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"Reduction of high inventory levels will be a critical determinant of the likely wholesale volume growth in the domestic tractor industry over the next 12-18 months.''

MUMBAI, June 11

A NORMAL monsoon this fiscal is extremely crucial for the tractor industry's performance, as it seeks to reduce high receivables built up over the last few years, a sectoral study by Crisil has said.

According to it, year-end receivables of the five major domestic tractor players (Mahindra & Mahindra, Escorts, Punjab Tractors, Tractors & Farm Equipment and Eicher) rose from less than a month's sales in 1996-97, to over five-months' sales in 2002-03.

"The receivables were around 65,000 tractors as on March 31, 2003, which were equivalent to almost half their annual wholesale volumes in 2002-03. This is despite manufacturers sharply cutting wholesale volumes in 2002-03, to around 1,60,000 units from around 2,16,000 units in 2001-02, in response to weak demand conditions,'' it said. The five players account for 90 per cent of the industry volumes.

Total inventory in the distribution pipeline also includes pile-up from channel financing and advance sales. As producers' working capital levels got stretched due to dealer credit, channel financing from FIs and NBFCs to enhance the credit available to dealers, gained popularity.

Weakening demand and rising pressure from manufacturers to push volumes saw advance sales by dealers, wherein the dealer hands over the tractor to the farmer for a small token amount.

Thus, the overall inventory in the pipeline was around seven-months' sales (about one lakh units) at the end of the financial year 2002. "The year-end levels for 2002-03 are estimated to be marginally lower. Reduction of high inventory levels will be a critical determinant of the likely wholesale volume growth in the domestic tractor industry over the next 12-18 months,'' the study said.

Manufacturers' wholesale push and advance sales by dealers, cause mismatch between wholesale and retail volumes. Buoyant agriculture, courtesy good rains, catalyses retail tractor sales and something sorely needed in the financial year 2004 to correct pile stocks even as players took steps in the financial year 2003 to restrain wholesale volumes. The latter at 1,60,000 units in 2002-03 is estimated to be "largely in line with retail volumes.''

However, the likely weak retail volumes of the next 12-18 months coupled with the existing inventory could exert margin pressures over the medium term. Tractor players' ability to control bad debt and sustain their high working capital levels would be a key determinant of their future credit risk profile, Crisil said.

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