Opinion

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-i

Sections

Executive summary A-1

- Overall demand projected to grow by 5-7 per cent up to 2012-13 A-1

- Most states to grow at moderate rates A-1

- Industry margins to remain under pressure in 2008-09 A-2

- Market concentration on a rise, stronger players to increase their

hold on market A-2

1.0 Demand review A-3

- State-wise review A-6

2.0 Financial profile of the industry A-7

- Industry margins to be under pressure A-7

3.0 Market concentration on a rise A-11

4.0 Demand outlook A-15

- Demand projected to grow by 5-7 per cent up to 2012-13 A-15

- State-wise outlook A-16

- State-wise demand forecast A-20 Charts

Executive summary

01 Projected state-wise growth and size matrix A-1

4.0 Demand outlook

01 Evaluation of states on different variables A-20

02 Projected state-wise growth and size matrix A-20

Figures

1.0 Demand review

01 Volume sales A-3

02 Southern states have gained share at the expense of northern states A-4

03 Higher than 40hp tractors continue to grow faster A-4

04 Exports volumes A-5

05 Region-wise exports A-5

06 Comparing tractor penetration across countries A-6

07 Comparing tractor penetration and past growth rates A-6

Continued�

Opinion March 2008

A-ii CRISIL RESEARCH TRACTORS ANNUAL REVIEW

�continued Figures

2.0 Financial profile of the industry

01 Trend in sales volumes A-7

02 Operating margins A-8

03 Capacity utilisation A-10

3.0 Market concentration on a rise

01 Herfindahl index A-11

4.0 Demand outlook

01 Regression of tractor population against agricultural GDP A-16

02 Comparing irrigation intensity and tractor penetration A-17

03 Comparing land holding pattern and tractor penetration A-17

04 Comparing cropping intensity per ha and tractor penetration A-18

05 Comparison agri-credit per hectare and tractor penetration A-18

06 Comparing agri-workers per ha and tractor population per ha A-19

07 Comparing agriculture GDP (Rs '000 per ha) and tractor penetration A-19 Tables

1.0 Demand review

01 Exports growth by region A-5


01 Operating margins A-8

02 Debtor days A-9

03 Interest cost A-9

04 Net margins A-9

05 Return on capital employed A-10


01 Benchmark for Herfindahl index A-11

02 Industry financials A-12

03 Key success factors A-13

CRISIL RESEARCH TRACTORS ANNUAL REVIEW A-1

Overall demand projected to grow by 5-7 per cent up to 2012-13 CRISIL Research projects domestic tractor sales to grow at a CAGR of 5-6 per cent, close to the long term trend in growth rate, during 2007-08 to 2012-13. The projected rate of growth is considerably lower than the 20 per cent witnessed during 2002-03 to 2006-07. While agricultural growth will continue to be the major factor that will drive sales, haulage applications are expected to increasingly support the economics of tractors. CRISIL Research projects exports to grow at a CAGR of 15-18 per cent from 2007-08 to 2012-13, mainly driven by exploring markets like Europe and Australia and increasing penetration in the existing markets especially the US, Africa and Latin America. Overall, CRISIL Research projects total industry sales to grow at a CAGR of 5-7 per cent by 2012-13.

Most states to grow at moderate rates CRISIL Research has evaluated all the states on six major demand drivers like irrigation intensity, landholding pattern, cropping intensity, flow of agricultural credit per hectare (ha), agricultural dependents per ha and agricultural GDP per ha and has ranked states on the likely growth and size up to 2012-13. We expect most states to grow moderately or at a low rate during the medium term. Chart 1: Projected state-wise growth and size matrix

Share in sales States

>5 per cent >1 and <=5 per cent <=1 per cent

High ASM, KER

Moderate AP, KAR, GUJ, MAH, RAJ, MP ORI, WB HP

Gro

wth

dur

ing

2007

-08

to

2012

-13

Low TN, HRY, UP BIH, PJB JK

MP: Madhya Pradesh; KAR: Karnataka; AP: Andhra Pradesh; ORI: Orissa; JK: Jammu and Kashmir

HP: Himachal Pradesh; GUJ: Gujarat; RAJ: Rajasthan; TN: Tamil Nadu; BIH: Bihar; WB: West Bengal

