Future trends: Critical factors

Raghuvir Srinivasan

ONE THING that is clear even now it is that the largest tractor market in the world in unit terms is going to witness tremendous competition of the kind that it has not seen till now.

This is because of two main reasons. First, is that the high growth markets in India -- Punjab, Haryana and western Uttar Pradesh -- have attained a saturation point so far as sales of new tractors goes. The offtake in this region will, at best, come from replacement demand and a small part from those settling for a second tractor.

Second, this means that the southern region, where farm mechanisation is low, is the high growth market of the future. This has naturally forced all the companies to make a beeline to this market which means that competition is going to be very stiff. An extra dimension to this would be the competition from multinationals whose products in the higher horse-power range may be suitable for the hard black soil that obtains in States such as Maharashtra and Gujarat.

The competition would have a natural impact on the margins of the companies operating in this industry. Not only will cash-and-carry be passe but even credit periods could become longer with the resultant impact on working capital and interest costs. Already, the margins of the companies indulging in the `advancing' strategy has come under pressure due to this. Even a conservative company such as Punjab Tractors had to extend credit to maintain sales in a falling market. ``Given the magnitude of change in tractor market conditions, the company has had to extend selective credit to support its sales operations, the first time after nearly 12 years,'' says the company's Directors Report for 1999-00. This is a significant pointer to the present overall market conditions.

While at the macro-level, offtake of tractors would depend on the performance of the agricultural sector, any sustained growth can only happen subject to some conditions being satisfied. First, would be land reforms. The increasing fragmentation of holdings is having a natural fallout on the demand pattern for tractors. While on the one hand, the need for a tractor is obviated because of the small farm size, even where the farmers decide to buy one it is a low horse-power tractor. Unless consolidation of land holdings happens, farm mechanisation cannot take off on a large scale.

Second, the government needs to catalyse investments in agricultural infrastructure such as cold storages, set up organised markets in every town where farmers can bring in their produce and improve logistics for transportation of agricultural produce. This is absolutely necessary as preserving and transporting the produce to the market is as crucial as managing the crop itself. Finally, agricultural commodity prices, which have been rather unremunerative in recent times, need to pick up if farm incomes are to improve. Ironically, the bumper crops in recent times in commodities such as wheat and rice are themselves responsible for the falling prices.

Only an improvement in the above areas can ensure a sustained demand for tractors in the long term. Though the Indian market is strong on volumes, the fact is that it does not measure up well with the developed world if one compares the penetration levels in terms of horse-power per hectare. This means that there is a lot of potential for farm mechanisation in spite of the already large size of the market.

For the tractor companies, it could be a tough time in the medium-term as they grapple for a share of a market that is going to grow rather slowly. It does appear as if the past growth rates of around 15 per cent are now history. Even when the industry gets back to an even keel, growth may average just about 10 per cent. Of course, this does not account for any supply-push that can emanate from the high installed capacity and number of players in the country.

In the near term, the current year may not be very good for the industry. Companies such as M&M, PTL, TAFE and Escorts are the ones that are strongly positioned to exploit future growth, though the last named is still to prove itself convincingly in the new avatar, minus the collaboration with Ford New Holland. These companies have demonstrated the ability to develop models in tune with changing market conditions. Besides, they are also well entrenched in terms of taking on competition from multinationals. Importantly, they have strong balance-sheets and genuine brand equity -- an important requisite in an industry where relationships matters a lot.

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Investors can consider buying into PTL at current prices while investment in M&M can wait till the performance of the company becomes clear after the first-half results come in. The worry regarding M&M is that it is not doing too well in the multi-utility vehicle segment where it is on the verge of launching its new range of vehicles based on the Project Scorpio platform next year. Investment in Escorts and Eicher can be put off for the moment.