Tractors Dealer Checks – Q4FY 2020-21

 We present an exhaustive Dealer Check exclusively conducted with the Tractor Dealers across India
covering all the geographic zones.

 Off late, Automobiles is one of the badly dented sectors due to the unprecedented surge in the
second wave of the Pandemic in April and May.

 Tractors is one of the sectors which had bucked the trend in the Automobile industry during the first
wave.

 Therefore, this time we have focused on Tractors and attempted to analyze their performance in this
second wave as well, by interacting with industry participants such as dealerships and industry
experts.

 The dealerships of following companies were covered under our dealer checks

M&M Escorts Sonalika ACE New Holland

Ashwin Patil
ashwin_patil@lkpsec.com 19-May-2021
+91 22 66351271
 Impact of COVID 19 first wave – A flashback

 After witnessing a complete halt in April 2020, the tractor outlets got permission to open at the
RAVINDRA start of May, which initially experienced very few footfalls.
AUTO SALES  However, tractors being an essential commodity, in a week or so, the farmers started crowding
the dealerships.

JATTARI  Rural areas being less impacted by the pandemic and the lockdown delaying the sowing, there
AUTOMOBILES was a sense of urgency among the farmers leading to a surge in June sales.

 In the wake of COVID-19 while maintaining all precautions of social distancing, in May 2020 the
dealerships reopened at 100% employee strength.

 The COVID-19 related costs were quite affordable when compared with the quantum of sales the
dealerships were deriving.

Shivam  Dealers had mentioned that the demand was oblivious to COVID-19 as the farmers took the
Automobiles pandemic in their stride.

 Therefore, shrugging off the effect of the pandemic the Tractor industry reported an excellent
growth of ~27% in FY 21 and shining as the best sector within the automobile industry.
SHRI RAM
 M&M continued to be the market leader (38.23% market share), followed by TAFE (18.43%),
AUTO MOVERS
Sonalika (13.06%) and Escorts (1.32%).

LKP Research 2
 Wholesale Domestic Tractor Industry FY 21 v/s FY 20

OEM FY 21 FY 20 % change Market share FY 21 Market share FY 20 % change

M&M 3,43,833 2,91,901 17.8% 38.23% 41.17% (294 bps)

TAFE 1,65,802 1,20,151 38.0% 18.43% 16.95% 149 bps

Sonalika 1,17,503 82,958 41.6% 13.06% 11.70% 136 bps

Escorts 1,01,849 82,252 23.8% 11.32% 11.60% (28 bps)

John Deere 85,610 68,322 25.3% 9.52% 9.64% (12 bps)

New Holland 35,828 26,745 34.0% 3.98% 3.77% 21 bps

Kubota 16,809 12,924 30.1% 1.87% 1.82% 5 bps

VST 8,162 6,703 21.8% 0.91% 0.95% (4 bps)

Preet 6,014 1,643 266.0% 0.67% 0.23% 44 bps

Indo Farm 4,611 2,875 60.4% 0.51% 0.41% 11 bps

Captain 4,446 3,123 42.4% 0.49% 0.44% 5 bps

Force 4,004 3,248 23.3% 0.45% 0.46% (1 bps)

ACE 2,540 2,055 23.6% 0.28% 0.29% (1 bps)

SDF 2,418 4,102 -41.1% 0.27% 0.58% (31 bps)

Total 8,99,429 7,09,002 26.9% 100.00% 100.00%

LKP Research 3
 April highlights – The slide begins
 With the onset of second wave of the pandemic, the year FY 21 began on shaky ground.
Kongunad
Tractors  We therefore need to have a look at the performance of the sector in this month briefly. Also
would like to mention that due to zero sales in April 20, yoy comparison will not be meaningful

CHAITANYA  We have observed that generally April is 10% lower than March
TRACTORS
 In April 21, however, most states witnessed a double digit decline (25-50% dip), except
Maharashtra, Assam and TN.
VIGNESHWARA
TRACTORS  North (-35%) and Central (-39%) witnessed the biggest fall, while South (-15%), West (-19%) and
East (-20%) performed better.