UP: Uttar Pradesh; MAH: Maharashtra; PJB: Punjab; ASM: Assam; HRY: Haryana; KER: Kerala

Source: CRISIL Research

Executive summary

A-2 CRISIL RESEARCH TRACTORS ANNUAL REVIEW

Industry margins to remain under pressure in 2008-09 Industry margins recorded a significant growth in the past 2 years, primarily due to increasing volumes and better capacity utilisation. In 2007-08, industry margins declined due to increasing raw material costs and declining sales. CRISIL Research expects industry margins to remain under pressure in 2008-09 on account of input cost pressures and slow growth rate. Market concentration on a rise, stronger players to increase their hold on market Market concentration in tractors industry is fairly high, with top two players, M&M (including Punjab Tractors) and TAFE accounting for 63 per cent of the market in 2007-08 (A-D). Market concentration increased over the past 3 years due to the acquisition of Eicher Motors� tractors business by TAFE in 2005-06 and PTL�s acquisition by M&M in 2006-07. CRISIL Research expects the key success factors for the players will continue to include diversified product portfolio, nation-wide distribution strength and cost competencies. CRISIL Research anticipates the relative ranking of players based on market share to remain stable with increasing polarisation of market position between stronger and marginal players.


2007-08 marks the end of cyclical upturn Figure 1: Volume sales

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1996

-97

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-98

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-99

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-01

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-02

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-03

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-04

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-08

(E)

Domestic sales Exports

4.8 per cent CAGR for last 10 years

Source: CRISIL Research, Industry Tractor sales are cyclical, as is evident from its historical annual sales pattern. After having touched a high of 255,000 units in 1999-2000, domestic sales of tractors continuously fell till 2002-03, when it touched 158,000 units, due to high channel inventories and poor monsoon. However, sales revived post 2003-04, on the back of significant growth in agricultural credit and relatively good monsoons. Domestic sales volumes grew at 22 per cent from 2003-04 to 2006-07 to reach an all-time high of 319,000 units. Export volumes grew at a CAGR of 26 per cent between 2003-04 and 2006-07, to touch 34,000 units in the latter year. 2007-08 marked the end of sales growth momentum, with domestic sales declining by 4-6 per cent as banks reduced credit disbursements in few states such as UP, Gujarat and Karnataka. Nevertheless, exports grew at a rate of 25-30 per cent. We expect total sales of tractors to decline by 1-2 per cent in 2007-08. Rising share of southern states Improving irrigation facilities, a nearly normal monsoon, good ground water levels, easy availability of credit, increased player thrust and rising income from custom hiring (non-farm income) on the back of increasing infrastructure activities stepped up tractor sales in the southern and western states of India. The share of South and West in total sales rose from 17 per cent and 21 per cent in 2000-01 to 25 per cent and 26 per cent in 2007-08, respectively. Although northern states continue to dominate domestic demand, their share fell from 51 per cent in 2000-01 to 39 per cent in 2007-08, due to the already-high tractor penetration.

1.0 Demand review


Figure 2: Southern states have gained share at the expense of northern states

54 55 51 51 50 4842 39 39 39

28 2421 26 24 27

2826 26

10 1417

13 14 15 20 26

7 8 12 10 12 10 10 9 9 9

26

2525

0%

20%

40%

60%

80%

100%

1998-99 1999-2000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08(A-D)

North West South East

Source: CRISIL Research, Industry

Figure 3: Higher than 40hp tractors continue to grow faster

22 23 20 17 16

54 50 51 51 49 46

20 21 21 23 26 27

5 7 8 8 8 10

18

0%

20%

40%

60%

80%

100%

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (A-D)

Upto 30 hp 31-40 hp 41-50 hp 51 hp and above


The share of over-40 hp tractors in total industry sales has been increasing steadily since 2003-04, and currently stands at 37 per cent. This transition is attributable to the increasing share of southern and western states, where higher hp tractors are preferred due to harder soil conditions, as well as rising use of higher hp tractors in northern states. In addition, the growing share of exports, where >40 hp tractors dominate (64 per cent), has also contributed to increasing off-take of higher hp tractors. Exports continue the strong momentum Tractor exports from India grew at a CAGR of 36 per cent from 2003-04 to 2006-07. Around 70 per cent (in 2004-05) of these exports were to the US, mainly driven by an increase in hobby farming in the country. Exports to other countries, such as South Asian countries, Malaysia, Turkey and Africa, are estimated to have been growing fast as well. In 2006-07, over 50 per cent of exports were to non US destinations. In 2007-08, exports had grown by 33 per cent till December.


