Demand-supply imbalances cause for drop in growth -- Mr. Yash Mahajan, vice-chairman and managing director, Punjab Tractors

Raghuvir Srinivasan

Punjab Tractors is a good example of a professionally-managed company proving successful with in-house technology.

It is the second largest tractor manufacturer in the country today and has tremendous brand equity in the mature markets of North India. It has now set its sight on the South and the West, which are expected to be the markets of the future. The vice-chairman and managing director of the company, Mr. Yash Mahajan, replied to a faxed questionnaire from Business Line.

Excerpts from the interview:

What is the current situation in the tractor industry? Is the present drop in growth rate due to a genuine fall in offtake or demand-supply imbalances caused by over-supply in the market?

After sustaining a robust 14 per cent growth rate in 1994-98, the tractor industry's growth for the next two-three years had to come down as a natural process of alignment to the long-term growth of 8 per cent. Of course, product losses/unremunerative prices in a few States in the past few seasons added to the downtrend. But the biggest adverse impact in the market has been over-production and billing maintained by some lead players over the past two years. It is this practice that has been most responsible for the low 2-3 per cent growth of 1998-99 and 1999-2000.

With monsoon having performed well, the coming kharif harvest is expected to be good. Backed by improved agri-prices, the period after the rainy season is likely to witness an improvement in demand, although large inventory carryover would continue to act as a damper.

Is there a shift in the demand pattern from the lower horsepower ranges to the middle and higher horsepower segment? What does this imply for tractor producers?

Horse Power usage depends on the size of land holdings, geo-climatic and soil conditions of the concerned area and the price range of the available products.

Over the years, the principal segment has been the 30-50 HP range. In our view, this would remain broadly the same as future growth would come from middle, Western and Southern markets where the need is for this HP range. The doing away of the earlier differential excise duty in favour of the 25 HP range will also help demand in the principal segment. In our view, above 50HP segment would continue to be a narrow, bottom-of-the-table segment.

With the maturing of the markets in the Northern and sub-Gangetic regions, which are the areas of high growth potential in the future? How is Punjab Tractors placed to exploit the changing demand pattern?

Punjab, Haryana, Western and Terai pockets of UP were the prime areas of tractorisation from the early 1970s. These markets having matured, future growth will come from large Central and Eastern areas of UP, MP, Bihar, Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka West Bengal and Orissa where the current population and density is substantially lower than their potential assessed on Punjab/Haryana norms. Falling in between mature and emerging markets are Rajasthan and Gujarat.

Continuing enhancement of Swaraj dealer network and further intensification of market specific model/variants would stay as the principal planks supporting PTL's efforts to improve the market share in these States. Efforts in this direction are yielding results -- the share in the emerging markets in April-July went up to the +20 per cent range from 12-18 per cent average of past years.

The industry was exposed to competition from multinationals more than two years ago. What has been the experience in this period? What are the strengths of the Indian players vis-a-vis the multinationals?

Following economic liberalisation, three global players have already entered the Indian tractor scene with their offerings. Over the last 2-2 1/2 years of their operations, their combined sales are understood to be below 6,000 units against average annual sale of existing Indian players of 2,50,000 tractors.

Indian companies have long experience of operating in the vast domestic market, good volume levels, broader product ranges and retail outreach, and unlike other auto segments, have always faced intense competition amongst themselves. Remember, all brands except Swaraj have had overseas tie-ups and support since beginning. Further, their capacities have been created at much lower costs than those of current MNCs entrants, and the Indian farmer is among the most price-sensitive in the world.

Having said this, PTL has accepted without discussion and debate that the new generation MNCs are sophisticated, high capacity and serious players, capable of further intensifying the competitive pitch. With this assessment, PTL has already broadened its product portfolio -- three new models in calendar 1999 and has introduced several upgrades/new features in all its models. Going forward, both manufacturing, product technology and service facilities will continue to receive priority focus.

What are the prospects for Indian tractor manufacturers in the export market?

The African countries, which provide a ready market for Indian type of tractors, continue to suffer from lack of finance, reducing actual export performance to the minimum.

