27 March 2012

India Tractors
The growth story continues continues…. Mayur Milak

(+91 22 ) 4096 9749

mayurm@dolatcapital.com mayurm@dolatcapital com

1

Executive summary
Why did we do a follow-up report on tractors NOW ?
The tractor industry has grown at a CAGR of ~12% during last five years. After a splendid performance, during the last two to three years, the Indian tractor industry is believed to head for a slow-down , we believe otherwise and hence our stance to b buy i into tractor at this j hi juncture.
Our takeaways:
There is an increasing lack of cheap farm labour due to migration to urban areas, leading to more mechanisation.
Further, f
F h farm i income h has grown at a CAGR of 12 8% d i f 12.8% during l last fi five years. W expect this growth to sustain going
We
hi h i i forward, which will continue to boost tractor sales.
Contrary to popular belief, rainfall does not affect tractor sales directly. Other factors such as higher farm income, availability of water (irrigation facilities), cheaper and more easily available finance, successful implementation of government schemes (NREGA) and higher MSP are the key drivers for growth in tractor sales.
We expect tractor demand to grow by 11-12%, going forward.
All key drivers are in place and adequate availability of water is expected with a forecast of regular and timely rainfall.
Our top-pick: M&M top pick:
M&M has always been a leader in the farm equipment sector. After acquiring Punjab Tractors Limited (PTL), it has further consolidated its position as the No.1 player in the country.
Historically, M&M tractors have outperformed the tractor industry during the last six years.
With a market share of almost 41% we believe the company is well poised to take advantage of the growth in the tractor
41%,
segment.
Land fragmentation (bifurcation of property and formation of nuclear families) is a major deterrent to tractor growth, but the new offering from M&M, ‘Yuvraaj’, targets this issue.

2

Highlight: Mahindra Yuvraaj vs the bulls
Cost analysis
Total cost of a pair of bulls:
Basic cost:
- Rs75,000 - One-time payment
One time
Average life
- 8 years
Per-year cost
- Rs 9,375
Maintenance cost
- Rs 4,000
Fodder cost
- Rs24,000
,
Cost per year
- Rs37,375
The Yuvraaj:
Basic cost
Average life
Per-year cost
Maintenance cost
Diesel cost
Cost per year

- Rs165,000 - One-time payment
-12 years
- Rs13,750
- Rs 8,760
- Rs15,000
- Rs37,510

3

Contents
Introduction: Indian agriculture and tractors tractors.............................................................................................................................. 5
Tractor penetration in Indian farm households ……………………………………………………………………………………………………….. 6
The future………………………………………………………………………………………………………………………………………………………..7
Background………………………………………………………………………………………………………………………………………………………8
Indian tractor market: Sales (including exports……………………………………………………………………………………………………….. 9
I di t t k t S l (i l di t Indian tractors: Exports………………………………………… ……………………………………………………………………………………… ..10
Indian tractor market: Market share …………………………………………………………………………………………………………………… 11
Indian tractor market: Segment-wise sales……………………………………………………………………………………………………………. 13
Indian tractor market: State-wise sales………………………………………………………………………………………………………………… 15
Current trends in farm mechanisation…………………………………………………………………………………………………………………. 17
Key requirements for tractor growth………………………………………………………………………………………………………………….….18
Factors affecting tractor sales……………………………………………………………………………………………………………………………..19
-Rainfall…………………………………………………………………………………………………………………………………………………………19
-Farm income…………………………………………………………………………………………………….…………………………………............ 20
-Interest rates………………………………………………………………………………………………………………………………………………….21
-Tractor financing…………………………………………………………………………………………………………………………………………….22
-Greater credit allocation……………………………………………………………………………………………………………………………………23
Company profiles
Mahindra & Mahindra Limited………………………………………………………………………………………………………......................... 24
Escorts Limted………………………………………………………………………………………………………………………………………………..36
Tafe Limited………………………………………………………………………………………………………………………………………………….. 40
John Deere Pvt Ltd…………………………………………………………………………………………………………………………………………..41
ITL………………………………………………………………………………………………………………………………………………………………..42
Appendix : Agricultural and irrigated area in India…………………………………………………………………………………………………..43
Appendix : Global agri-commodity price movement…………………………………………………………………………………………………. 44
Appendix : Minimum support prices (wheat, rice, sugar)…………………………………………………………………………………………...45

