Surprising divergence in Feb auto volumes; tractor sales zoom ahead, two-wheeler putters along

Government schemes are supportive of farming activities, which is also reflecting in the tractor volumes.

February 2023 auto sales volumes have delivered a surprise. Tractor sales volumes beat Street expectations by a significant margin, while two-wheeler volumes saw a minor uptick.

While the former rose 20-25 percent year on year (YoY), the latter rose by 8-10 percent YoY.

Also read: Bajaj Auto sales under pressure, the Street says production cut 'already factored in'

Sales of the two segments are considered a good gauge of rural demand. But February volumes were showing a divergence -- with one pointing to a healthy recovery and the other pointing to a reluctant turnaround. Why was that?

Market experts point to a change in segment-wise consumer behaviour, particularly after the pandemic.

Surprise numbers

“Tractors came as a surprise. I was expecting its volumes to slow down slightly because it is a cyclical industry and the last four years provided a strong base. But industry wholesale volumes (M&M’s 26 percent plus Escorts Kubuta’s around 28 percent) grew by around 25+ YoY (in February),” said Varun Baxi, institutional research analyst at Antique Stock Broking.

Aniket Mhatre, institutional research analyst, automobiles, at HDFC Securities, said they began the year expecting a mid, single-digit volume growth for this segment in FY23 but now they have revised it to a 12-14 percent increase.

“In the earlier part of the year, the commentary around monsoon was uncertain. We had unseasonal rainfall and pockets that didn’t get sufficient rainfall… but later on we realised that, overall, the sowing patterns and the crop output were healthy (despite the uncertainties),” said Mhatre. Winter crop, too, surprised in cultivation levels and output.

Besides better crop output, there have been other reasons for rural incomes improving and that is being reflected in the tractor numbers, according to analysts.

“Rabi sowing has been strong, MSPs offered are high and water levels are adequate. Also, this year’s Budget was the last full-fledged one before the elections and there was significant allocation made to the rural and agri sectors,” said Baxi.

Farming has been well supported by various government schemes and subsidies, pointed out Abhishek Gaoshinde, Deputy Vice President of Research, Sharekhan by BNP Paribas. Besides this, farmers are also dealing with labour shortage and are seeing an additional source of income from non-agricultural use of tractors, he added.

When farmers have extra income, first they first opt for mechanisation of their farms and this has become more pronounced since the pandemic.

“Based on ground reports, our understanding suggests that, after COVID, consumption and spending patterns in rural areas have slightly altered. The farmers are now more watchful on improvement in crop yield and income generation compared to the pre-COVID period,” said Sharekhan’s Gaoshinde.

Pricing worries

Two-wheelers are more a discretionary buy, according to the analysts. Demand in this auto segment had already been under pressure for a decade and exports for many of the 2W makers had plummeted, with their export markets battling inflation, weakening currency and political turmoil.

Baxi said that the replacement cycle in two-wheelers has been stretched by more than three years now. “Domestic volume growth has been flattish from FY12 to FY22, which means either the new buyer has not come in or the replacement cycle has been stretched… this could be because of the limited utility of two-wheelers and because people are upgrading,” he said.

Both Mhatre and Gaoshinde said that customers are delaying their replacement buying because prices have gone up significantly over the past few years.

Also read: TVS Motor close to catching up with Ola Electric in 2W category: Nomura

This depressed sentiment has affected Hero MotoCorp the most, according to Gaoshinde. “Hero MotoCorp has been the largest player in rural-focussed executive and entry-level motorcycle segments, and is, hence, facing major headwinds due to the delay in recovery in rural economy,” he said.

Gaoshinde said that when auto recovery, led by rural demand, takes off, Mahindra and Mahindra and Hero MotoCorp would be the key beneficiaries because of their strong presence in the rural markets.