On a bumpy ride: Demand for low-cost tractors hits margins in June quarter

Margins of most tractor makers took a knock in the quarter ended June as farmers opted for cheaper, low-horsepower (HP) models.  This is despite volumes touching a record high.

With inflation unlikely to cool off any time soon, demand for cheaper tractors is likely to continue in the months ahead, according to industry representatives. In fact, the trend could accelerate once the new emission norms for tractors —TREM IV — take effect from October, said Raman Mittal, joint managing director, Sonalika Tractors.

“With the new regulations, tractors will have to move to CRDi technology, which is likely to make them expensive by Rs 100,000 to 150,000,” Mittal told Business Standard. That would mean an increase of 20 to 25 per cent in prices, he said.

This incremental cost would majorly impact the demand for tractors that are greater than 50 HP in Q4, said Mittal. The average market operating price of a 50HP tractor is Rs 7.5 lakh.

Tractor demand is typically influenced by commercial considerations  such as farm profitability, which has been impacted by high input costs including frequent increase in price of tractors. 

This is driving a shift towards lower- priced HP tractors.

The EBIT (earnings before interest and tax) margins for Escorts Kubota’s agri machinery business shrunk by 490 basis points to touch 10.6 per cent year-on-year.

 

Even market leader Mahindra & Mahindra had a sharp year-on-year fall of 428 basis points in its margins to touch 16 per cent.  Other tractor firms like Tafe, Sonalika, John Deere are privately held and do not share financials.

 Bharat Madan, Group CFO and Corporate Head, Escorts Kubota, said over the last 18 months, the company had to hike prices six times.  “This has mounted pressure on demand and forced farmers to shift to lower HP segments.”

In addition to the commodity inflation and the company’s inability to pass it on to consumers, Rajesh Jejurikar, executive director (farm equipment and automotive sector) at Mahindra and Mahindra also attributed the drop in margins to an inferior model mix.

The mix will continue to be adverse for some time, said Madan. “But still we expect the margins to come back to the earlier levels by Q4 as commodity prices soften,” he said.

 The recent ban on wheat exports and the late onset of monsoons coupled with high price of farm inputs are also hurting the farm profitability, wrote Joseph George, analyst at IIFL, in a recent research report.