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Introduction: Indian agriculture and tractors
Highlights of the Indian agricultural sector
Has always been a key sector of India’s economy
Currently contributes ~18% of Indian GDP
Accounts f ~10% of I di ’ exports
A
t for 10% f India’s t Second largest producer of rice and wheat in the world
Largest producer of pulses
Fourth largest producer of coarse grains
Second largest producer of vegetables, groundnuts and fruits
Current average growth rate: 2.8%

Highlights of the Indian tractor industry
The Indian tractor industry has developed over the years to become the largest tractor market in the world.
From just about 50,000 units in the early eighties, the size of the tractor market in the country has grown to over 600,000 units. Increased use of tractors for haulage and non agricultural applications non-agricultural applications.
The opportunities are still huge considering the low farm mechanisation levels in the country, when compared to other developed economies across the world.
After a splendid performance during the last two to three years, the Indian tractor industry is believed to head for a slowdown , which we believe is a myth. y 5

Tractor penetration in Indian farm households

46.2%
Large
Farmers
>20 acres
1%

21.9%

Medium Farmers

82mn farm households

5-20 acres
17%

Small Farmers
2.5-5 acres
19%

1.2%

Marginal Farmers
<2.5 acres
63%

Source: NSSO (59th Round), Dolat Capital

6

The future…
India agriculture 2020: Government vision
Rising productivity and rapid diversification in the agricultural sector.
Total proportion of work force involved in agriculture is expected to decrease from 56% to 40%.
Agriculture growth rates are expected to increase from the current average of 2.8% to ~4-5%.
Agriculture-based energy policy to focus on production of fuel oil and biomass power; could generate lucrative alternative markets for farm production while reducing the country’s dependence on imported fuels.
Accelerated acquisition of technology capabilities to raise productivity in agriculture, industry and services.

For the year FY12-14:
Demand outlook for FY12-14 remains positive We expect the industry to grow ~11-12% YoY positive. 11-12% YoY.
Farm income growth continues to be strong and acts as a strong catalyst for demand.
Tractor financing continues to enjoy priority lending status, thus attracting lower interest rates and higher participation by banks.
The greater participation by NBFCs and private banks will further boost sales sales. The meteorological department has predicted a regular monsoon for this year. Although rainfall does not directly affect tractor sales, availability of water will definitely lead to higher productivity, which will boost tractor sales.
Successful implementation of government schemes (NREGA) and higher minimum support prices will put more money directly in the farmers’ hands, driving tractor demand. y , g 7

Background
Before the 1960s, India had to import most of its food. However, improved farming techniques, including farm mechanization, the use of irrigation and high-yield grains, have greatly increased the food production and allowed India to become self-reliant with regard to food. Since most of the cropped area, even now, does not have any assured irrigation, monsoons are crucial for agricultural production. Agricultural development in India can be categorised into four major periods:
Pre-Green Revolution - Before 1960s: there was a need for higher productivity of coarse grains and pulses per unit of land. Green Revolution (mid 1960s-1980s) - a period of expansion of area and rapid growth in productivity of wheat and rice, expansion of agricultural research and establishment of national infrastructure.
Post-Green Revolution (mid 1980s-2000) - a period of expansion of area under maize, cotton, sugarcane and oil seeds and continued growth in productivity achieved through intensification of chemical use and labour.
The Current Stage (2000 present) - characterized by the following: Further diversification of cropping patterns from low
(2000-present)
lowvalue to high-value crops, such as fruits, vegetables, flowers and other horticultural crops for domestic consumption, processing and export.

