Erratic monsoon may halt tractor stocks' rally in near-term: Analysts

Analysts believe the on-going rally across tractor stocks may face headwinds from spatial distribution of monsoon across the country, which could keep sentiments in check

Shares of tractor manufacturers have displayed a resilient show in the past one month as a turnaround in kharif sowing, and improvement in earnings before interest, tax, depreciation, and amortisation (Ebitda) margins during the June-ended quarter (Q1-FY24) aided sentiment.

At the bourses, related-stocks like Mahindra and Mahindra (M&M), Escorts Kubota, and VST Tillers jumped up to 17 per cent in the past month, as against 1.3 per cent fall in the S&P BSE Sensex, ACE Equity data show.

According to Mumuksh Mandlesha, research analyst at Anand Rathi Institutional Equities, the run-up comes on the back of the recovery in cumulative rainfall spreads from July onwards and turnaround in aggregate kharif acreage, which aided tractor sales volumes in July.

According to their monthly business update, M&M sold 24,168 tractors in the domestic market in July, with a growth of 11 per cent over last year. Escorts Kubota, meanwhile, saw a 9.7 per cent YoY jump in sales last month.

That said, analysts believe the on-going rally may face headwinds from spatial distribution of monsoon across the country, which could keep sentiments in check.

As of August 11, the distribution of rainfall in the Southern Peninsula and Eastern regions remained in the deficit zone, while Northern and Central regions received normal rainfall, showed a report by Bank of Baroda Capital Markets.

"The last 15 days, however, have been relatively dry. One has to wait and watch for the revival trends. We can expect some hiccups on a month-to-month basis if there is below normal rainfall from now till September," said Deepak Jasani, head of retail research at HDFC Securities.

'Long-term growth intact'
 

Market watchers, however, believe the long-term structural growth story of the segment remains buoyant due to increase in minimum support prices (MSP) of food grains. Moreover, improved spread of the monsoon, adequate water reservoirs, and consumer credit availability could further support the outlook.

"With the festive season at the corner and harvest cropping season (October-November) coming up, the tractor industry is gearing up for a positive outlook. We remain positive on M&M and Escorts Kubota," said Parul Sharma, research analyst at SAMCO Securities.

In the recently concluded quarter, margins for tractor companies expanded driven by full impact of price increases undertaken in Q4FY23, cost reduction efforts, and softening of commodity prices.

M&M's farm-equipment Ebitda margin, for instance, expanded 161 basis points (bps) year-on-year (YoY) to 17.5 per cent in Q1-FY24, while Escorts Kubota's agri-machinery Ebit margin improved by 285 bps YoY to 13.4 per cent.

On the other hand, VST Tillers' Ebitda margin rose to 19 per cent in Q1-FY24 from 8.1 per cent in the year-ago period.

New launches
 

That apart, various new launches lined up by these companies may provide some fillip to their farm equipment segment, analysts said.

In an effort to double tractor volume sales over the next three years (36,000 by FY26), M&M launched the OJA platform in Capetown, South Africa on August 15. It will also be launched in North America, Asean, Brazil, Australia, South Africa, Europe, and SAARC regions.

VST Tillers, too, launched Series 9 compact tractors on August 9 in the range of 18.5-36 horsepower to address growing needs of farm mechanisation in orchard, horticulture, and traditional agricultural crops.

Besides, Escorts Kubota said in their earnings call that they will launch one of their flagship models in the Farmtrac series over the next three months.