Tractor Industry - Favorable Monsoon & Balanced Growth across Regions; Healthy 15% CAGR over FY13-FY15E - Karvy

We maintain our positive view on India's tractor industry aided by various economic factors, while favorable monsoon distribution will be a key trigger. We highlighted in our note dated 16th July 2013: "We believe that better monsoon coupled with low base of last year would benefit the industry in H2FY14. We estimate the overall tractor industry to grow by 12-15% in FY14E & FY15E". We maintain our growth estimate of 15% CAGR over FY13-FY15E. Moreover, going forward, we expect growth to be more balanced across regions. We expect strong revival in South & Western region in H2FY14E & FY15E. We expect Central region to continue its positive momentum over next 3-4 years & Northern region would continue to grow due to replacement demand amid rise in alternate usage of tractors. We expect next phase of growth to come from South & West regions, backed by strong expectation of Rabi crop in FY14.

Labour Issues Warrant Farm Mechanization despite Cost Disadvantage: Over past 4-5 years, labour intensive industry witnessed big dearth of human force for physical hard work, particularly agricultural industry. Over FY05-FY10, agricultural employment fell by 15.7 mn human capital. Due to issues related to labour as well as maintaining animal, farmers are forced to increase farm mechanization for smaller than 5 acre farm, despite cost disadvantage against usage of human/animal power. Moreover, recent trend of tractor rental model makes it viable for small land holdings. We expect tractor penetration to increase to 36/1000 hct of agri-land over next 5 years from current ~27/1000 hct.

Balanced Growth across Regions, Strong Revival in South & West: There is direct co-relation between tractor sales and rainfall as well as GDP and rainfall. In FY13, South and Western region witnessed decline of 27% & 10% YoY in tractor sales, due to drought. While on positive note, this year monsoon was normal and water level in all major reservoirs is sufficient to meet Rabi Crop requirements. Therefore, we expect economic revival in South & West over next 1.5 years, which in turn would drive Tractor growth on low base. We expect volume share of Southern region to bounce back to 20% in FY15E from 14% in FY13 (it was 26% in FY08). On the Other hand, improving affordability & rising mechanization would lead the Central region to grow at decent level over next 2 years, while pace of growth would taper down from 50%+ to <30%.

Massive Shift in Preference of Tractors: Rising affordability and increasing commercial usage led to upgrade from 20-40 HP to >40 HP. We expect the trend to continue, benefitting average realization for manufacturers.

We reiterate our "BUY" recommendations on M&M (TP: Rs. 1,040 per share) & Escorts (TP: Rs. 165 per share revised from Rs. 122).

Source : Equity Bulls

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