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Rural prosperity drives tractors ahead of trucks in sales and revenues in FY21

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Tractor sales overtook commercial vehicles both in terms of volume and value for the first time in the last fiscal year, as the impact of the Covid-19 pandemic affected the two segments differently.

The agriculture and allied sectors grew despite the pandemic, boosting demand for tractors and other farm equipment. But the pandemic and the restrictions on movements hurt demand for transporting goods, pulling down sales of commercial vehicles.

Trucks sales, seen as a barometer of economic activity, fell to a decade low in fiscal 2021 at 5.75 lakh units. Tractor sales, meanwhile, grew 26% to a record high at 8.99 lakh units.

In terms of revenue, according to an ETIG analysis, tractor sales have generated around Rs 48,500 crore in the year ended March 31, 2021. Revenue from commercial vehicles, which are priced higher, is estimated at Rs 47,500 crore.

Tractors sales were ahead of trucks by 1,400 units in fiscal 2014 as well, but truck sales had generated double the revenue at the time.

The gap between tractor and commercial vehicle sales was about 8,000 units in FY20, with the tractor sales at 7.09 lakh units and commercial vehicles at 7.17 lakh units. In terms of revenue, the difference was Rs 21,000 crore, with CVs generating Rs 60,000 crore.

Hemant Sikka, president of the Farm Equipment Sector at & Mahindra and president of the Tractor Manufacturers Association, said the agri sector was the most resilient in FY21 in the face of adversities.

“Classified as an essential activity, the agri industry was allowed to operate and serve the farmers, even while the rest of the country was still under lockdown,” Sikka said. This drove “unprecedented growth” in the segment, with the supply chain, manufacturing and sales network recovering very fast, he added.

The record volume was also aided by two consecutive years of above-normal monsoon rains, which happened for the first time since 1960. While major crops saw higehr yields, the realisation on farm produce was high at 12%. This led to higher disposable income and improved cash flows which resulted into a bumper year for tractor industry growth. If not for a shortage of parts, the volumes could have been even higher in the sector.

On the contrary, the industrial sectors had to endure a strict lockdown. Commercial vehicle manufacturers also faced challenges from shortage of parts as well as workforce when the market reopened.

To be sure, the commercial vehicle segment was also sitting on a glut in capacity due to introduction of new axle load rules in FY19, which added 20% in carriage capacity for existing fleets. This meant the trucks could carry more load, which reduced demand for new vehicles.

The record sales also boosted tractor makers’ financial performance.

Higher sweating of installed capacity and lower expenses during Covid catapulted the operating margins of the listed tractor players to a record high. Market leader Mahindra’s tractor segment posted an operating margin of 24.4% in the December quarter. Escorts, which has a market share of around 11%, posted a margin of 20% for the same period.

The tractor industry was the sole segment of the automotive business which grew on a compounded annual basis in the last five years — tractor volume grew 12.7% annually in the last five years, while the rest of the industry contracted in the range of 1-17%, barring light commercial vehicles.

The share of the tractor industry in the total automotive industry revenue rose to 15% in FY21 from an average of less than 10% in the previous eight years. In terms of value, it has been 44-65% of the CV industry between FY13 and FY20.

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