Figure 4: Exports volumes

0

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10000

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25000

30000

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1999

-200

0

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-01

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-02

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-03

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-04

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-05

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-06

2006

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2006

-07(

A-

D)

2007

-08(

A-

D)

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Exports Growth


Figure 5: Region-wise exports

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004-05 2005-06 2006-07

(per cent)

N. America Asia Africa S. America Europe Australia

Source: CRISIL Research, DGFT

Table 1: Exports growth by region (per cent) 2005-06 2006-07

Africa 188 107

Asia 87 10

Australia 550 246

Europe 133 227

N. America 24 -4

S. America 106 -9

Grand Total 53 21

Source: CRISIL Research, DGFT

India catching up in terms of tractor penetration, but lags behind in average hp Tractor penetration in India has grown steadily post-green revolution in the 1970s. Between 1971 and 2007, tractor population is estimated to have risen from 0.19 million to 3.2 million units (presuming an average tractor life of 15 years). To gauge the penetration level in India, we have compared the same with other countries that have similar attributes. These countries were selected using the following two parameters:


1. Tractor population of the country 2. Arable area (defined by the FAO as land under temporary crops, temporary meadows for moving or for

pasture, land under market or kitchen gardens and land temporarily fallow) Figure 6: Comparing tractor penetration across countries

Tractor penetration (arable area) (2005)

0

5

10

15

20

25

30

35

40

45

Rus

sia

Aus

tral

ia

Chi

na

Arg

entin

a

Ukr

aine

Mex

ico

Bra

zil

Ind

ia

Pak

ista

n

Can

ada

Ira

n

Wor

ld

US

Tur

key

(per

th

ou

san

d h

ecta

re)

Source: Food and Agriculture Organisation According to Food and Agriculture Organisation, tractor penetration in India in 2005 was estimated to be around 16 units per 1,000 hectare of arable land, whereas the world average was around 20 units per 1,000 hectare of arable land. According to CRISIL Research estimates, tractor penetration in India is 21 units per 1,000 hectare of arable land in 2007. However, given use of higher hp tractors in US and western Europe, India�s hp per hectare may be lower than some of the peer countries. State-wise review We have compared state-wise tractor penetration (tractor population as proportion of net sown area) and growth during the last 5 years to assess past trends and potential demand. There is a moderate negative correlation between growth and level of penetration, suggesting higher growth in states with lower tractor penetration and vice-versa. Figure 7: Comparing tractor penetration and past growth rates

HRY

PJB MPBIH

UP JKHP

GUJ

ASM WB RAJ

TN

KER

AP MAH ORI KAR

(20)

(10)

-

10

20

30

40

- 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

5-year CAGR (per cent)

Tractor penetration

Correlation = -0.5



Industry margins to be under pressure The tractor industry is moderately capital-intensive in terms of long-term capital requirements, but more capital-intensive in terms of short-term (working) capital requirements. Industry margins have improved significantly in the past 2 years, mainly because of increasing volumes and better capacity utilisation. In 2007-08, margins have been under pressure due to increasing raw material costs and declining sales volumes. 2007-08 marks the end of cyclic upturn in volume sales The tractor sector, which grew at a CAGR of 22.6 per cent from 2003-04 to 2006-07, has recorded a downfall in volumes in 2007-08. Nevertheless, the average realisation per unit has increased due to the three price hikes effected during the year. Out of the total increase in average realisation around 35 per cent can be attributed to change in mix and around 65 per cent to the rise in prices. The increase in raw material prices was passed on to end users in the form of higher prices. Figure 1: Trend in sales volume

0

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100000

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2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08P

0

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120

(Rs

bill

ion

)

Average realisation Volume sales Value sales (Rs billion)

Un

its

sold

an

d a

vera

ge

real

isat

ion

(R

s)

P: Projected Note Industry aggregates includes PTL, TAFE, Escorts, ITL and M&M Ltd. Source: CRISIL Research

Operating margins decreased in 2007-08 after increasing for 4 consecutive years The tractor segment�s operating margin (PBIT as a percentage of net sales), which has historically been a function of the capacity utilisation level and raw material costs, has been increasing since 2003-04. The improvement is the result of enhanced capacity utilisation to meet the growing demand. Operating margins of the industry have fallen in 2007-08. Decreasing sales and lower capacity utilisation, combined with increase in raw material costs, have brought about this decline.



