Budget 2021 will be focused on improving the growth and development in the rural areas. Government will take necessary steps and announce measures in the upcoming Budget to ensure that the standard of living of people in rural areas improves further. Kotak believes the tractor industry’s volume growth is likely to remain buoyant over the next two years due to two good monsoon seasons, stable crop prices and strong financing support. Kotak raised their tractor segment forecast for Escorts as Kotak believes the low dealer inventory levels and strong retail off-take will lead to higher than expected volume growth. Maintain BUY and revise Fair Value to Rs 1680 (versus Rs 1535 earlier).
Strong rural economy to drive domestic tractor sales:
Kotak believes the tractor industry is likely to show strong growth over the next two years led by:
(1) good monsoons over the past two years
(2) improvement in financing by NBFCs and private banks
(3) stable crop prices and higher Rabi crop output than the previous year.
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Two consecutive above normal monsoons (cumulative rainfall in India was 9% above long-term average in FY2021 and 10% above long-term average in FY2020) augur well for the domestic tractor industry. As per Kotak’s analysis, overall correlation of monsoons with tractor sales is quite high (60%), barring states that have high irrigation intensity (percentage of irrigated areas across all crops in the state), which have shown lower correlation to monsoons with tractor sales.
The government has also announced 3-6% yoy increase in MSPs for Rabi crops, which we believe will boost farm income. Financiers continue to remain aggressive in lending (90% of the tractors are financed), given strong rural cash flows. Water availability in reservoirs is 20% above long-term average, which also boosts crop prospects. With supply-chain normalizing and lower inventory levels, Kotak expects tractor OEMs to report strong wholesale numbers over the next two quarters.
Kotak expects the domestic tractor industry to grow by 15% yoy in FY2021E followed by 10% yoy growth in FY2022E. Kotak expects Escorts to grow broadly in line with the industry, maintaining its market share around 11-12% over the next two years. Kotak believes Escorts can export additional 15000-20000 tractors at least, over the next five years as Kubota opens its distribution network.
Kotak expects export volumes to grow at a CAGR of 23% over the next three years. With revival in the economy and government spending, we expect construction equipment and railway segment revenues to grow by double-digit CAGR over FY2022-23E.