BS Tractors  Chhattisgarh (-51%) observed the biggest decline, while Maharashtra saw a flattish growth. UP
and MP fell by 44% and 37% respectively.

MM Motors  OEM wise, M&M saw the lowest sequential decline at 12% as they filled in channel inventory,
while Escorts recorded highest fall of 46% mom. TAFE, New Holland and Sonalika
underperformed by 29%, 31% and 36% respectively. John Deere reported 21% fall.

 In April M&M gained market share by 615bps, while TAFE, Escorts and Sonalika witnessed loss
by 98 bps, 372 bps and 178 bps respectively.

LKP Research 4
 Wave 2 - Current scenario

 From the start of April 2021, the second wave of the pandemic has emerged all of a sudden
impacting lives, businesses and day to day livelihood.

 Its unprecedented rise has affected the automobile industry in different forms – production cuts,
lockdowns, reduced employee strengths and ultimately the demand.

 Among automobiles, all the sectors are hit alike but the tractor sector which has different
dynamics than the PVs, CVs or the 2Ws is also equally hit this time.

 Intermittent localized lockdowns have hit the production in certain states as well.
 The deep penetration of the virus in the rural areas which were more or less spared in the first
wave is leading to scarce demand for tractors.

 Sentiments in rural markets are very negative, which is stopping the farmers from stepping out
of their houses.

 Border sealing has been done in some villages by the village heads to restrict the spread. In such
scenario, free movement of farmers is not possible, thus limiting the buying of tractors.

LKP Research 5
 Dealers point of view – Fear Factor is too high!

 Retail demand in April had dropped by a good 15-20% over March as the second wave started then.
Kongunad
Tractors  In May this decline as compared to March is down by 50% till date. And as compared to April it is
down by 25%-30%.

CHAITANYA  Farmers are very scared to move out of their houses considering the 3x-4x rise in number of cases
TRACTORS and deaths as compared to last wave.

 Rural penetration being too high in this wave and being skeptical about the rural medical infra
VIGNESHWARA structure, farmers are staying put.
TRACTORS  They are in fact postponing their purchases and waiting for the wave to subside as the April-June
quarter is traditionally one of higher sales quarter considering the khariff sowing season, which
ends in June.
BS Tractors  Dealers are hopeful that if the wave subsides by May end, then they might witness a pent–up
demand in June like last year.

MM Motors  Dealers had faced supply crunch last year when there was a sudden surge in demand post the
lockdown was lifted.

 On the other hand, supply is not an issue at this point in time unlike the first wave. In April, we
believe companies like M&M had filled up the channel inventory, due to which their wholesale
sales declined lesser than other OEMs (12%) month on month.

LKP Research 6
  In May, OEMs are also not pushing the inventory too much unlike April as they are realizing the
RAVINDRA ground reality.
AUTO SALES
 Companies like M&M and Escorts had taken price hikes in Q4 and at the start of April to cover up
their input costs, but demand being completely slowed down in April and May, OEMs may in fact
JATTARI think of providing discounts now, according to dealers.
AUTOMOBILES
 However, currently, the dealers are finding it very difficult to sell their product and at the same
time cover their expenses and pay their debts.

 Outlets are functioning at ~30% employee strength. Covid related expenses are also weighing a lot
on their finances.

 Online selling is of a very little help as the farmers prefer visiting the outlets and selecting the
Shivam product physically.
Automobiles
 Segment wise, the higher HP segment of 45-60HP has always remained the favorite among the
farmers.

SHRI RAM  There are very few banking schemes launched off late. No meaningful support seen from the
AUTO MOVERS banks or the government this time for the farmers or dealers unlike first wave.