8

Indian tractor market: Sales (including exports)
Tractor market has grown at a CAGR of 12.8%, in the last five years
Comparatively young by world standards, the tractor market has expanded at a spectacular pace in the last few years.
The tractor industry in India has developed over the years to become one of the largest tractor markets in the world. From only about 50,000 units in the early eighties, the size of tractor market in the country has grown by up to ~600,000 units.
Sales, steady since FY07, should increase even more
(as witnessed in FY12) due to rising farm income and rural growth.

Tractor sales have always been better in the second half of the year than the first half. The exception to this was FY09, when
2HFY09 sales were 8% lower than in 1HFY09.

Source: Dolat Capital, CMIE

9

Indian tractors: Exports
Indian tractors are the cheapest in the world. By some estimates, the cost of a tractor produced in India is as much as the cost of its gear box in a developed country. The scope for exports, therefore, is tremendous.

Source: Alchemy Research, CMIE

Exports in the last 10 years have been improving year-on-year (with the exception of FY10). From a mere ~2,700 tractors e po ted exported in FY00, India managed to export ~42,000 tractors in FY09. In FY11, the exports registered a growth of 68% YoY.
00, d a a aged e po t
2,000 t acto s
09.
, t e e po ts eg ste ed g o t o o .
Exports formed around 11% of total tractor sales. India mainly exports to USA, Nepal, Bangladesh and Sri Lanka.

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Indian tractor market: Market share
Currently, there are as many as 10 players (including MNCs) in tractor manufacturing, in India.
About 90% of the market is shared by only the top five to six players.
Mahindra & Mahindra (M&M) continues to dominate the industry with close to 40% market share.
Tractor and Farm Equipment Limited (TAFE) has the second largest market share in India at ~21%, while other players like
Escorts (~12%), John Deere (~10%), ITL (~8%) and New Holland Tractors (~6%) constitute the balance.
India tractor market share - FY00

India tractor market share - FY05

India tractor market share – FY11

Source: Dolat Capital, CMIE

11

Indian tractor market: Market share
Change in market share in Indian tractor industry over the last 10 years:

Source: Dolat Capital, CMIE
Capital

M&M has continued to dominate the Indian tractor market during the last 10 years. In FY09, it acquired PTL, further consolidating its leadership position.
On detailed analysis we conclude that the company has gained from the synergies of acquisition: M&M’s post acquisition analysis, M&M s post-acquisition market share (39.7%), in FY11, increased from M&M and PTL’s combined FY08 market share (M&M 28.5%, PTL 8.1%).
Tractor and Farm Equipment Limited (TAFE), the second largest tractor player in India, has been consistent and registered a growth in its market share from 17.4% in FY00 to 21.0% in FY11. g g
Escorts is the third largest player in India and has managed to maintain its position, but has lost much of its market share. Its ~20% share in FY00 has come down to 12.1% in FY11.
International Tractor Limited (ITL), started tractor production in FY02 and currently has a market share of ~9%.

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Indian tractor market: Segment-wise sales
The Indian tractor market is broadly classified into five segments: less-than-20 hp (horsepower), 21-30 hp, 31-40 hp, 41-50 hp and 50+ hp.
India has been predominantly a 31-40 hp market, ~42% of the industry.
However, during the last 5 years, there has been a shift to higher hp tractors. The share of 40+hp tractors has gone up from 29% in FY05 to 44% in FY11, clearly indicating the multi-use of tractors.

