Tractor Makers' Operating Margin To Shrink By 300-400 Basis Points Amid High Steel Prices

The operating profitability of tractor makers is set to shrink by 300to 400 basis points (bps), owing to a sharp increase in the prices of raw materials, especially steel, and a lower sale volume and resumption of discretionary cost, the credit rating agency CRISIL said in a press release on Friday. 

For the fiscal year 2022, an analysis of three tractor makers reveals that the credit profiles of the tractor makers will, however, remain stable fueled by strong and almost debt-free balance sheets and robust liquidity, thus accounting for 70% of the industry’s revenue.

The three tractor makers have already seen the operating profitability decline by 300-350 bps in the first half of this fiscal. Notably, the operating margin of the tractor makers will remain healthy at 15 to 16 per cent in line with the pre-pandemic levels, according to the credit rating agency. 

Last fiscal, the operating margins had expanded by 400 to 450 bps to 18 to 19 per cent due to a better product mix, a shift towards higher horsepower (HP) tractors, lower raw material cost (especially in the first half) and curtailment of discretionary expenses such as advertising, travelling, discounts and administrative costs.

Meanwhile, the prices of key raw materials such as steel and pig iron, have risen 35 to 40 per cent year-on-year (YoY) in the first nine months of this fiscal year. 

Anuj Sethi, Senior Director, CRISIL Ratings said, “We expect tractor sale volume to fall ~ 20 per cent in the last quarter of this fiscal over the very high base of last year. Patchy rainfall has worsened the impact and lower-than-expected Kharif production — albeit 0.9 per cent higher on year. Furthermore, the budgeted allocation for government schemes, which had supported growth last fiscal, is 10 per cent lower this fiscal.”

“As a result, rural income levels have been affected this fiscal and we foresee domestic tractor sales volume declining 4 to 6 per cent this fiscal,” he added. 

On the export front, tractor exports, which accounts for 9 to 10 per cent of total demand, is expected to grow by 40 to 50 per cent. For the FY23, the domestic sale volume of tractors is expected to grow 2 to 4 per cent year-on-year due to the expected normal monsoon and good crop profitability. The operating margin is also likely to expand by 100 to 150 bps year-on-year for the fiscal year 2022-23, owing to the softening of key raw materials. 

Gautam Shahi, Director, CRISIL Ratings says, “Despite moderation in operating performance, credit profiles should remain healthy this fiscal and in the next, driven by negligible debt for most players, robust cash surplus of Rs 20,000 crore and low capital expenditure requirement. Gearing for the sample set is expected to be ~0.1 time, while interest coverage will remain healthy at over 20 times.”