Figure 2: Operating margins

-

5.0

10.0

15.0

20.0

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08P

0

10

20

30

40

50

60

70

80

Capacity utilisation (RHS) Operating margin - PBIT(LHS)

(per cent) (per cent)

P: Projected Note 1. For calculating capacity utilisation and PBIT margins we have considered capacity, production and financials of M&M, PTL, ITL & TAFE. 2. Operating margins for 2007-08 do not include TAFE and for 2006-07 do not include ITL. Source: CRISIL Research

Table 1: Operating margins PBIT margin (per cent) 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08P

Escorts Ltd 18.3 -12.3 18.7 7.2 3.2 -

Mahindra and Mahindra Ltd 7.3 8.8 9.3 11.1 13.6 13.3

Punjab Tractors Ltd 11.6 10.1 12.7 18.3 11.7 8.5

Tractors & Farm Equipment Ltd 6.6 6.7 8.4 12.2 12.6 -

International tractors Ltd 12.7 12.8 17.1 16.3 - -

Industry 8.8 9.2 10.8 13.3 13.0 12.4

P: Projected Note 1. Industry aggregates includes PTL, TAFE, ITL and M&M Ltd. 2. Figures for 2007-08 do not include TAFE and for 2006-07 do not include ITL. Source: CRISIL Research Operating margins increased for both Mahindra & Mahindra and TAFE in 2006-07, whereas it declined for Punjab Tractors Ltd. Raw material costs of Mahindra & Mahindra decreased by around 400 basis points and TAFE�s selling and distribution and other expenses declined by around 150 basis points, leading to higher operating margins for both players. PTL�s margins fell sharply because of a huge 634-basis-points increase in its raw material costs. Debtor days and interest costs decline in 2006-07 Conscious efforts by industry players to lessen their receivables have yielded the desired outcome of reduced debtor days. This, in turn, has helped prevent the piling up of inventories at the dealer�s end. Certain players have also undertaken the process of inventory correction, which has again reduced the working capital blocked in inventories. Interest costs have shown a varied trend across players.


Table 2: Debtor days 2003 2004 2005 2006 2007

Escorts Ltd 141 74 59 47 -

Mahindra and Mahindra Ltd 47 28 21 22 21

Punjab Tractors Ltd 272 259 215 216 209

Tractors & Farm Equipment Ltd 157 112 52 31 27

International Tractors Ltd 52 45 44 45 -

Note

Overall financials have been considered in the absence of tractor

specific details of companies having other businesses.


Table 3: Interest cost 2003 2004 2005 2006 2007

Escorts Ltd 1,343.4 1,584.0 1,672.4 957.9 -

Mahindra and Mahindra Ltd 1,159.0 769.3 302.4 269.6 198.0

Punjab Tractors Ltd 142.5 140.0 129.7 131.1 73.0

Tractors & Farm Equipment Ltd 162.6 144.7 69.7 117.2 128.6

International Tractors Ltd 19.6 8.7 12.1 51.4 -

Note

Overall financials have been considered in the absence of tractor specific details of companies

having other businesses.


Net margins moved in the same direction as operating margins The net margins of the tractor industry were in line with the operating margins. They increased for both Mahindra & Mahindra and TAFE and fell for Punjab Tractors Ltd. Table 4: Net margins (per cent) 2003 2004 2005 2006 2007

Escorts Ltd 3.1 -28.4 3.1 1.1 -0.2

Mahindra & Mahindra Ltd 3.9 6.9 7.8 10.6 10.8




Note




Declining sales and increasing pressure on margins can lead to decreasing RoCE The RoCE of major players in the tractor industry rose in 2006-07 in accordance with improvement in operating efficiency and asset turnover. However, it is estimated to decline in 2007-08 due to low operating efficiency. CRISIL Research does not expect an increase in the sector�s fixed capital requirements. Any significant capacity addition in the medium to long term is also unlikely.


