Demand Estimation of Indian Tractor industry

by puneetjaggi (student)

University Degree Business and Administrative studies

Objective:

Demand Estimation of the Tractors industry in India.

Introduction:

Tractor industry plays an important part as agriculture sector has a major contribution to India’s GDP. Tractors are part of agricultural machinery industry. Tractors came to India through imports and later on were indigenously manufactured with the help of foreign collaborations. The manufacturing process started in 1961-62. Indian tractor industry is relatively young but now has become the largest market worldwide.

Higher productivity and greater output are the two major contributions in farm mechanization. Tractors form an integral part of farm mechanization and have a crucial role to play in increasing agricultural productivity. Tractor is a highly versatile piece of machinery having a multitude of uses, used in agriculture both for land reclamation and for carrying out various crop cultivation and also employed for carrying out various operations connected with raising the crops by attaching suitable implements and to provide the necessary energy for performing various crop production operations involved in the production of agricultural crops. Tractors are capital intensive, labour displaying used as a mode of transport, in electricity generation, in construction industry and for haulage operation. It has now become an integral part of farm structure . Indian tractor industry is comparatively young by world standards have expanded at a spectacular pace during last four decades. Consequently it now occupies a place of ride in India's automobile industry. U.S.A., U.S.S.R. and only a few Western European countries exceed the current production of tractors in India, but in terms of growth India's growth is unmatched even with countries of long history of tractor manufacturing.

The spectacular achievement reflects the maturity and dynamism of tractor manufacturers and also the policies adopted by the government to enable it to effectively meet the demand. The tractor industry in India has made a significant progress in terms of production and capacity as well as indigenisation of technology. It is a typical sector where both imported technology and indigenous developed technology have developed towards meeting the overall national requirements. The global spotlight on tractors manufacturers certainly interms of volume seems to be swinging away from the USA, UK and Western and Eastern Europe towards India where growth in the number of producers and the total volume inrecent years have been impressive. In India tractor industry has played a vital role in the development.

India's gross cropped area is next only to United States of America and Russia and long with fragmented land holdings has helped India to become the largest tractor market in the world. But it drops to eight position in terms of total tractor in use in the country when compared to international figures, only 3% of total tractors used all over the world . It is to be noted that while the overall automobile industry is facing recession the tractor industry is growing at 9%.About 20% of world tractor production is carried out in our country only. The arable land in India is high as 12% of the total arable land in the world. Tractor market in India is about Rs6000 crore. On an average around 400000 tractors are produced and their sale is 260000.

Key features related to Indian Tractor Industry:

One third of world’s tractor production is in India.
Total turnover 12,000 Crores.
Total investment 9,000 Crores
Employment 32,000 people directly, 1, 60,000 people indirectly.
Witnessed a compound annual growth rate of 12.8% over the last 5 years in the tractor

industry where a other Passenger vehicle sector was struggling to retain the growth rate.

Tractor market has grown at a CAGR of 12.8%, in the last five years:

(Source : CMIE data base & ICRA )

Current trends in Industry in India:

The Indian tractor industry has experienced strong volume growth during FY10-9mFY12 on the back of favourable cyclical and structural demand drivers. Tractor sales volumes remained robust through most of FY12 despite macro-economic headwinds.

Growth during FY10-9m FY12:

(Source : CMIE data base & ICRA )

Growth trends on a Regional basis:

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industry where a other Passenger vehicle sector was struggling to retain the growth rate.

Tractor market has grown at a CAGR of 12.8%, in the last five years:

(Source : CMIE data base & ICRA )

Current trends in Industry in India:

Growth during FY10-9m FY12:

(Source : CMIE data base & ICRA )

Growth trends on a Regional basis:

The western and southern parts of the country have performed above par while the eastern and central parts have reported muted growth figures in 9mFY12. Further, the northern region, which is the largest tractor market of the country, grew at a healthy pace during the period, benefiting from sustained replacement demand. The demand outlook from southern India continues to be robust over the medium term and many OEMs are shifting focus from saturated markets to relatively under penetrated geographies in southern states.

