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Steel and pig iron prices, which account for over 90% of total raw material costs for tractors, have decreased in recent months.
According to a statement from CRISIL, domestic tractor sales volume growth would drop by half to 4-6% in fiscal 2024 from a strong base created by a compound annual growth rate of 10% since fiscal 2020.
Aa per the CRISIL Ratings, the rate of growth in tractor sales would be half in FY24, but operational margins will rise due to decreased input prices.
Tractor sales volume will reach a new high in fiscal 2023 as farm response remains positive following another strong monsoon as this is the primary source of revenue and a rise in the Minimum Support Price (MSP) for the 2022-23 market season.
Therefore, net cash-positive balance sheets will sustain excellent credit profiles in the future. The farm and commercial tractor industries will drive growth in the coming fiscal year.
"The 5% increase in MSP for wheat for the current rabi crop will boost farmers’ earnings, while the government's infrastructure push and increased building activity will boost commercial demand," Director Naveen Vaidyanathan stated.
Nitin Bansal, Associate Director stated that high input prices have resulted in operating margins dropping for the last two fiscals, from a high of nearly 22% in fiscal 2021 to about 15% in fiscal 2023.
Falling input prices, such as those for steel and pig iron, will help tractor makers' operating margins by 100-200 basis points (bps).
Steel and pig iron prices, which account for over 90% of total raw material costs for tractors, have decreased in recent months and may fall by 6-12% next fiscal year due to lower coal prices.
According to Bansal, this should assist raise the operating margin to 16-17%.
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