Table 5: Return on capital employed (per cent) 2002-03 2003-04 2004-05 2005-06 2006-07

Escorts Ltd 12.5 -14.6 27.1 15.4 -

M&M 11.9 21.7 26.0 31.4 28.6




Note




Figure 3: Capacity utilisation

0

20

40

60

80

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120

140

Escorts HMT ITL M&M NHI JD PTL TAFE Industry

Cap

acit

y u

tilis

atio

n r

ate

in 2

006-

07

(per cent)

Note: NHI: New Holland India, ITL:International Tractors Limited, JD: John Deere, PTL: Punjab Tractors Limited Source: CRISIL Research


The intensity of competition in the Indian tractor industry has moderated in the past few years and is expected to remain modest in the short-to-medium term. This has been an outcome of high sales growth in the past 3 years, higher capacity utilisation, no imminent new player entering the market and increased market concentration. Market concentration increased partly due to TAFE�s acquisition of Eicher Motors� tractors business in 2005-06 and intensified further in 2006-07 with PTL�s acquisition by M&M, which is reflected in a healthier Herfindahl-Hirschman Index (HHI). For the purpose of comparison, we have bifurcated HHI values into the following three categories: Figure 1: Herfindahl index

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (A-D)

Her

fin

dah

l-H

irsc

hm

an In

dex

Increase in market concentration


Table 1: Benchmark for Herfindahl index Index value Concentration in the industry 0-1000 Low 1000-1800 Moderate 1800 and above High


The trend in HHI over the last few years indicates that there was a decline in the index from 2000-01 to 2003-04, indicating growing competition during the period. However, from 2004-05, the index has moved upwards indicating increased market concentration and reduced competition in the industry. After M&M�s acquisition of PTL, only four major players constitute the tractor industry and competition among them is relatively moderate.



Table 2: Industry financials

Units 2002-03 2003-04 2004-05 2005-06 2006-07

Selling cost as a percentage of net sales per cent 4.4 5.2 5.0 4.8 5.7

PBIT margins per cent 7.8 8.8 10.5 13.3 12.8

Net profit margins per cent 4.7 6.8 7.8 10.4 10.1

RoCE per cent 12.9 20.1 26.0 31.0 27.6

Debtor days days 95 64 51 48 39

Inventory days days 23 19 22 24 22

Asset turnover times 2.0 2.4 2.9 3.3 3.4


Going forward, CRISIL Research expects market concentration to remain fairly high. We expect that the key differentiations among players will continue to include diversified product portfolio, nation-wide distribution strengths, and finance tie-ups to support sales and cost competencies. CRISIL Research anticipates the relative ranking of players based on market share to remain stable with increasing polarisation of market position between stronger and marginal players.


Stronger players to increase their hold on the market Table 3: Key success factors Industry M&M TAFE Escorts PTL ITL

I Product strengths Share in industry sales (April - December 2007-08) below 30 hp 16% 37% 29% 16% 4% 8% 31-40 hp 46% 31% 32% 9% 10% 10% 41hp and above 38% 24% 8% 19% 6% 9%

II Regional strengths Share of sales in following regions in company's domestic sales (April - December 2007) High growth states 1% 20% 16% 20% 4% 19% Moderate growth states 65% 31% 23% 14% 9% 10% Low growth states 19% 27% 24% 17% 9% 10% Share of exports in total sales 12% 8% 10% 7% 0% 4%

III Cost efficiency Capacity utilisation rate (2006-07) 68% 66% 89% 52% 43% 121% Debtor days (2006-07) 21 27 47 209 45 Raw material as a percentage of net sales (2006-07) 76% 65% 75% 75% 78% 77% Indirect cost as a percentage of net sales (2006-07) 19% 21% 13% 23% 16% 10% Overall cost efficiency Strong Moderate Moderate Weak Moderate