Major players & their Market share:

Currently, there are as many as 10 players (including MNCs) in tractor manufacturing, in India.

With relaxation of FDI in Agriculture large international participants entered the market either through fully owned subsidiaries or through joint ventures
Tractor industry has relatively low entry barriers in terms of technology, costs involved in branding, distribution network..
About 90% of the market is shared by only the top five to six players.
Tractor industry witnessed consolidation in the years 2005 & 2008 with merger of manufacturers such as Eicher & Punjab tractors with TAFE and M&M.
Tractor and Farm Equipment Limited (TAFE) has the largest market share in India at ~21%, while other players like Escorts (~12%), John Deere (~10%), ITL (~8%) and New Holland Tractors (~6%) constitute the balance.

(Source : Indian Tractor Manufacturer association )

Segment-wise sales:

The Indian tractor market is broadly classified into five segments: less-than-20 hp (horsepower), 21-30 hp, 31-40 hp, 41-50 hp and 50+ hp.
India has been predominantly a 31-40 hp market, ~42% of the industry.
However, during the last 5 years, there has been a shift to higher hp tractors. The share of 40+hp tractors has gone up from 29% in FY05 to 44% in FY11, clearly indicating the multi-use of tractors.

(Source : Indian Tractor Manufacturer association )

The domestic tractor market is showing some signs of weakness over the last couple of months (January-March) posting a drop in demand across the industry. An improvement is only expected with the harvest season around April. The poor pick-up has been attributed to lower farm incomes on the back of increased agricultural supply, while both tractor prices and other costs such as labour have steadily gone up. Higher interest rates, which finance 80 per cent of purchases, have also been blamed.

Indian Tractor Industry – Manufacturing Capacity:

(Source : CMIE data base & ICRA )

Prolonged industry up-cycle and favourable demand outlook over the medium term have prompted market participants to enhance their manufacturing capacity. Almost all the major manufacturers have announced capex plans for the next 1-2 years and the industry’s capex budget for the FY12-FY14 period is estimated at Rs. 1400 crore. During YTD FY12, additional manufacturing capacity of 57,000 units has come on-stream. As per estimates, a large capacity of 2.8 lakh units is expected to get commissioned in 2012-2014.

Capacity Enhancement Projects Announced by Market Participants:

(Source : ICRA report )

Drivers of Tractor Industry Growth:

Primary demand emanates from agriculture industry and secondary demand is due to usage as transport and load carrier. The demand-side economics in the tractor industry continue to find favour from factors such as:

Support from the Government of India (GOI) towards rural development and agri-mechanisation.
Change agricultural output (Agri GDP).
Continuous hike in MSP for all key crops like wheat, paddy, sugar cane, cotton.
Increase in Credit flow to agriculture Sector.
Scarcity of farm labour especially during the sowing season.
Increase in credit flow to agriculture.
Increase in non-agri application of tractors as in infrastructure projects.
Growth in niche power segments (<20HP and >50HP) and untapped territories.
Healthy export sales.
Spending of Government of India on Agriculture and allied activities.
Increase in Food inflation.
Tightening of Vehicle financing interest rates by RBI.
Monsoon Rainfall.
Average life cycle of Tractor.
Increase in exports.
Fuel Price.
Change in steel price.
Arable land.
Real estate growth and hence more demand for industrial tractors.

But of all these factors we have considered the following mentioned factors which significantly affected the demand of tractors:

Area under cultivation:

The percentage of area under irrigation is particularly high in states such as the Punjab (98% under irrigation), Haryana (88.5%), Uttar Pradesh (74.9%) and Bihar (63.1%), which have amongst the largest population of tractors in the country. The ability of a farmer to invest in farm mechanisation is also contingent on the cash flows from the crop. Nevertheless, India has experienced healthy monsoon rainfall over the last few years, which has certainly helped rural prosperity.

MSP of sugarcane, wheat & paddy :

Improvement in rural liquidity on the back of increase in minimum support prices (MSP) offered by the government as evident from the charts below. Higher income levels coupled with appreciating land value has enabled a larger farm audience to adopt tilling and planting machinery.

