Growth trend in tractors industry

Source: CRISIL Research, Industry Factors affecting demand for tractors Irrigation intensity and monsoons Landholding pattern Availability of credit Minimum support prices of food grains Cropping pattern Increase in cash crop production Raw material continues to be the key cost parameter Raw material is the key cost component of a tractor, accounting for 65-70 per cent of the total operating income. Other major costs include employee costs and selling expenses. The trend in employee cost varies for different players across the industry, whereas the selling cost, as a per cent of operating income, has increased over the past 5 years.

14 states across 4 regions constitute bulk of demand for tractors We have used the following structural parameters - tractor penetration, size of land holdings, irrigation intensity, cropping intensity and commercial usage - to analyse demand for tractors across 14 key states (ranked by sales volumes) in the 4 regions (North, South, East and West). These states constitute over 95 per cent of the domestic tractor demand. Structure of CV industry CV industry is oligopolistic in nature The domestic CV industry is relatively concentrated with the top three players accounting for 88 per cent (in volume terms) as of 2011-12. Tata Motors continues to dominate the CV industry with nearly 60 per cent share, followed by Mahindra & Mahindra (M&M) with 18 per cent, and Ashok Leyland with 10 per cent. On the basis of usage, the industry can be broadly divided into two product segments, namely, goods vehicles (trucks) and passenger vehicles (buses). These can be further segmented on the basis of gross vehicle weight into light commercial vehicles (LCV) and medium and heavy commercial vehicles (MHCV). CRISIL Research expects 9-11 per cent growth in the passenger vehicles segment, with utility vehicles growing by 15-17 per cent versus a 8-10 per cent growth in cars. We expect macroeconomic recovery and decline in petrol price to aid revival in small car sales. We expect utility vehicle sales to continue to grow, led by new model launches. However, growth will be capped at 15-17 per cent on account of diesel price hikes. Long term growth prospects continue to remain healthy until 2017-18. CV : Historically, the domestic CV industry has remained relatively concentrated with the top three players accounting for 87.8 per cent (in volume terms) as of 2009-10. As competition intensifies, in order to retain their market share, players are forming joint ventures with international companies for adopting new technology to manufacture upgraded trucks and buses.

Cars and UVs industry: CRISIL estimates installed capacities in the cars and UVs industry to grow by 760,000 units to 5.4 million units by 2012-13. While the top three carmakers are expected to contribute 35 per

cent to the incremental capacity additions, the rest is expected to come from expansion by other players to cater to the domestic and export demand. Domestic sales of cars and utility vehicles (UVs) are expected to grow moderately in 2012-13, growing by only 8-10 per cent, despite a low base in 2011-12. We expect demand to grow by 911 per cent in 2013-14 with revival in small car sales. Operating rates are likely to remain at similar levels while operating margins are expected to improve, led by decline in raw material prices. Long term prospects to remain healthy.