Performance / outcome of above

I RoCE (2006-07) 25.0% 28.6% 29.3% 15.4% 18.2% 27.7%II PBIT Margins 13.6% 12.6% 3.2% 11.7% 16.3%III 5 year CAGR in sales 10.0% 12.0% 23.0% 6.0% -6.0% 15.0%II Change in market share during past 5 years 2.3% 9.4% -3.3% -10.0% 1.9%II Market share in 2006-07 (till November 2006) 29.3% 22.2% 13.8% 7.7% 9.3%

Note 1. The above shading grades the players on various factors as

Strong Moderate Weak

2. Industry figures include figures for M&M, TAFE, Escorts, PTL and ITL Source: CRISIL Research

In the long run, Mahindra & Mahindra is expected to remain the leader in the tractor industry due to well-diversified product mix, strong pan India presence, cost-efficient operations and rising global sales. Now, post acquisition of Punjab Tractors, its leadership has become stronger. In total, it commands a 38 per cent market share. After the acquisition of Eicher Motor�s tractor division, TAFE has emerged a strong number two in the industry with better product portfolio and distribution network (although overlapping may cause some loss of share). TAFE�s share went up to 28 per cent after its acquisition of Eicher.


Escorts and International Tractors, with a market share of 14 per cent and 10 per cent, respectively, are expected to remain strong competitors in the medium-to-long term. International Tractors is expected to maintain its share as it would not be able to grow at higher than industry growth rate. Global players like John Deere and New Holland India are likely to provide strong competition to the other well-established players in the coming years, as they strengthen their Indian product portfolio and distribution network and remain major exporters. Smaller players like Force Motors, VST Tillers and HMT are likely to be marginalised further in the long run due to lack of diversified product portfolio, poor nation-wide distribution network and weakness in cost structure.


Demand projected to grow by 5-7 per cent up to 2012-13 CRISIL Research projects domestic tractor sales to grow at a CAGR of 5-6 per cent, close to the long term trend in growth rate, during 2007-08 to 2012-13. The projected growth rate is considerably lower than the near 20 per cent CAGR witnessed during 2002-03 to 2006-07. The structural growth drivers for tractor sales continue to be two-fold. Firstly, the growing need for farm power per hectare and increasing substitution of animate power for various farming operations. Here we believe that while states like Punjab and to an extent Haryana and western Uttar Pradesh have reached their potential, western and southern states have been moving from a stage of low penetration to moderate penetration. Increasing finance penetration, more affordable rates of finance have enabled a large number of farmers to own tractors. At the same time, economics of tractor operation has improved due to increasing custom hiring for agricultural purpose as well as other purposes including transport of farm produce, personal transport as well as transport of materials for road construction and other infrastructure projects. The rise in custom hiring and growing credit reach are likely to continue to drive penetration. We also expect replacement demand to grow in line with the ownership stock. However, we rule out significant growth acceleration to continue on two counts, one, because in some states the gap between current and potential penetration levels has reduced and two, since we believe that problems or perceptions related to credit quality, or inadequate irrigation will continue to constrain growth in the less penetrated states. From a cyclical perspective, we view a significant part of the growth in the past 5 years arising from a recovery following a sharp decline in 2000-01 and 2001-02. However, across states, sales as well as ownership stock had significantly exceeded the long term trend by the end of 2006-07. Since we do not expect any structural acceleration of growth, we expect a reversion in the growth rate trend. Further, channel inventories increased in 2006-07 and may require a correction in the near term. Hobby farming, new markets to boost Indian exports CRISIL Research has identified US, Canada and Australia as potential markets for hobby farming based on the agricultural scenario and population density of each country. These hobby farms require tractors from medium hp (31-40 hp) segment, which accounts for more than half of the total tractor sales in India. In the US, hobby farms account for more than 50 per cent of the total farms and the number of urban dwellers opting for hobby farming has picked up considerably in the last few years. With annual tractor sales in the US estimated to be around 250,000 units, the US market provides a huge potential (75,000-80,000 tractors based on a conservative estimate) for Indian exports. Similarly, Canada and Australia are also witnessing an increase in the number of people taking up hobby farming, which is again likely to boost export volumes of Indian players. CRISIL Research projects exports to grow at a CAGR of 15-18 per cent from 2007-08 to 2012-13, mainly driven by exploring new markets like Europe and Australia and increasing penetration in the existing markets especially

