Tractors: November 2012 sales update: Impressive growth, but unlikely to sustain - BRICS

The festive season boosted tractor sales in Nov 2012, which saw a yoy growth after three consecutive months of decline. Industry sales were up 10.3% yoy to 51,241 units, albeit on a small base, driven by a strong growth by companies like Swaraj. Domestic sales contributed 47,309 units, up 19% yoy. India's southern and western markets, which had reported a high growth last year, have been recording a decline this year. Moreover, the North Indian market is not yet showing any signs of a pick-up in tractor sales. The performance of these regions resulted in sales of the tractor industry declining 2% in YTDFY13.

Tractor manufacturers expect delayed rains to result in good Rabi crop, which will help them achieve higher sales in H2 over H1. Although the tractor industry reported an impressive growth of 10% yoy in Nov 2012, we believe it was driven mainly by the festive season and it will be very difficult for the growth to sustain. We expect tractor sales to remain under pressure and decline 3% in FY13, due to overall pressure on the agri segment and weak sentiments.

The growth in industry sales for Nov 2012 was led by Swaraj, up 35% yoy to 6,406 units, and HMT, up 78% yoy, albeit on a very low base, to 270 units. John Deere was the only company to report a yoy decline in sales, down 3% yoy, apart from other very small players. Sales were up yoy by 10% for M&M, 9% for TAFE, 12% for Sonalika, 6% for Escorts and 3% for New Holland. M&M (including Swaraj) reported an impressive growth of 17% yoy.

Domestic sales in Nov 2012 grew 19% yoy on a relatively low base to 47,309 units, as YTDFY13 sales remained in negative territory, down 1% to 368,937 units. Domestic sales growth was boosted by M&M (including Swaraj), up 22% yoy, TAFE (up 23% yoy) and Escorts (up 10% yoy). However, John Deere continued to a report decline (down 6% yoy) in Nov 2012 as well. Industry exports fell 40% yoy in Nov 2012.

Outlook: We expect the tractor industry to remain under pressure in FY13 due to: 1) lower increase in income on account of lower rise in MSPs and 2) high finance cost. We estimate industry sales to decline 3% (563,440 units) in FY13, but grow 4% (585,978 units) in FY14. Among the tractor stocks under our coverage, we maintain Add on M&M and Reduce on Escorts.

HP-wise performance in October 2012

- Sales in the below-20HP segment grew 205% yoy in October 2012, with its share in total tractor sales increasing to 2% vs. 1% in October 2011. TAFE began reporting sales in the sub-20HP segment, though VST Tillers and M&M's Yuvraj continue to enjoy a duopoly. International Tractors entered the market in August 2012, but is yet to make an impact.

- Sales in the 21-30HP segment declined for the seventh consecutive month this financial year, down 52% yoy in October 2012 to 4184 units, with sales of M&M and Escorts down 82% yoy and 85% yoy respectively.

- Sales in the 31-40HP segment were up 11% yoy to 33,145 units. M&M recorded a decline of 4% yoy in sales, while sales grew yoy by 44% for Escorts, 34% for John Deere and 19% for TAFE.

- Sales in the 41-50HP segment grew 19% yoy in October 2012 to 24,887 units. M&M's sales in the segment recovered and were up 83% yoy.

- Several companies are betting on the 51HP+ segment to drive future growth, though the executive class tractors reported a decline of 34% yoy in October 2012 to 9,849 units.

Source : Equity Bulls

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