POM14-2 Project report

Forecasting the Tractor sales in India

Facilitator: Prof Abhishek Chakraborty

Students of PGDM (GM) 2014-15,

XLRI Jamshedpur:
Prabhakar MN G14035
Reddypalli Sudheer Reddy G14043
Salin Kumar Gopinathan Pillai G14047
Tirthankar Pal G14055
Vikas Srivastava G14059

1. Introduction
1.1 Indian Tractor Industry
The Tractor industry in India has seen a strong volume growth in the last few years backed by
strong domestic demand and initiation of exports. Tractor industry has witnessed a change in
demand in terms of consumer preference, primarily driven by increase of farmers income and
creation of new value segments. Further certain other factors such as GDP growth, Agricultural
sector growth, Govt subsidiaries, HSD prices, seasonal cyclicality and Interest rates from
financial institutes also affect the tractors sales.

Currently, 83% of the farmers in India fall under small and marginal segment (Marginal
landholding <1 ha and Small land holding- 1-2 ha), where tractor penetration is close to 1%
only. The growth of tractor sales is forecasted in this segment significantly over coming years.
There are some emerging trends in this Industry, which will act as key drivers for sales growth
we have tried to capture them while forecasting the future demand in tractor sales.

Tractors
60,000
50,000
40,000
30,000
20,000
10,000

Fig 1: Tractor sales trend for last 5 years.

Aug-14

Jun-14

Apr-14

Feb-14

Dec-13

Oct-13

Jun-13

Aug-13

Apr-13

Feb-13

Oct-12

Dec-12

Aug-12

Jun-12

Apr-12

Feb-12

Dec-11

Oct-11

Jun-11

Aug-11

Apr-11

Feb-11

Oct-10

Dec-10

Aug-10

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

1.2 Indian Tractor Market

The tractor penetration level in India is very low as compared to the world standards. Also the
penetration levels are also not uniform throughout the country. While the northern region is
now almost saturated in terms of new tractor sales, the southern region is still under
penetrated. The medium horse power category tractors, 31-40 HP are the most popular in the
country and fastest growing segment. There are currently 14 players in the industry. Mahindra
& Mahindra is the leading player in the industry. Monsoon season is a key driver for sales of
tractors. A series of good or bad monsoon can affect the sales. In recent years the industry has
registered a good growth in sales, both domestic as well as exports. This is also partly because
of the initiative of the government to boost up agriculture and agricultural machinery industry.
Tractor industry has made a steady and satisfactory progress even in drought areas.
In 2013-14, 567489 tractors were sold as compared to 465482 in 2010-11. The sales has
increased backed by production of new Mahindra Yuvraj 215 (M&M), Captain DI 2600, Captain
DI 120 (Captain Tractors), Shakti MT 180D, EuroTrac-VST 180D (VST Tillers), Sanedo
(Produced by NIF), Ustad (Greaves Cotton) and others.

Another key trend to be looked at is the increasing demand of the features laden in these
segments. With increased spending power of mid and high income farmers, consumers are
looking for tractors with AC Cabins, LCD Panels, Air suspension seats, tilt able steering and
ergonomically designed pedals and levers. The added benefits of working for longer hours,
alternate use for construction related purposes and possibility of renting the equipment make
these tractors an attractive investment.
While tractor volumes remained robust through most of FY13-14 despite macro-economic
headwinds; the demand-side economics in the tractor industry continue to find favor from
factors such as support from the Government of India (GOI) towards rural development and
agri- mechanization; scarcity of farm labour especially during the sowing season; increase in
credit flow to agriculture; increase in non-agro application of tractors as in infrastructure
projects; growth in niche power segments (<20HP and >50HP) and untapped territories;
besides healthy export sales.
2. Project Objective

We looked into different facmtors which effect the demand of tractors in India, they are listed
down separately, and based on these factors we have chosen different forecasting models such
as Simple Exponential Smoothing, Trend regression, Moving Average, Holts Method to analyze
90% of the data which was available to us from public domain and predict for the last 10%.
These results will be checked against the actual production data to find the best suited method
for tractor sales forecast. The difference between the actual data and our forecast will be taken
as the error term associated with the method.
We have also analyzed different factors affecting the demand of tractors in India.