4.0 Demand outlook


the US, Africa and Latin America. Exports can grow at a higher-than-projected rate if Indian manufacturers are able to develop higher hp tractors that can cater to markets like Europe, Latin America, etc and the potential from hobby farming markets is realised fully. We conducted a regression analysis of tractor population against agricultural GDP and concluded that there exists a strong correlation between the two and the same is incorporated in our projections. Figure 1: Regression of tractor population against agricultural GDP

y = 5017075.21Ln(x) - 62856376.49

R2 = 0.93

1000000

1500000

2000000

2500000

3000000

3500000

4000000

300000 350000 400000 450000 500000 550000 600000

Agri GDP

Tra

cto

r p

op

ula

tio

n


Overall, CRISIL Research projects the total industry volume sales to grow by a CAGR of 5-7 per cent by 2012-13.

State-wise outlook We have carried out a state-wise analysis of various factors affecting demand and compared the likely demand potential from these states. Sales to grow slowly driven by rising custom hiring and increasing demand for higher farm power Growth in tractor volume sales in India has been driven by lesser penetration and rising farm incomes. State-wise tractor penetration (computed as tractor population per thousand hectares of net sown area) has been heavily skewed in favour of states like Punjab and Haryana, which were the early beneficiaries of the Green Revolution during the 1970s. But in the 1990s, other states started catching up with Punjab and Haryana due to improving irrigation facilities and tangible benefits of farm mechanisation. In order to derive the potential for fresh demand we have compared the state-wise tractor penetration with the following different parameters. We have conducted a regression analysis of state-wise tractor penetration with different parameters by drawing a line of best fit. States above the line are over penetrated while states below the line are under penetrated. • Irrigation intensity (Gross irrigated area as proportion of Gross cropped area): Indian agriculture, which

gambles on the monsoons, is predominantly dependent on the rainfall due to poor irrigation facilities


(irrigation intensity in India was only 40.3 per cent in 2003-04). Irrigation is a key driver of tractor demand as it ensures the farmer of assured water supply for harvesting. This in turn assures the farmer a fixed source of income, whereby he can invest in relatively expensive assets like tractors. In order to compare the future growth potential, we have compared tractor penetration with irrigation intensity across various states.

Figure 2: Comparing irrigation intensity and tractor penetration

MP

RAJ

ORI

GUJ

MAH KAR

UP

JK

WB KER ASM

AP

HRY PJB

HP

BIH

TN

y = 0.7887x - 7.8399

R2 = 0.7987

0

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30

40

50

60

70

80

0 20 40 60 80 100 120

Irrigation intensity (per cent)

Tra

cto

r p

enet

rati

on


• Proportion of land holdings above 2 hectares: In India, farm holdings are fragmented, as a huge proportion

of population is dependent on agriculture. Average land holding size per farmer in India is less than 2 hectares. A tractor is a relatively expensive tool for a farmer. Hence, only a few farmers with larger land holdings can afford a tractor. We have only considered farmers owning over 2 hectares of land as the addressable market for tractors. In order to compare tractor penetration across states, we have plotted the proportion of number of more than 2 hectare holdings to the total number of holdings in a state.

Figure 3: Comparing land holding pattern and tractor penetration

MP

RAJ

ORI

GUJ

MAH

KAR

UP

JK

WB KER

ASM

AP

HRY PJB

HP

BIH

TN

y = 0.6047x + 9.2939R2 = 0.2553

0

10

20

30

40

50

60

70

80

0 10 20 30 40 50 60 70

Proportion of land holding above 2 hectares (per cent)

Tra

cto

r p

enet

rati

on



• Cropping intensity (Gross cropped area as proportion of net sown area: Gross cropped area is the sum total of net sown area cropped once and the area cropped more than once. Higher cropping intensity will mean better farm incomes and hence the tendency to buy a tractor would be higher.

Figure 4: Comparing cropping intensity per ha and tractor penetration

TN

BIH

HP

PJB HRY

AP

ASM

KER WB

JK

UP

KAR MAH

GUJ

ORI

RAJ MP

y = 0.4984x - 45.01R2 = 0.3014

0

10

20

30

40

50

60

70

80

100 110 120 130 140 150 160 170 180 190 200

Cropping intensity (per cent)

Tra

cto

r p

enet

rati

on


• Flow of agriculture credit per hectare of net sown are: Nearly all the tractors are bought on credit.