The principal emerging market for Indian tractor exports, perhaps surprisingly for many, is the US. In the US, market for up to 50 HP tractors used for secondary operations is around 60,000 tractors, more than the demand of Punjab and Haryana combined. Because of large cost-advantage from current local volumes, and improved manufacturing and product technology, Indian companies can aim and achieve a significant share in this segment of the US market. This is assuming they meet expectations on quality/feature/delivery fronts and provide topline after-sales-service.

Technology has not really been a problem for Indian companies till now. Will it continue this way or will Indian companies need to absorb technology, especially in the high horsepower segment?

Steady 7-8 per cent growth over the past 25 years, coupled with intense internal competition, has led to improvement and upgradation in both manufacturing and product technology of India's lead players. With the entry of MNCs, the pace of progress in these areas will have to further go up in the Indian companies which have over the last three decades built up volumes, brands and sales/service outlets across the country.

PTL has specific plans for steady upgradation of products and features and service facilities. Equally, its manufacturing facilities are in the process of being upgraded to global standards in all its aspects. Setting up of new manufacturing facilities dedicated to Swaraj exports is also on the anvil.

What has been your experience in the South Indian market where Swaraj is a relatively new brand?

The farmer as a customer is generally the same all over India -- a person with income flows for four-five months of the year against 12 months expenditure flows. Therefore, he is cautious, slow (but sure) to place trust and faith in relationship and extremely price sensitive. However, geoclimatic and soil conditions demand variation in tractor needs from place to place.

PTL has always kept these aspects in mind while choosing its dealers and in establishing a code for our behaviour towards the customers. Indeed, it is a part of PTL's mission statement to provide a quality product with distinctive features at reasonable prices, for durable customer satisfaction. PTL has a number of market-specific variants to suit soil and working conditions of Southern/Western India, which are predominantly rice-cultivating and, in many places, represent the virgin territory.

These practices have been carried since inception. Therefore, as we enlarged our dealerships in these territories, the emphasis was on these very aspects. The response has been positive. For example, for the new Swaraj-744 model (48 HP), PTL's first offering in the 40-50 HP range, Andhra has been the largest market in April-July 2000 sales followed by Punjab, MP, UP, Tamil Nadu.

On the strength of our product portfolio now spread across all segments and expanded dealer net work, Swaraj sales in Southern belt would show upward swing in the coming years.

What are the medium-to-long-term prospects for the tractor industry in India? What, in your opinion, would be a sustainable future growth rate for the industry?

India's tractor industry, a mere 4,000 in 1960-61, has grown to become the world's largest. Yet, today's population base of 2.4 million tractors is less than 50 per cent of the country's potential when reckoned as per tractor density of Punjab and Haryana 15 years ago, linked to the respective State's irrigation potential.

Looking from another angle, 50 per cent of India's arable area, that is, more than 80 million hectares is covered by 10 million holdings. Even if half these holdings come to own tractors, it would push total tractor population to the level of five-million plus.

Past long-term growth rates have been:

25 years: 9.1 per cent

15 years: 8.2 per cent

10 years: 8.2 per cent

5 years:10.2 per cent

Against the above background and considering that India has targeted a food output of 310 million tonnes by 2009-10, against the 1999-2000 production of 206 million tonnes, a secular demand of 5-6 per cent (on a cautious basis) over next 10 years appears sustainable. It is important to remember that in India, tractor is much more than a farm equipment -- it serves as a power and a haulage source too, generating additional income to the owner/farmer.

What are PTL's own plans for the future? Where do you expect the company to be three years from now in terms of market-share?

PTL has always believed that it has a long-standing relationship with the farm and farming community -- the national heritage as well as the national agenda -- which provides us with immense growth opportunities. We would, therefore, seek quality sales growth through focus on the tractor industry.

Since long, PTL has had a global thinking which has

enabled it upgrade its models and add new features from time to time. It is now poised to become a global player on the strength of a strong R&D set-up and in-house engineering and technology base supported by global level manufacturing facilities. Combined with expanded product portfolio and dealer/service network, PTL is on the thresh-hold of achieving a quantum jump in the next three years.

On a conservative basis, Swaraj share in the domestic market is expected to increase by 1-2 per cent every year over next three years.