LKP Research 7
 Region-wise flavor
 Overall each region resonated the same view that the retail demand in May has been very weak
Kongunad  In the North, particularly in Haryana and Punjab, the mom sales in the first 18 days were down by
Tractors 80-90%.
 While in UP they are down by 50%. Migration of labour from cities like Mumbai, Pune and Delhi
CHAITANYA may create some employment and some demand for tractors despite the pandemic.
TRACTORS  In Rajasthan, dealers expect the sales to decline by 45-50% in May.
 In the East, since Covid wave surged freshly post elections in Bengal, farmers are very cautious
VIGNESHWARA about stepping out and are postponing buying by holding cash for the ‘rainy day’. Therefore,
dealers are projecting a dip of 40-50% in May on a mom basis.
TRACTORS
 In other states as well like Orissa and Bihar, 30-40% sequential decline is expected.
 In West and South, the lockdowns have been stricter. In Maharashtra (with highest number of cases
BS Tractors and deaths) certain tractor outlets in rural areas are shut compulsorily since last 5 to 10 days. Sales
do happen but through their workshops, but the volumes are very low. Dealers expect a 60-70%
decline in May, post observing a 75% fall in the first 18 days of the month.
MM Motors  In South too, in states like Karnataka, TN and Kerala, lockdown is quite stringent as the magnitude
of cases are also high. April was still better, but May is going very tough with about 60-70%
sequential fall expected.
 All the zones are expecting a better June as monsoon is approaching and second wave is expected
to mellow down a bit. Therefore, sentiments would improve and genuine buyers shall visit the
showrooms and it would convert into sales.

LKP Research 8
 FADA view

 They believe Tractor sector is the worst impacted among all the automobile sectors.
Kongunad
Tractors  This is due to the pandemic hitting the hinterland this time around.
 Contrary to dealers’ expectations, FADA believes that this fear shall last longer than expected and
CHAITANYA would impact buying of tractors in June and Q2 as well.
TRACTORS  Farmers would surely conserve cash and continue their agricultural work with their old tractors
itself or buy smaller tractors and tillers, rather than buying big ticket tractors like they do every
VIGNESHWARA year.
TRACTORS  Since construction work has also slowed down due to Covid, the non-agri usage of tractors will also
not attract demand.

 In view of this, FADA expects H1 FY22 to be on a slower wicket, while Q1 FY22 to de-grow by 25 to
BS Tractors 35%.

 In the wake of pandemic softening, and no occurrence of third wave, FADA expects the festive
MM Motors season to see some cheer and from then the sales should show a good revival.

LKP Research 9
 Our view

 We believe the tractor sector is facing challenging times currently as the pandemic has taken toll of
its opportunities in short term.
RAVINDRA
AUTO SALES  Deep penetration of pandemic in the villages has struck fear among farmers which has led to a
steep fall in tractor sales

JATTARI  Restriction on movement within villages led by village chiefs has further led to difficulties for
AUTOMOBILES commutation for farmers and vehicle logistics.

 We anticipate May and some part of June as well to face softness in tractor demand.
 We believe May sales to fall close to 50-60% mom over April in view of first 18 days of the month
having reported ~70% fall.

 Q1 FY22 may also witness close to 30-40% fall qoq. However, this fall may be to the tune of 20-25%
when compared yoy, as last April was a month of zero sales but May and June were very strong.
Shivam
Automobiles  We also believe that as and when the second wave subsides, there will be pent up demand
provided there is no third wave; in occurrence of which we may see extended losses in the sector.

 However, the pent –up demand will be lower than last year, as in the first wave, rural markets were
SHRI RAM less impacted as compared to second wave.
AUTO MOVERS

LKP Research 10
  However, we believe that geographies with lesser cases or reducing cases should see an early
revival than other regions.

 We also believe that Maharashtra, TN or UP based tractor manufacturers (M&M, Escorts, JD) may
undergo production cuts or lesser working days/employees due to localized lockdowns in the near
term, since these states have more cases.

 To conclude, we expect a slow revival in demand from mid of Q2 and believe it to get stronger from
Q3 around the festive season.

 Considering the ground reality surrounded by factual information from the dealers, we believe that
tractors are on weak wicket in the short term and the OEMs involved in this sector may witness
some correction in their stock prices in the near term. However, companies like M&M, Escorts and
ACE are fundamentally strong listed players and therefore any correction in stock prices will
provide a buying opportunity.

LKP Research 11
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