3. Factors affecting demand of Tractors in India

The demand for tractors is affected by a number of factors. The major factors that influence the
demand are:
1.
2.
3.
4.
5.

Growth in GDP.
Growth in Agricultural sector.
PPP of India.
Steep price increase in HSD.
Government support for agriculture and rural development: long-term driver for tractor
industry. Strong rural liquidity sustained by higher MSP for corps and double-digit food
inflation.
6. Adequate Credit availability to agriculture driven by NBFCs and private banks with
respect to variation in interest price by financial institutes.
7. Good southwest monsoons among the factors supports farm output, thereby increasing
tractor sales.
8. Scarcity of farm labour Alternate employment opportunities following urban migration
and other Government-run schemes such as the National Rural Employment Guarantee
Act (NREGA) have necessitated greater farm mechanization
9. Increasing non-agricultural application Increasing use of tractors for haulage in
infrastructure and construction projects.
10. Strong replacement demand roughly 40% of domestic demand is from the replacement
market. The average life-cycle of a tractor has reduced to ~8-9 years from ~11-12
years.
11. Export Sales Addition of new export destinations and increased offerings by domestic
manufacturers in the higher HP segment has spurred export growth in last 5 years.
Among the above factors we consider the following three factors for analysing the sales of
tractors as primary demand for tractor emanates from Agriculture and its influencing factors
along with the growth of the economy. Availability of water is also another important factor that
ensures the agricultural yield. To attract the educated youth and to support the farmers,
government has institutionalized various support systems such as Minimum Support Price
(MSP), RYVY etc. Apart from these important factors we also considered the impact of credit

facility availability to farmer for buying tractors. The government must take initiatives in
providing long-term policies of marginal interest rates to enhance the use of agricultural tools.
a) GDP: GDP estimates are commonly used to measure the economic performance of a whole
country or region, but can also measure the relative contribution of an industry
sector. While taking GDP as a anchor for tractor demand growth we wanted to test the
correlation between the two.As Indian GDP is highly dependent on agriculture which in turn
is related for demand of tractors in the country we found the relation between the two.

GDP Groth in CR INR

30,000,000.00

160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0

25,000,000.00
20,000,000.00
15,000,000.00
10,000,000.00
5,000,000.00
Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Jun-10

Dec-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-07

Dec-06

Jun-06

Jun-05

Dec-05

0.00

Tractor Sales in No

Relation between Growth in GDP wrt to Tractor Sales

Axis Title
GDP in CR INR

Tractor Sales

Fig 2: Relation between GDP in Cr INR and Tractor sales

It can be seen from the above graph that the demand for Tractors increases with growth in
GDP of Indian economy same is confirmed by high correlation coefficient of 0.92.
Based on this we can assume that Tractor growth is highly dependent on state of economy and
future growth in Indian economy will fuel higher demand in this Industry.
b) Government support for agriculture and rural development: long-term driver for
tractor industry: Agriculture employs over 50% of the domestic workforce and remains a
key focus area for the GoI. In order to ensure self-sufficiency in food grain production in the
backdrop of a rising population, state agencies have assumed a greater role as facilitators of
technology adoption. GoI has consistently increased its budget outlay for agriculture and
allied activities and also increased its allocations for schemes like Rashtriya Krishi Vikas
Yojana (RYVY) to boost farm output and improve labor productivity. In conjunction,
subsidies on fertilizers and electricity have also supported rural
Prosperity, and favorably influenced the demand-side drivers of farm mechanization. We
found contribution of agricultural sector in GDP and correlated it with tractor sales to find if
both are co dependent on each other.

