation of states on different variables 02 Projected state-wise growth and size matrix

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Figures
1.0 01 02 03 04 05 06 07 Demand review Volume sales Southern states have gained share at the expense of northern states Higher than 40hp tractors continue to grow faster Exports volumes Region-wise exports Comparing tractor penetration across countries Comparing tractor penetration and past growth rates

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Continued…

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…continued

Figures
2.0 01 02 03 Financial profile of the industry Trend in sales volumes Operating margins Capacity utilisation

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3.0 Market concentration on a rise 01 Herfindahl index 4.0 01 02 03 04 05 06 07 Demand outlook Regression of tractor population against agricultural GDP Comparing irrigation intensity and tractor penetration Comparing land holding pattern and tractor penetration Comparing cropping intensity per ha and tractor penetration Comparison agri-credit per hectare and tractor penetration Comparing agri-workers per ha and tractor population per ha Comparing agriculture GDP (Rs '000 per ha) and tractor penetration

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Tables
1.0 Demand review 01 Exports growth by region 2.0 01 02 03 04 05 3.0 01 02 03 Financial profile of the industry Operating margins Debtor days Interest cost Net margins Return on capital employed Market concentration on a rise Benchmark for Herfindahl index Industry financials Key success factors

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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
States >5 per cent Share in sales >1 and <=5 per cent <=1 per cent ASM, KER

Growth during 2007-08 to 2012-13

High

Moderate

AP, KAR, GUJ, MAH, RAJ, MP

ORI, WB

HP

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

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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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Demand review

2007-08 marks the end of cyclical upturn
Figure 1: Volume sales
400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 1996-97 1997-98 1998-99 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 1999-2000 2006-07 2007-08 (E) 0

4.8 per cent CAGR for last 10 years

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.

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Figure 2: Southern states have gained share at the expense of northern states
100% 7 10 80% 28 60%

8 14 24

12 17 21

10 13 26

12 14 24

10 15

10 20

9 25

9 26

9 25

27

28

26

26

26

40% 54 20% 55 51 51 50 48 42

39

39

39

0% 1998-99 19992000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (A-D) North West South East

Source: CRISIL Research, Industry

Figure 3: Higher than 40hp tractors continue to grow faster
100% 80% 60% 54 40% 20% 22 0% 2002-03 2003-04 2004-05 31-40 hp 2005-06 41-50 hp 2006-07 2007-08 (A-D) 23 20 18 17 16 50 51 51 49 5 20

7 21

8 21

8 23

8 26

10 27

46

Upto 30 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 35000 30000 25000 20000 15000 10000 5000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 1999-2000 2006-07 2006-07(AD) 2007-08(AD) Australia 0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 -

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

Source: CRISIL Research, DGFT

Table 1: Exports growth by region
(per cent) Africa Asia Australia Europe N. America S. America Grand Total Source: CRISIL Research, DGFT 2005-06 188 87 550 133 24 106 53 2006-07 107 10 246 227 -4 -9 21

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:
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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 (per thousand hectare) 35 30 25 20 15 10 5 Pakistan Argentina Australia Canada Russia China Ukraine Mexico World Brazil India Iran US
HRY JK 15 20 25 30 35 BIH MP 40 UP 45 50 55 60 65 70 75 PJB 80

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) 40 KER

Correlation = -0.5

30 ORI MAH WB ASM HP (10) 5 10 AP KAR RAJ GUJ

TN

20

10

(20)

Tractor penetration

Source: CRISIL Research

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Turkey

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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 capitalintensive 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 Units sold and average realisation (Rs) 350000 300000 (Rs billion) 250000 200000 150000 100000 50000 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08P Value sales (Rs billion) 20 0 80 60 40 120 100

Average realisation

Volume sales

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.

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Figure 2: Operating margins
(per cent) 20.0 (per cent) 80 70 15.0 60 50 10.0 40 30 5.0 20 10 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08P 0

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) Escorts Ltd Mahindra and Mahindra Ltd Punjab Tractors Ltd Tractors & Farm Equipment Ltd International tractors Ltd Industry 2002-03 18.3 7.3 11.6 6.6 12.7 8.8 2003-04 -12.3 8.8 10.1 6.7 12.8 9.2 2004-05 18.7 9.3 12.7 8.4 17.1 10.8 2005-06 7.2 11.1 18.3 12.2 16.3 13.3 2006-07 3.2 13.6 11.7 12.6 13.0 2007-08P 13.3 8.5 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.

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

Table 3: Interest cost
2003 Escorts Ltd Mahindra and Mahindra Ltd Punjab Tractors Ltd Tractors & Farm Equipment Ltd International Tractors Ltd Note Overall financials have been considered in the absence of tractor specific details of companies having other businesses. Source: CRISIL Research 1,343.4 1,159.0 142.5 162.6 19.6 2004 1,584.0 769.3 140.0 144.7 8.7 2005 1,672.4 302.4 129.7 69.7 12.1 2006 957.9 269.6 131.1 117.2 51.4 2007 198.0 73.0 128.6 -

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

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.