India tractor sales segment-wise - FY00

India tractor sales segment-wise - FY05

India tractor sales segment-wise– FY10

Source: Dolat Capital, CMIE

13

Indian tractor market: Segment-wise sales
Change in market share in Indian tractor industry over the last decade:
Ch
i k h i I di i d h l d d
Combined share of tractors above 40 hp has more than doubled over the last ten years

21-30 hp – The share of this segment has consistently declined over the last 10 years from ~22% in FY01 to ~19% in FY05 and further down to ~13% in FY11.
31-40 hp – India has been predominantly a 31-40 hp market. However, market share of this segment has also declined over the last 10 years. In FY01, this segment had a market share of ~55%, which came down to ~51% in FY05. In FY11, this segment had a y , g ,
,
g market share of ~42%.
41-50 hp – This segment has seen a steady improvement in its market share over the last 10 years. The market share improved from ~15% in FY01 to ~21% in FY05. In FY11, this segment had a share of ~28% of total sales.
51 and above hp – The biggest growth in market share happened in this segment. It grew from ~7% market share in FY01 to
~16% i FY11
16% in FY11.
The future:
More sophisticated and powerful tractors are making their way into the market.
The dependence on machines is increasing every day due to a large exodus of farmers into urban areas, which in turn makes labour scarce and costly in rural areas.
Powerful tractors of over 50 hp may be in great demand, with leasing gaining importance (as the future is expected to lie in co-operative farming).
Also driven by a growing demand for tractors from the infrastructure sector (mainly construction activities).

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Indian tractor market: State-wise sales
About 75% of tractor sales in India come from seven to eight major states.
Uttar Pradesh leads the state-wise tractor sales.
Other major markets include Andhra Pradesh, Rajasthan, Maharashtra, Madhya Pradesh, Haryana, Gujarat and Punjab.
India tractor sales – State-wise market share

Source: Dolat Capital, CMIE

Uttar Pradesh (U.P.) – Market share of tractor sales in this state has come down significantly from ~27% in FY01 to ~16% in
27%
16%
FY12 (up to January). However, U.P. continues to remain the leader in terms of highest tractor sales. It registered a growth of
11% YoY in FY12 (till January).
Andhra Pradesh (A.P.) – A.P registered a 3% YoY growth in tractor sales in FY12 (up to January). Its market share has declined from 9.2% in January 2011 to 8.2% in January 2012.
Rajasthan (RAJ) – Rajasthan registered a significant growth of 48% YoY in FY12 (up to January). It’s market share has improved from 7.4% in January 2011 to 9.5% in January 2012.
Maharashtra (MAH) – The total market share of this state has improved from ~6% in FY01 to ~11% in FY11. In FY12, tractor sales grew 13% YoY over FY11 sales (up to January).

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Indian tractor market: State-wise sales
India tractor sales – State-wise market share

Source: Dolat Capital, CMIE

Madhya Pradesh (M.P.) –. The state registered a growth of 7% YoY in FY12 (up to January) versus industry growth of 15%, thus y (
)
g g ( p
y)
yg
,
losing market share from 10.3% in January 2011 to 9.5% in January 2012.
Gujarat (GUJ) – The state has registered a remarkable growth of 54% YoY in FY12 (up to January) selling almost ~48,000 tractors. Its market share improved from 7.9% in January 2011 to 10.5% in January 2012.
Bihar – The state has seen decline in market share. Its share was ~6% in January 2011. In FY12 (up to January), it registered a
6% Y Y growth i volumes t ki
YoY
th in l taking it market share d its k t h down t 5 5% to 5.5%.
Punjab (PUNJ) – Punjab has been amongst the loser states. The state had 8.2% share in FY01, which has come down to 6.6% in
FY09. The state has registered a 2% decline in volumes in FY12.
Other States – Overall, tractor sales in India grew by 15%.
Compared to this, A
C
d hi Assam grew b 61% Y Y T by YoY, Tamilnadu grew b 34% Y Y J&K grew b 17% Y Y il d by YoY, by YoY.
The states which registered lower growth year-on-year were Orissa (16%), Uttarakhand (12%) and Kerela(6%).

16

Current trends in farm mechanisation
Increased use of tractors for haulage and non-agricultural applications.
Moving towards secondary mechanisation, leading to increased use of new attachments like reapers, combines or seed drills.
Farmers with small land holdings (two to four acres) are buying lower horsepower tractors because of land fragmentation
(bifurcation of property and formation of nuclear families).
Reduced availability of cheap farm labour.
Replacement demand mainly coming from traditional north Indian states.