Steel price:

About 18,000 kg of steel is used in a tractor manufacturing, which is one of the major input costs. During past 5-6 years steel prices have increased significantly causing additional burden on the tractor manufacturers. These high input steel prices resulted in increase in the price of the tractor, which had negatively impacted tractor demand.

Credit input from Govt:

There exists a strong correlation between farm mechanisation and availability of agri-credit. While scheduled commercial banks are mandated by the Reserve Bank of India (RBI) to meet a target of 18% of their net banking credit for the agricultural sector, growth is driven by increased lending by non-banking finance companies, especially in the southern states. Institutional credit to the farm sector has increased at a CAGR of 19.9% from FY06 to Rs. 4,46,779 crore in FY11 and expected to cross Rs. 5,00,000 crore in FY12. Apart from increase in the magnitude of credit availability, the sector has also benefited from introduction of innovative credit delivery schemes such as the Kisan Credit Cards (KCC). However, the availability of credit has not been uniform throughout the country. Better finance penetration in Punjab, Haryana and Uttar Pradesh has led to higher farm mechanisation in these states However, limited activity of financers in certain pockets like the eastern region has prevented these states from achieving their potential tractor penetration.

Demand Equation:

Q= f (Area, Sugarcane MSP, Wheat MSP, Credit, Steel price, Paddy MSP)

Our regression model is:

QTr = C + B1 (Ar) + B2 (Ps) + B3 (Pw) + B4 (Cr) + B5 (Pst) + B6 (Pp)

Ar = Area of land in Million Hectares

Ps = MSP of sugarcane in Rs/quintal

Pw = MSP of wheat in Rs/quintal

Pst = MSP of steel in Rs/tonne

Pp = MSP of paddy in Rs/quintal

Cr = Credit input from Govt in Rs crores

We initially collected the actual parameters influencing demand of Tractors and plotted them on a table. (Refer Table A)

Table A : Actual Parameters Data (Source: Ministry of Agriculture and Tractor Manufacturers Association (TMA) )

From data collected we conducted a regression analysis (Refer Table 1) through E-views.

Table 1 : Regression Analysis of parameter Area, Sugarcane MSP, Wheat MSP, Credit, Steel price, Paddy MSP

Notes to analysis:

We found after the analysis that the p-value of Sugarcane MSP came out to be insignificant.
We removed the Sugarcane MSP since the p-value is greater than 0.05.
D-W value is quite high 3.10

Table 2: Correlation matrix between independent variables. Blue colour shows correlation between crops MSP’s

As per Table 2, when we are correlate one crop’s MSP against the other crop’s MSP, we find a good correlation between them. Because the Govt raised the MSP for all crops each year, the MSP hike trend in all crops is similar over the years.

Since production of Wheat is the highest and it creates most significant effect of tractor sales, so we took into consideration only Wheat MSP and ignored other crop’s MSP in order to avoid a repetition of the independent variables.

We then conducted a regression analysis (Refer Table 3) between Area, Wheat MSP, Credit and Steel price. We find that p value of steel price is 0.1250 which is higher than 0.05 and thus not significant. Thus we rejected the independent variable Steel price.

Table 3 : Regression analysis using parameters Area, Wheat MSP, Credit and Steel price

We again conducted regression analysis (Refer Table 4) of the remaining variables Area, Wheat MSP and Credit. We find that p value of independent variable Area to be 0.07 to higher than 0.05 and thus not significant. Thus we reject the variable steel price.

Table 4 : Regression analysis using parameters Area, Wheat MSP & Credit.

We then conducted regression analysis (Refer Table 5) between the final two variables Wheat MSP and Credit. We find that the p value for all variables is less than 0.05. Thus both variables Wheat MSP and Credit are significant. Also, D-W value is 1.92.

Table 5 : Regression analysis using parameters Wheat MSP & Credit.

Our Final Equation after complete demand estimation of tractor industry:

QTr = 226564.5 + (-226.2161) Pw + (1.264080) Cr