Tractor sales outpace forecast to record highs, brokerages surprised

tractor registrations beat registrations during the 2021 festival season period by 66 percent, and it beat the pre-COVID 2019 festive period by 34 percent. (Representational image; Photo by Jannis Knorr/Pexels)

Tractor sales have beat estimates this October, carrying forward the sales momentum the segment had begun to see in September. Sales touched record highs on improving sentiment.

The Street had estimated flat quarterly growth but sales went up by more than 12 percent. Mahindra and Mahindra, and Escorts Kubota made a record number of sales in October.

The largest tractor maker in India, Mahindra and Mahindra, saw around 11 percent year-on-year (YoY) rise in sales volumes to nearly 52,000 units in the month, even as brokerages were expecting flat growth over this period.

The third-largest tractor manufacturer, Escorts Kubota sold 14,500 units in October, which according to brokerage Nomura was the highest ever monthly sales for the company. Its average sales volume this year (January to October 2022) has been around 8,688.7 units, and the average sales for the company in October over the past five years has been 13,632 units.

Overall, tractor registrations beat registrations during the 2021 festival season period by 66 percent, and it beat the pre-COVID 2019 festive period by 34 percent. Analysts put the good show down to ample supply of water thanks to good rains and favourable government policies.

“The domestic tractor industry reported a high single-digit y-o-y increase in volumes in October 2022. Festive demand was supported by above-normal monsoons and healthy water reservoir levels,” stated a recent report from Kotak Institutional Equities (KIE).

According to the Central Water Commission’s bulletin released on November 3, live storage available in the 143 reservoirs is 109 percent of the live storage level of the corresponding period last year, and 118 percent of the average of the last 10 years.

The KIE report also mentioned the increase in minimum supported prices (MSPs) announced on October 18. “Sentiment remains positive on account of higher MSP for Rabi crops, good moisture content in soil and good progress in Rabi sowing,” it added.

The government raised the MSP for all rabi (winter-sown) crops for the marketing season (April to March) of 2023-2024. Support prices of wheat, barley, gram, safflower, rapeseed and mustard, and lentil (masur) were increased by between Rs 100 and Rs 500 per quintal. Given all this, KIE’s analysts expects tractor volumes to grow 6 percent YoY in FY23, and then moderate to 4 percent in FY24 and FY25.

Nomura’s analysts estimate that there will be a 5 percent yearly decline in industry volumes in FY23, but said that they see an upside risk to that estimate.

Analysts at Edelweiss gave a ‘buy’ call to Mahindra and Mahindra in their October 28 report, and cited the company’s tractor business as a key highlight. “The tractor business is in a sweet spot and well placed to benefit from robust industry demand and sustain market share gains, riding new launches and network expansion,” the report said.

The other highlights included the company’s utility vehicle business which the analysts believed would get back on track with the company intent on closing product gaps.

M&M’s Q2FY23 results will be out on November 11.

Escorts Kubota’s second-quarter results were below expectations, with a 190-basis point (bp) quarterly drop in operating profit margin, which stood at 8.1 percent in the September quarter. A Sharekhan November 4 report pegged this to “negative operating leverage, volume decline in construction equipment division and unabsorbed inflation of commodity and other costs”. The brokerage still holds a “positive” view on the stock, and the key positives included the growth in tractor revenue at 12.5 percent YoY; and market share gain in the segment of 70 bps YoY and 40 bps quarter-on-quarter to touch 9.7 percent. Escorts was renamed Escorts Kubota in June 2022 after its Japanese partner and agricultural machines maker Kubota increased its stake to 44.8 percent. Sharekhan’s analysts see this as a trigger for further growth.

“We believe that EKL’s partnership with Kubota would provide the company an opportunity to gain global market share going forward, driven by product launches across brands and increase the addressable markets,” their report stated.

“EKL is well-poised to gain market share in India and globally, driven by new product launches, an increase in share of non-agricultural-based tractors, increase in global footprints and beneficiary of a single exclusive vehicle of Kubota in India,” it added. Besides, the analysts are positive about the company’s strong balance sheet with zero debt, strong free cash flow and decent return on capital employed profile of 17-22 percent.

On the other hand, analysts at Asian Markets Securities have a ‘sell’ call on the stock. In their November 4 report, they commented on the company’s plan to transform from a tractor manufacturer to an agri-services provider.

“The company intends to provide complete crop solutions by offering implements and knowhow to farmers. ESC also plans to introduce an Uber-like model for tractors that makes mechanised solutions more affordable for small-scale farmers, besides laying the groundwork for commercial production of its electric tractor,” they stated.

According to the analysts, the company also plans to capture the higher end of the domestic tractor market with the Kubota offerings.

But according to the brokerage, despite its zero debt and healthy return ratios, and its transformative strategy that may work well in the mid- to long-term, the valuations are “rich to justify the near term growth”.