Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities
After having witnessed 10% CAGR in the past 15+ years, we believe that tractors' growth will moderate to 5-6% over the next decade. Additionally, during this period, tractor penetration in the country increased to 45-50 tractors per '000 hectares, which is higher than the world average (~30). Meanwhile, India's landholding remains highly fragmented, with 86% (majority) of the farmers owning under 2 hectares of land. We believe that cyclicality will increase, going ahead, due to higher replacement demand in overall sales and increased dependence on small farm owners for first-time (new) tractor sales. Based on our assessment, replacement sales will account for ~50% (half) of total sales as penetration has already risen to quite an extent, particularly in north India.
Tractor penetration rises sharply: As tractor sales have grown at ~10% CAGR in the past 15+ years to 899k units, penetration rates have risen steadily and now stand at 45-50 per '000 hectares. They are higher than the world average of ~30 tractors (per '000 hectares), despite India having a more fragmented landholding pattern. We believe that sales growth will moderate from hereon to 5-6% p.a.
Estimates by leading OEMs indicate tractor sales will reach 1.2mn-1.5mn units by FY30E, implying moderation of industry growth rates to 4-6% over the current decade. We believe that the share of first-time buyers will reduce in the overall mix from ~65% today to ~50% (as penetration rates have risen). Further, the share of replacement demand would increase to a higher proportion of sales. If we were to assume a replacement cycle of 12 years, it would imply that 400-500k tractors would be replaced every year, which would account for ~40-50% of tractor demand (up from about 30-35% today).
Tractor industry to witness increased cyclicality in sales: As the larger sized farms have reached a high degree of tractor penetration, we believe that new tractor sales will be driven by small farmers owning less than 2 hectares of land. These farmers (who own 47% of the country's agri land) have relatively limited resources and incomes that are subject to external factors like monsoons, credit availability, government subsidies, etc. Further, as the share of replacement demand increases in the overall mix, the industry cyclicality will increase. At present, replacement demand is the highest in the northern states. Based on our studies and anecdotal evidence, it is extremely high in Haryana and Punjab (as high as 70-80%). Even in states like UP, the penetration of tractors has risen, led by the more fertile western UP region (while it progressively reduces in central/eastern UP).
Stock outlook: We currently have an ADD rating on Escorts and Mahindra & Mahindra. At Escorts, the management has indicated that the tractors industry could grow in low single-digit in FY22E; at present, we await more clarity on the company's capital allocation plans. At Mahindra, we believe the moderation in tractor volumes in FY22E would be offset by a pick-up in the core SUV segment sales, driven by launches.