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

Figure 3: Capacity utilisation
(per cent) 140 Capacity utilisation rate in 2006-07 120 100 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 HerfindahlHirschman 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 2,000 1,800 1,600 1,400 1,200 1,000 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (AD) Increase in market concentration

Source: CRISIL Research

Table 1: Benchmark for Herfindahl index
Index value 0-1000 1000-1800 1800 and above Source: CRISIL Research Concentration in the industry Low Moderate High

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.

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

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.

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Stronger players to increase their hold on the market
Table 3: Key success factors
Industry I Product strengths Share in industry sales (April - December 2007-08) below 30 hp 31-40 hp 41hp and above II Regional strengths Share of sales in following regions in company's domestic sales (April - December 2007) High growth states Moderate growth states Low growth states Share of exports in total sales III Cost efficiency Capacity utilisation rate (2006-07) Debtor days (2006-07) Raw material as a percentage of net sales (2006-07) Indirect cost as a percentage of net sales (2006-07) Overall cost efficiency Performance / outcome of above I RoCE (2006-07) 25.0% 28.6% 13.6% 10.0% 12.0% 2.3% 29.3% 29.3% 12.6% 23.0% 9.4% 22.2% 15.4% 3.2% 6.0% 13.8% 18.2% 11.7% -6.0% 7.7% 27.7% 16.3% 15.0% 1.9% 9.3% II PBIT Margins III 5 year CAGR in sales II Change in market share during past 5 years II Market share in 2006-07 (till November 2006) 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 76% 19% 68% 66% 21 65% 21% 89% 27 75% 13% 52% 47 75% 23% 43% 209 78% 16% 121% 45 77% 10% 1% 65% 19% 12% 20% 31% 27% 8% 16% 23% 24% 10% 20% 14% 17% 7% 4% 9% 9% 0% 19% 10% 10% 4% 16% 46% 38% 37% 31% 24% 29% 32% 8% 16% 9% 19% 4% 10% 6% 8% 10% 9% M&M TAFE Escorts PTL ITL

Strong Moderate Moderate

Weak Moderate

-3.3% -10.0%

In the long run, Mahindra & Mahindra is expected to remain the leader in the tractor industry due to welldiversified 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.

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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 wellestablished 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

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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 4000000 3500000 Tractor population 3000000 2500000 2000000 1500000 1000000 300000 350000 400000 450000 Agri GDP 500000 550000 600000 R = 0.93
2

Source: CRISIL Research

Overall, CRISIL Research projects the total industry volume sales to grow by a CAGR of 5-7 per cent by 201213.

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

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(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 R = 0.7987 80 70 60 50 40 30 20 10 0 0 ASM MAH KAR HP RAJ ORI 40 MP GUJ AP JK WB 60 80 100 120 TN BIH UP HRY
2

PJB

Tractor penetration

KER 20

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

PJB

Proportion of land holding above 2 hectares (per cent)

Source: CRISIL Research

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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 70 Tractor penetration 60 50 40 30 20 10 0 100 110 120 130 140 TN GUJ AP KAR RAJ BIH HP WB 160 170 180 190 200 UP HRY PJB

MP

MAH KER ASM

JK ORI 150

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 80 70 Tractor penetration 60 50 40 30 20 10 ASM 0 0 BIH JK UP GUJ KAR HP 10,000 15,000 20,000 25,000 TN AP R = 0.3769 HRY PJB
2

MP RAJ

MAH ORI WB 5,000

KER 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.

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Figure 6: Comparing agri-workers per ha and tractor population per ha
y = -0.0035x + 26.13 R = 0.0074 80 70 Tractor penetration 60 50 40 30 20 10 0 0 200 400 RAJ HP JK ASM 600 MP GUJ KAR MAH KER 800 ORI 1,000 1,200 UP TN AP BIH
2

PJB HRY

WB 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 R = 0.0089 80 70 Tractor population 60 50 40 30 20 10 0 0 2,000 4,000 RAJ MP GUJ KAR MAH AP WB KER 8,000 JK HP 12,000 BIH UP TN HRY PJB
2

ORI

ASM 6,000 Agri- GDP per ha (Rs '000)

10,000

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.

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

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 201213, and hence, the likely sales (volume terms) by 2012-13.
Chart 2: Projected state-wise growth and size matrix
States Growth during 2007-08 to 2012-13 >5 per cent High Share in sales >1 and <=5 per cent <=1 per cent ASM, KER

Moderate

AP, KAR, GUJ, MAH, RAJ, MP

ORI, WB

HP

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

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