Availability of credit acts as an important catalyst for creating tractor demand. Hence we have compared agriculture credit in a state to tractor penetration to assess relative penetration across states.

Figure 5: Comparison agri-credit per hectare and tractor penetration

TN BIH

HP

PJB HRY

AP

ASM KER WB

JK

UP

KAR MAH

GUJ

ORI

RAJ MP

y = 0.0014x + 9.1112

R2 = 0.3769

0

10

20

30

40

50

60

70

80

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Agri-credit (Rs per ha)

Tra

cto

r p

enet

rati

on


• Number of agriculture workers per hectare of net sown area: Availability of agriculture workers during

harvest time is crucial for farming. Lesser availability of agriculture workers will persuade farmers to opt for tractors. In order to compare availability of agri-labourers with tractor penetration, we have regressed total number of agriculture workers per hectare of net sown area with the tractor penetration across states.


Figure 6: Comparing agri-workers per ha and tractor population per ha

TN

BIH

HP

PJB HRY

AP

ASM KER WB

JK

UP

KAR

MAH

GUJ

ORI

RAJ

MP

y = -0.0035x + 26.13

R2 = 0.0074

0

10

20

30

40

50

60

70

80

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Agri-workers per ha

Tra

cto

r p

enet

rati

on


• State-wise agri-GDP (Rs �000) per hectare of net sown area: We have compared tractor penetration across

states with agricultural GDP per hectare of net sown area across various states. Figure 7: Comparing agriculture GDP (Rs '000 per ha) and tractor penetration

MP RAJ

ORI

GUJ

MAH KAR

UP

JK WB

KER ASM

AP

HRY PJB

HP

BIH TN

y = 0.0008x + 19.426

R2 = 0.0089

0

10

20

30

40

50

60

70

80

0 2,000 4,000 6,000 8,000 10,000 12,000

Agri- GDP per ha (Rs '000)

Tra

cto

r p

op

ula

tio

n


Comparison of tractor penetration with different variables Methodology We have compared the tractor penetration levels on various parameters and concluded that states under penetrated on four or more variables as under-penetrated. Similarly, states under penetrated on two or three variables are taken as moderately penetrated and states under penetrated on less than two variables as over penetrated. The table below indicates states, which are under, over or moderately penetrated on comparison with different demand drivers.


Chart 1: Evaluation of states on different variables Irrigation Proportion of land holding Agriculture Agriculture Overall intensity above 2 ha credit per

haGDP per ha conclusion

Andhra Pradesh U M U U UAssam O U U U UBihar U O O O OGujarat O U O O OHaryana O O O O OHP O U U U UJ&K U M O U UKarnataka O U U U UKerala M U U U UMP O U O O OMaharashtra O U U U UOrissa U U U U UPunjab O O O O ORajasthan O U O U MTamil Nadu O O U O OUttar Pradesh U O O O OWest Bengal U U U U UNote U: Under penetrated M: Moderately penetrated O: Over penetrated ha: hectare area Source: CRISIL Research

State-wise demand forecast Based on present penetration levels and the likely changes in major demand drivers such as irrigation, custom hiring and demand for farm power, CRISIL Research has estimated high/moderate/low growth states up to 2012-13, and hence, the likely sales (volume terms) by 2012-13. Chart 2: Projected state-wise growth and size matrix

Share in sales States

>5 per cent >1 and <=5 per cent <=1 per cent

High ASM, KER

Moderate AP, KAR, GUJ, MAH, RAJ, MP ORI, WB HP

Gro

wth

dur

ing

2007

-08

to

2012

-13

Low TN, HRY, UP BIH, PJB JK

MP: Madhya Pradesh; KAR: Karnataka; AP: Andhra Pradesh; ORI: Orissa; JK: Jammu and Kashmir HP: Himachal Pradesh; GUJ: Gujarat; RAJ: Rajasthan; TN: Tamil Nadu; BIH: Bihar; WB: West BengalUP: Uttar Pradesh; MAH: Maharashtra; PJB: Punjab; ASM: Assam; HRY: Haryana; KER: Kerala Source: CRISIL Research

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