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The report also pointed out that three major listed tractor makers have already seen their operating profitability decline by 300 to 350 basis points in the first half of this fiscal year.

New Delhi:

A sharp increase in raw material prices, mainly steel, along with a drop in sales volume and the recovery of discretionary costs will reduce the operating profitability of tractor manufacturers by 300 to 400 basis points, said the rating agency CRISIL in its latest report.

However, the agency suggested that their credit profiles will remain stable, supported by strong and nearly debt-free balance sheets, and robust liquidity, based on an analysis of three tractor manufacturers, which account for 70% of the company’s revenues. the industry.

Operating margins increased by 400-450 basis points to 18%-19% in fiscal 2021 due to better product mix, shift to higher horsepower tractors ( HP), lower raw material costs (particularly in the first half) and reduced discretionary spending such as advertising, travel, rebates and administrative costs, according to the report.

    Source: Crisis Assessments
Source: Crisis Assessments

This financial year, added CRISL, prices of key raw materials such as steel and cast iron (75% to 80% of total cost) increased by 35% to 40% year-on-year in the first nine months and discretionary costs have normalized. Despite the resulting decline, the operating margin will remain healthy at 15%-16%, in line with pre-pandemic levels, he noted.

The report also pointed out that three major listed tractor makers have already seen their operating profitability decline by 300 to 350 basis points in the first half of this fiscal year. With sales volume growth slowing to 0.7% in April-December 2021, they were only able to partially pass on the higher raw material cost impact through price increases.

“We expect tractor sales volume to fall by around 20% in the last quarter of this fiscal year compared to the very high base of last year. Erratic rains have compounded the impact and the lower than expected kharif production – although 0.9% higher year-on-year.2 In addition, the budgeted allocation for public schemes, which had supported growth in the previous 10% lower this fiscal year As a result, rural income levels have been affected this fiscal year and we expect domestic tractor sales volume to decline by 4% to 6% this fiscal year said Anuj Sethi, Senior Director, CRISIL Ratings.

That said, the expected 40-50% growth in exports, which represent 9-10% of demand, will marginally offset the impact of moderating domestic demand.

In fiscal 2023, assuming normal monsoon and good crop profitability, domestic sales volume is expected to grow 2-4% YoY, while slowdown in major commodity prices is expected to increase margin of 100 to 150 basis points over one year, CRISIL is noted.

According to CRISIL, the sector has stable long-term growth potential due to the country’s low mechanization (~2 HP per hectare). Switching to tractors with a higher HP of 41-50 will further contribute to growth. “Despite the moderation in operational performance, credit profiles are expected to remain healthy in this financial year and in the following financial year, thanks to negligible debt for most players, a solid cash surplus of INR 20,000 crore and low capital expenditure requirements.The gearing for the sample set should be around 0.1x, while interest coverage will remain healthy at over 20x.

That said, the spread of the third wave of Covid-19 infections in the hinterland and its impact on rural demand will be one to watch, CRISIL added.

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Equipped with six pairs of cameras and artificial intelligence capabilities, the equipment constantly checks its position to the nearest inch, and stops automatically as soon as it perceives an obstacle and sends a warning signal.

National tractor sales were 16,687 units last month, down from 21,173 units in December 2020, down 21%. Exports, on the other hand, rose 27% to 1,582 units from 1,244 units in December 2020, the company said.