Tractor volume growth seen halving to 4% to 6% in fiscal 2024: CRISIL – ET Auto

The progression of monsoon and the risk of El Niño and its consequent impact on farm income will bear watching.

Domestic tractor sales volume growth is seen halving to 4%-6% in fiscal 2024 from a high base, created by a compound average growth rate of 10% since fiscal 2020 on the back of successive normal monsoons, according to CRISIL Ratings.

However, softening prices of inputs such as steel and pig iron will provide a 100-200 basis points (bps) respite to the operating margin of tractor makers.

Further, net cash-positive balance sheets will continue to support strong credit profiles.

In fiscal 2023, tractor sales volume will hit a record as farm sentiment remains healthy after another good monsoon, the key driver of farm incomes and increase in Minimum Support Price (MSP) for the 2022-23 market season.

Naveen Vaidyanathan, Director, CRISIL Ratings, said, “Riding on a high base, tractor volume growth next fiscal will be driven by both, the farm and commercial segments. The 5% increase in MSP for wheat for the ongoing rabi crop — the highest in the last four fiscals — will improve farm incomes, while the government’s infrastructure push and higher construction activity will drive commercial demand.”

Nitin Bansal, Associate Director, CRISIL Ratings, said, “High input prices had led to operating margin falling for the last two fiscals from a decadal high of ~22% in fiscal 2021 to ~15% in fiscal 2023, despite successive price hikes. However, prices of steel and pig iron, which together account for ~90% of the total raw material cost of tractors, have eased in the past few months and may decline by 6-12% next fiscal, driven by softer coal prices. This should help improve operating margin to 16-17%.”

Apart from improving profitability, robust balance sheets (with low gearing of 0.3 time) and limited capital expenditure, given the capacity utilization of nearly 76%, will support credit profiles of tractor makers.

The progression of monsoon and the risk of El Niño and its consequent impact on farm income will bear watching.

  • Published On Mar 21, 2023 at 01:07 PM IST

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