Tractor industry

Domestic demand to grow at subdued pace over next five years on high base

CRISIL Research projects domestic tractor sales to expand at 3-5% CAGR during fiscals 2020 to 2025, after
factoring in 1-2 years of below normal monsoon in the period along with a decline in investment in Pradhan
Mantri Gram Sadak Yojana by 10% over the next five years, owing to the lower targets impacting commercial
demand.

Over next five years, the following structural factors will support the 3-5% CAGR:

e The government's target of doubling farm income by 2022 via initiatives such as e-NAM (National
Agriculture Market), expansion of crop insurance coverage, direct income support, and improvement in land
productivity via soil health cards. These measures should improve farmers’ crop yields and affordability, and
boost tractor penetration

« The government's renewed thrust on enhancing irrigation intensity and making the country more drought-
proof is expected to support agriculture growth and increase mechanisation. Irrigation investments to increase
at 4-6% CAGR during fiscals 2020 to 2025

¢ Custom-hiring centres are being promoted through government incentives. The trend is gaining ground in
Andhra Pradesh, Karnataka, Madhya Pradesh, Orissa, and Telangana. To be sure, Andhra Pradesh, Karnataka,
Madhya Pradesh, and Punjab are promoting such hiring centres through training, demonstrations and financial
incentives

« Tractor rental services made available on mobile applications by manufacturers, such as Farm by TAFE and
Trringo by Mahindra, to prop up demand for tractors in the long term. Global companies such as Hello
Tractors, in association with Aeris, a California-based technology company, is also planning to launch a pay-
as-you-use tractor service for Indian farmers.

Nevertheless, the following will crimp growth, relative to the past 6-7 years:

© — States such as Gujarat, Haryana, and Punjab have already reached high horsepower (hp) penetration; hence,
growth here will be restricted unless tractors penetrate small and marginal farm holdings;

¢ Going forward, high growth in minimum support prices is unlikely to continue in view of the central
government's fiscal constraints and fixing of inflation control emerging as the central pillar of economic
policy. Moreover, the cost of agricultural inputs such as seeds, fertilizers, and farm labour is rising, affecting
farmers' profitability;

e — Tractor exports to grow at moderate pace over five years;

« Export CAGR between fiscals 2020 and 2025 is expected to be moderate at 4-6% compared to a flattish
trajectory between fiscals 2015 to 2020, with Africa and Asia likely to remain the focal regions. Also, with
India emerging as an export hub for relatively small tractors (30-75 hp), and major companies increasing
focus on international markets with the launch of 90-120 hp tractors, CRISIL Research expect sustainable
export growth over the next five years.

Utility vehicle industry

Post 14-19% on-year projected decline in fiscal 2021, UV and van sales are forecast to grow a faster 13-15%
CAGR between fiscals 2021 and 2025, driven by continued shift in consumer preferences and multiple model
launches by manufacturers in this segment. The entry of new players in the UV segment is also expected to support
traction. Replacement demand is likely to rise as well, as car owners opt for newer models because of higher
affordability, competitively-priced launches, and easy finance availability.

The growth trajectory of compact UVs gained momentum in the last five years with aggressive pricing, premium
features as well as launches of petrol variants. The proportion of replacement demand will rise as car owners
become inclined to opt for newer models on account of higher affordability, competitively-priced launches, and
easy availability of finance.

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