Analytical Contacts: Subrata Ray Anupama Arora

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1 Analytical Contacts: Subrata Ray Anupama Arora Rohan Kanwar Gupta INDIAN TRACTOR INDUSTRY Healthy monsoon precipitation has helped boost farm sentiments; demonetization to impact industry over the short term December

2 TABLE OF CONTENTS 1. Overview Industry Sales Update Trend in Monthly and Quarterly Sales Volumes 8 3. Agri & Monsoon Update Industry Sales Trends Market-share and growth rates of OEMs Trend in HP wise sales Snapshot of HP segment Region Wise Sales Trends Trends in Domestic Sales Trend in Export Sales Special Comments: Market Profile (Eastern Region) Sale Volume, Market Share and key Characteristics: Rajasthan Sale Volume, Market Share and key Characteristics: Haryana Raw Material Price Trends Tractor Industry: Outlook Financing Environment Trends Key Takeaways from Channel Check Outlook Tractor Industry: Outlook ICRA Ratings in Tractor Industry Quarterly Performance trend of listed tractor OEMs Escorts Limited Mahindra and Mahindra Limited VST Tillers Tractors Limited

3 LIST OF EXHIBITS Industry Sales Update Exhibit 1: Monthly Tractor Sales Volumes (Domestic) Exhibit 2: Quarterly Tractor Sales Volumes (Domestic + Exports) Agri & Monsoon Update Exhibit 3: Performance of South West Monsoon Rainfall Exhibit 4: Trend South West Monsoon Rainfall over the years Exhibit 5: Region wise Monsoon Precipitation Exhibit 6: Trend in Crop Production Exhibit 7: Trend in Reservoir Storage Levels Exhibit 8: Trend in Rabi Sowing Industry Sales Trends Exhibit 9: Market Share Trends Domestic Exhibit 10: Trend in Growth Rates of Various OEMs Domestic Exhibit 11: Market Share Trends Region wise Engine HP Wise Trends Exhibit 12: Engine Capacity-wise Segment Mix (Domestic) Exhibit 13: HP Orientation Key Market Players Exhibit 14: Comparative Profile of OEMs in HP Segment Region wise Trends Exhibit 15: Sales Mix across Regions Exhibit 16: Growth Rates across Regions Exhibit 17: North Region - Yearly volume Trends Exhibit 18: North Region - State-wise Monthly Growth (YoY) Exhibit 19: North Region Market Characteristics, Demand Indicators Exhibit 20: North Region - Market Share Trends Exhibit 21: North Region - HP-wise Trends Exhibit 22: South Region - Yearly volume Trends Exhibit 23: South Region - State-wise Monthly Growth (YoY) Exhibit 24: South Region Market Characteristics, Demand Indicators Exhibit 25: South Region - Market Share Trends Exhibit 26: South Region - HP-wise Trends Exhibit 27: West Region - Yearly volume Trends Exhibit 28: West Region - State-wise Monthly Growth (YoY) Exhibit 29: West Region Market Characteristics, Demand Indicators Exhibit 30: West Region - Market Share Trends Exhibit 31: West Region - HP-wise Trends Exhibit 32: Central Region - Yearly volume Trends Exhibit 33: Central Region - State-wise Monthly Growth (YoY) Exhibit 34: Central Region Market Characteristics, Demand Indicators Exhibit 35: Central Region - Market Share Trends Exhibit 36: Central Region - HP-wise Trends Exhibit 37: East Region - Yearly volume Trends Exhibit 38: East Region - State-wise Monthly Growth (YoY) Exhibit 39: East Region Market Characteristics, Demand Indicators Exhibit 40: East Region - Market Share Trends Exhibit 41: East Region - HP-wise Trends Export Trends Exhibit 42: Annual Trend in Export Volumes Exhibit 43: OEM-wise Split: Export Volumes Special Comments: Eastern Region Exhibit 44: Trend in Tractor Sales Rajasthan Exhibit 45: Market Share Rajasthan Exhibit 46: HP-wise Split Rajasthan Exhibit 47: Trend in Tractor Sales Haryana Exhibit 48: Market Share Haryana Exhibit 49: HP-wise Split Haryana Raw Material Price Movement Exhibit 50: Raw Material Price Trends Outlook Exhibit 51: Trend in Delinquency Levels 90+ DPD levels Exhibit 52: Trend in Annual Tractor Sales Volumes (Domestic + Export) Exhibit 53: Outstanding ICRA Ratings Exhibit 54: Rating Transition over the Years Exhibit 55: Financial Performance: Aggregated Numbers 3

