>AUTOMOBILE SECTOR: Tractor demand - more stable than Cars / M & HCVs trucks

There have been rising concerns on the sustainability of tractor demand owing to certain adverse developments and the strong performance of the tractor segment over the last few years (17% CAGR during FY08-11 and 20% YTDFY 12)


Recent adverse developments like (1) declining Agri term of trade (ATOT)(2) lack of buying support by FCI, resulting in produce being sold below MSPs and (3) slowdownin agri credit/rising NPAs (of PSU banks) have raised concerns over cash flows of the farmers


Some of these concerns are overdone, while others are still nascent. If these concerns materialize, then there can be pressure on tractor demand in the short term. However, this would be a temporary blip as structurally, demand continues to be on an upswing and it is nowhere near its peak. Our confidence stems from a number of indicators highlighted below

• Indian tractor industry is more than stable Card/M&HCVs. Since 1973, the tractor industry has registered a CAGR of 8.6%.

• While India's tractor penetration at 19 per 1000 hectares appers reasonable, we believe it is misleading. Penetration per 1000 agricultural people is a better indicator. At 5 per 1000, India's tractor penetration is among the lowest. 

• Across the globe, there has been a sharp reduction in population relying on agriculture as a source of income.

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