Monsoon cheer may not be enough for tractor stocks

ET Intelligence Group: Some degree of caution may be exercised by investors betting on high doubledigit volume growth for tractors this year after the weatherman’s forecast of an ‘above-normal’ rainfall.

Investor interest in Mahindra & Mahindra, Escorts and VST Tillers has led these stocks to outperform benchmark indices in the past three months — delivering returns of 12%, 43% and 37%, respectively against the Sensex gaining 10% in the same period.

However, an analysis of the past cycles suggests that apart from the monsoon distribution, there are a string of other factors that are equally crucial for a strong recovery in the tractor industry growth, such as increase in global agri prices, growth in minimum support prices, availability of agricultural credit and level of construction activity. An ‘above normal rainfall’ alone may not translate into double-digit growth in tractor volumes.

Analysts believe that a normal monsoon could lead to 10-12% industry growth in FY17, but revival in agricultural crop prices holds the key to more than 20% growth. Over the past two years, weak monsoon and a steep decline in global agricultural crop prices have caused a 10-13% decline in industry volumes on an annual basis.

Recall what happened in 2004, when the tractor sales volume grew 5% despite a low base and an above normal monsoon. (In the past twenty years, there has been only one instance of below-normal monsoon for three consecutive years, which is FY01-03).

Interestingly, the tractor segment clocked in a double-digit volume growth during FY05-07, when the other aforementioned factors, along with monsoon, fell in conjunction. Currently, cyclical elements (like a steep increases in MSPs, social welfare spending and subsides) as well as structural factors (private investment) do not seem to be in favour.