Relation between Growth in Agriculture wrt to Tractor Sales

30,000,000.00

160,000
140,000

25,000,000.00

120,000
20,000,000.00

100,000

15,000,000.00

80,000
60,000

10,000,000.00

40,000
5,000,000.00

20,000

GDP in CR INR

Mar-14

Oct-13

May-13

Dec-12

Jul-12

Feb-12

Sep-11

Apr-11

Nov-10

Jan-10

Jun-10

Aug-09

Mar-09

Oct-08

May-08

Dec-07

Jul-07

Feb-07

Sep-06

Apr-06

Nov-05

0
Jun-05

0.00

Tractor Sales

Fig 3: Relation between Growth in Agriculture wrt to Tractor Sales

Clear correlation between Income from agriculture sector and Tractor Sales can be seen
which confirms our hypothesis that increased growth in agriculture sector fuels higher
demand of Tractors. Same is also quantitively proved by high correlation coefficient of 0.82.
c) Monsoons among the factors supporting tractor industry growth : Cyclicality and
rainfall seems to be directly related to demand of tractors in different seasons. It is intuitive
to correlate a good monsoon year with strong tractor sales there are certain indirect factors
which also effect tractor demand as per season cyclicality. In this report we have tried to
find the correlation of average rainfall in India and demand (Sales) of tractors in
corresponding period.

TRACTOR SALES IN NO

60,000

400
350
300
250
200
150
100
50
0

50,000
40,000
30,000
20,000
10,000

AXIS TITLE
Tracktor Sales

rainfall in mm

Fig 5: Relation between Tractor demand and seasonality

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Oct-10

Jul-10

Apr-10

Jan-10

Oct-09

RAINFALL IN MM

Tractor sales with respect to rainfall

It can be seen from the graph that no significant correlation exists between demand of
tractors and rainfall which further gets confirmed by correlation coefficient of 0.22 which is
very less. We can conclude from this that demand of tractors is independent of seasonality
and the industry does not cyclical based on weather seasons.
d) Credit flow to agriculture fuels industry volumes: There exists a strong correlation
between farm mechanization and availability of agri-credit. While scheduled commercial
banks are mandated by the Reserve Bank of India (RBI) to meet a target of 18% of their
net banking credit for the agricultural sector, growth is driven by increased lending by nonbanking finance companies, especially in the southern states. But after 2012 recession to
control the inflation RBI increased the interest rate which can adversely affect the demand
of tractors in agricultural areas.

60,000
50,000
40,000
30,000
20,000
10,000
0

12
10
8
6
4
2
0

Base Intrest Rate by RBI

Tractor sales

Relation between Tractor sales and increse in base intrest

rate

Axis Title
Tractor sales

Base rate

Fig 4: Relation between base interest rate and tractor sales

We plotted the graph for finding the relation between tractor sales and base interest rate
set by RBI from July 2010 to July 2014, our hypothesis was that the tractor sales should
decrease with increase in base interest rate but the same is not observed from the graph.
Further the correlation coefficient between the two is 0.43 which does not provides and
significant relation between these two factors.

References:
1. Factors affecting Tractor sales:
http://icra.in/Files/ticker/SH-2014-Q2-1-ICRA-Tractors.pdf
http://articles.economictimes.indiatimes.com/2014-06-18/news/50678734_1_longterm-industry-drivers-tractor-industry-tractor-sales
http://economictimes.indiatimes.com/tractor-industry-to-grow-by-4-6-in-fy15icra/articleshow/36795660.cms
2. Tractor sales data (login reqd):
http://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001
091003000000000&repnum=21889&frequency=Q&colno=1
3. GDP data (login reqd):
http://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001
091003000000000&repnum=21889&frequency=Q&colno=1
4. Contribution to GDP by agriculture (login reqd):
http://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001
091003000000000&repnum=21889&frequency=Q&colno=1
5. Rainfall:
http://www.tropmet.res.in/static_page.php?page_id=53
ftp://www.tropmet.res.in/pub/data/rain/iitm-regionrf.txt