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Tractor stocks may have bumpy ride in near-term; stay selective: Analysts

March 08, 2024 13:01 IST

After a stellar run on  the bourses that saw tractor stocks rise up to 52 per cent, analysts are turning cautious on the sector as muted demand trends may weigh in the near-term.

Tractor

Photograph: Amit Dave/Reuters

Total volumes in the tractor segment for the last three quarters of the current financial year (9MFY24) have remained weak with VST Tillers, Escorts Kubota, and M&M seeing declines of 21 per cent, 5 per cent, and 3 per cent year-on-year (Y-o-Y), respectively, during the period, amid patchy rainfall, delayed crop harvest, and lower reservoir level.

 

Across industry, total domestic sales volume so far in the current financial year (April '23 to January '24) has declined 5 per cent Y-o-Y, as per Tractor Manufacturers Association (TMA).

Exports from India to the US and EU, too, are down 27 per cent Y-o-Y FYTD'24.

Moreover, increased competition from Korean manufacturers has also dampened sales, analysts said.

"We believe that the tractor volumes could remain subdued in the near-term as well due to lower reservoir level in many parts, above normal inventory, and high base of the last year.

"In addition, discontinuation of certain incentives in some states will also dent purchasing power.

"Thus, we factor industry growth decline of 5-6 per cent for the current fiscal year (FY24) and expect low digits for FY25," said Saji John, research analyst at Geojit Financial Services.

On a monthly basis, total tractor retail sales stood at 88,671 units in January 2024, as per data from Federation of Automobile Dealers Association (FADA), up 21.16 per cent Y-o-Y and 12.4 per cent M-o-M.

February sales, however, are expected to decline again with Nuvama Institutional Equities pegging the slide at over 10 per cent Y-o-Y in the domestic market due to high base (inventory filling before festive season last year) and weak customer sentiments in south/west regions.

Nomura, too, expects wholesale tractor sales to decline 13 per cent  Y-o-Y in February.

"We estimate FY24/25 growth at -6 per cent/5 per cent," it said in a sales preview report.

Automobile companies are scheduled to report their February sales data on Friday, March 1.

On the bourses, shares of tractor manufacturers have outperformed the benchmark S&P BSE Sensex over the past one year.

ACE Equity data shows a surge of 43 per cent in shares of VST Tillers Tractors, 38.04 per cent in Escorts Kubota, and 52.4 per cent in M&M.

By comparison, the benchmark Sensex index advanced 23 per cent during the period, while the S&P BSE Auto index jumped 60.2 per cent.

El Nino a key trigger

Analysts are keeping a close eye on emerging El Nino trends as a normal and well-distributed monsoon is crucial for the majority of Indian farmers and, thus, tractor sales.

Reservoir levels in the southern and western region have slipped to 30 per cent and 55 per cent, respectively, of the live storage capacity compared with 51 per cent and 66 per cent a year ago.

However, levels in the northern region, especially Uttar Pradesh which contributes 40 per cent tractor demand, has grown by 6 per cent Y-o-Y.

"If the impact of El Nino wanes out in FY25, we may expect positive implications in tractor volumes post-Union Elections.

"We await projections by the India Meteorological Department (IMD), which is expected in mid-March, 2024," said Aditya Welekar, senior research analyst tracking the sector at Axis Securities, who suggests a 'Buy on Dips' strategy for the sector from a medium-term perspective.

Saji John of Geojit Financial Services, on the other hand, expects the tractor segment to recover from Q2FY25 as the preliminary monsoon forecast guidance and the new crop cycle kicks in later this year.

"In addition, continuous government support for horticulture production is expected to support the rural economy and thereby aid tractor demand.

"But, we don't foresee any immediate recovery owing to peak volume and premium valuation," he said.

Stock-wise, Nuvama has 'Buy' rating on Escorts (target: Rs 4,200), while Nomura has 'Buy' on M&M (target: Rs 2,143).


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Nikita Vashisht
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