4 INDIAN TRACTOR INDUSTRY Demonetisation a near term negative for the industry December 2016 Overview Domestic volumes increase by 25.2% in April-October FY2017; exports volumes remain flat Domestic tractor industry volumes have grown at a healthy pace, led by improvement in farm sentiments on the back of a normal monsoon Domestic tractor volumes have posted a recovery since the beginning of the current fiscal; the volume growth in festive months has been more pronounced with reported growth of 49% in September2016 in anticipation of bumper festive growth followed by 34% in October The key driver of recovery in current fiscal has been improvement in farm sentiments led by healthier southwest monsoon (97% of Long Period Average) as compared to previous two fiscals after a good rabi harvest in April There has been a recovery in tractor volumes across most large tractor markets, with a pan India growth in volumes of 25.2% in 7m, FY2017 (YoY basis). While agri demand has shown signs of improvement and non-agri demand has also picked up in certain regions, thereby contributing to the industry growth. Tractor exports growth, which moderated in FY2016, has remained weak during the current fiscal; the weak demand in the global markets has led to stagnant volumes in 7m, FY2017. Although OEMs continued to take initiatives to enhance their distribution networks in various geographies and launched products tailored for specific markets, the weak demand in the global markets has constrained export volumes. M&M further strengthens its market leadership position M&M extends its market leadership position in the current fiscal; TAFE has struggled, losing market share across all regions M&M has further strengthened its market leadership status, with the OEM now constituting about 44% of the total domestic industry volumes (in 7m, FY2017). The company has gained market share across all regions, benefiting from strong brand recognition, enhanced financing tie-ups and dealer penetration. TAFE, despite continuing to be the second largest player, has lost market shares across nearly all regions. ITL, which had seen market share expansion over FY2012-FY2015, has failed to gain further market share and continues to remain the third largest player in the industry. Escorts, has gained market share across all regions, benefitting from enhanced management focus and improved product portfolio post new launches. John Deere has followed up its market share gains in FY2016 with further gains in the current fiscal (7.0% market share in 7m, FY2017); the increase in market share has been most pronounced in the Southern and Eastern regions. 4

5 Overview Recovery in demand seen at a pan-india level; only select pockets of Northern region continues to struggle Healthy volumes sales in the festive season helped even the northern region to report a growth in volumes in the fiscal till date The growth trends in the domestic market over the past 2-3 years have not been uniform across regions, with the southern region outpacing growth across all others regions on a consistent basis. The southern region has continued its growth story in the current financial year with the growth in volumes in the region being led by a robust demand in states like Andhra Pradesh, Tamil Nadu and Karnataka, on account of healthy monsoon precipitation and benefitting from various government programmes. The eastern region, which had also been able to withstand the weakness in domestic demand during FY , has continued to benefit from various government initiatives to boost farm mechanisation in the region and has continued its growth story in the current financial year. A healthy monsoon precipitation in the current fiscal has also led to an improvement in farm sentiments in the western and central regions, which had been severely hit on account of weak farm sentiments caused by the debilitating demand drivers during FY As such, only the northern region continues to suffer from weak farm sentiments, reporting contraction in tractor volumes for a large part of the current fiscal. The variation in growth rates across regions has led to a significant change in regional mix; although the northern region continues to constitute a majority of the domestic volumes, its contribution has declined from around 40% in FY2015 to 34% in 7m, FY2017. On the other side, strong growth seen in the southern region has helped increase its contribution from levels of 14% in FY2015 to 20% in 7m, FY2017. Healthy monsoon has lifted farm sentiments; advance estimates indicated a healthy increase in crop production Healthy monsoon precipitation in the current fiscal after deficient monsoons in the past two years has boosted farm sentiments After two deficient monsoons in the past two years, the country recoded a normal south west monsoon performance in the current fiscal (97% of LPA); although the precipitation was lower than initial forecasts of the Indian Meteorological department (106% of LPA); a healthy spatial and temporal distribution of rainfall on the back of two deficient spell of south west monsoon helped improve farm sentiments. The First Advance Estimates of kharif crop production released in August 2016 indicated a sharp increase in production of key crops, taking cue from an increase in kharif crop sowing area and a healthy monsoon precipitation as compared to previous two fiscals. The positive estimates coming on the back of estimates of a healthy rabi production during the start of the fiscal has helped boost farm sentiments significantly. If the estimates materialize, then farm cash flows are expected to mark a healthy improvement in the current fiscal. 5

6 Overview Outlook: Demonetization to adversely impact industry volumes over the short term The tractor industry witnessed a spike in domestic volumes since April 2016 with farm sentiments uplifted by reasonable rabi crop production, healthy rainfall precipitation as well as government support programmes. Although monsoon precipitation was lower than initial forecasts, it still marked improvement over the precipitation during the previous two fiscals. Buoyed by a healthy monsoon, Kharif sowing was healthier than previous year; higher sowing coupled with improved yields is likely to aid growth in agricultural production. The healthy south west monsoon also helped replenish reservoir levels across various regions to an extent, which is likely to aid the winter crop. Factors such as financiers reviving interest towards the sector in view of the expected improvement in farm cash flows as well as recovery in demand from commercial applications also supported volumes. Demonetization to lead to short term pain for the farming community; industry sales volumes growth to be stunted While the improved farm sentiments could have driven a healthy double digit growth in the volumes during the current fiscal, the recent demonetization by the Government of India would adversely impact sales volumes over the near term. As the ban coincided with the timelines of kharif harvest being available for sale, the inadequate liquidity in the supply chain has adversely impacted realizations besides the collections related to the sale of kharif output. This apart, rabi sowing could also be adversely impacted as the cash crunch has limited the capacity of farmers to purchase new seeds and fertilizers and could eventually have a negative bearing on rabi output. With District Central Co-operative barred from accepting old currency, the credit worthiness of associated farmers may deteriorate, thereby affecting their ability to borrow for purchases for the next season. Overall, the short term impact of the demonetization is likely to be adverse for the farming community, offsetting the positives ushered by better monsoon precipitation this year. Although the government has taken several steps to improve liquidity for farmers, normalization of cash availability in the rural ecosystem is likely to take some time. Although the domestic sales volumes have grown at a strong pace in the current fiscal till date, the demonetization is likely to adversely impact the industry volumes over the next few months. ICRA thus forecasts a growth of 9-10% in tractor volumes (domestic + exports) in FY2017, keeping in mind the impact of demonetisation over the near term. In the long run, ICRA continues to maintain a volume CAGR of 8-9% for the industry over the next five years as long term industry drivers remain intact. The government of India (GOI) remains committed towards rural development and agrimechanization, a critical component in improving the state of agriculture in the country. Also, continued support towards enhancing irrigation penetration through fresh allocations would reduce rainfall dependence over long term. This coupled with other factors such as increasing rural wages and scarcity of farm labour is likely to aid growth in industry volumes over the long term. 6

7 ICRA Contact Details CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon Ph: , Fax; REGISTERED OFFICE 1105, Kailash Building, 11 th Floor, 26, Kasturba Gandhi Marg, New Delhi Tel: Fax: MUMBAI Mr. L. Shivakumar Mobile: rd Floor, Electric Mansion, Appasaheb Marathe Marg, Prabhadevi, Mumbai Ph : , /53/62/74/86/87 Fax : shivakumar@icraindia.com GURGAON Mr. Vivek Mathur Mobile: Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon Ph: , Fax; vivek@icraindia.com CHENNAI Mr. Jayanta Chatterjee Mobile: Mr. P Kalaivanan Mobile: th Floor, Karumuttu Centre, 498 Anna Salai, Nandanam, Chennai Tel: , /9659/8080 Fax: jayantac@icraindia.com p.kalaivanan@icraindia.com KOLKATA Ms. Vinita Baid Mobile: A-10 & 11, 3rd Floor, FMC Fortuna, 234/ 3A, A.J.C. Bose Road, Kolkata Tel: / 8839, , Fax: Vinita.baid@icraindia.com AHMEDABAD Mr. Animesh Bhabhalia Mobile: & 908 Sakar -II, Ellisbridge, Ahmedabad Tel: /2008/5494, Fax: animesh@icraindia.com HYDERABAD Mr. M.S.K. Aditya Mobile: , CONCOURSE, 3rd Floor, No , Ameerpet, Hyderabad Tel: , Fax: adityamsk@icraindia.com PUNE Mr. L. Shivakumar Mobile: A, 5th Floor, Symphony, S. No. 210, CTS 3202, Range Hills Road, Shivajinagar, Pune Tel : , /196, Fax : shivakumar@icraindia.com BANGALORE Mr. Jayanta Chatterjee Mobile: 'The Millenia', Tower B, Unit No. 1004, 10th Floor, Level 2, 12-14, 1 & 2, Murphy Road, Bangalore Tel: , Fax: jayantac@icraindia.com 7

8 CORPORATE OFFICE Building No. 8, 2 nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon Tel: ; Fax: info@icraindia.com, Website: REGISTERED OFFICE 1105, Kailash Building, 11 th Floor; 26 Kasturba Gandhi Marg; New Delhi Tel: ; Fax: Branches: Mumbai: Tel.: + (91 22) /53/62/74/86/87, Fax: + (91 22) Chennai: Tel + (91 44) /9659/8080, / 3293/3294, Fax + (91 44) Kolkata: Tel + (91 33) / / / , Fax + (91 33) Bangalore: Tel + (91 80) /4049 Fax + (91 80) Ahmedabad: Tel + (91 79) /5049/2008, Fax + (91 79) Hyderabad: Tel +(91 40) /7251, Fax + (91 40) Pune: Tel + (91 20) /0195/0196, Fax + (91 20) Copyright, 2016 ICRA Limited. All Rights Reserved. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies, while publishing or otherwise disseminating other reports may have presented data, analyses and/or opinions that may be inconsistent with the data, analyses and/or opinions presented in this publication. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents. 8