17

Key requirements for tractor growth
Many factors influence tractor demand:
Primary demand usually comes from agricultural growth.
Secondary demand comes from multi-use (non-agricultural use) of tractors.
The i
Th primary usage is dependant on the following factors: i d d h f ll i f There is an immediate need to expand agri-land by conversion of wasteland. For the past 20 years, irrigated and arable land area has not increased.
Availability of water is a crucial factor in agricultural yield, but should not depend only on the yearly variations and predictability of monsoons monsoons. Government implementation of major projects: e.g. the national policy on water resources (interlinking of rivers) requires urgent government attention. Even the incremental progress achieved while implementing this project will give a boost to Indian agriculture. The short-term focus must be on increasing and maintaining natural water resources such as natural water storage, ponds, lakes and retention dams.
Credit and money availability has always been a big factor in the tractor industry’s and mechanisation’s fortunes. The government must initiate a long-term policy of zero or marginal interest rates to enhance the use of agricultural mechanisation. Higher participation of commercial banks and NBFCs to offer finance to all customers with clear intention to pay.
There needs to be a uniform loan policy and a standardised application format across all banks. p y pp 18

Factors affecting tractor sales
Rainfall trend and tractor sales
In the exhibit below, we are exploring the correlation between the rainfall and tractor sales in a fiscal year.

Growth (%)

Source: IMD, Dolat Capital

Contrary t popular b li f th l t 10
C t to l belief, the last 10-year d t d i t th t th rainfall h data depicts that the i f ll has no significant b i ifi t bearing on th sales of t i the l f tractors. t (Correlation 0.25).
There has been surplus rains only in two out of last ten years while tractor sales have been positive in seven out of last ten years. Despite poor rainfall in FY09 and FY10, the growth in tractor sales in FY10 and FY11 were high.

19

Factors affecting tractor sales
Farm income and tractor sales
In the exhibit below, we are exploring the correlation between the farm income of one year and tractor sales in the following fiscal year. Note: Farm income has been calculated based on crop production and MSP. Actual income may be higher
Source: Dolat Capital, CMIE, Agricultural Ministry

During FY06–FY11, the farm income registered a CAGR of 12.5%.
During the same period tractor sales registered a CAGR of 12.8%.
Furthermore, there is a correlation of 0.88 between the two variables, from FY01 to FY11.
Thus,
Thus it is evident that tractor sales are highly proportional to farm income. Higher farm income leads to higher tractor income sales.
Farm income grew 6% YoY in FY11 while tractor sales are up ~13% in FY12 (up to January).
Farm income continues to be higher and should continue to benefit tractor sales in the coming years as well.

20

Factors affecting tractor sales
Interest rates and tractor sales
In the exhibit below, we are exploring the correlation between the interest rates and tractor sales in a fiscal year.

Source: Dolat Capital, CMIE

In the above chart, we have taken the SBI prime lending rate (PLR) as a benchmark for interest rates.
The h
Th chart clearly d i l l depicts a strong i inverse relationship b l i hi between the two variables. Lower i h i bl interest rates h have b been one of the major f h j drivers for tractor sales and vice-versa.

21

Factors affecting tractor sales
Tractor financing and tractor sales
Tractor finance qualifies for priority sector lending. The banks are mandated to lend 40% of their total lending to priority sectors. Out of this, tractors qualify for the 4% direct lending and the first 18% of indirect lending.
Currently, the share of various players in domestic tractor financing is:
PSU Banks – 40-45%

Private Banks - ~10%
NBFCs - ~20%
Unorganised lending – 20-25% g g
The average ticket size for a tractor loan is ~Rs300,000-Rs350,000. The lending term varies from banks to NBFCs.
The banks finance ~72-74% of the loan to value (LTV) for a term up to seven years , with interest rates between 10-12%.
The NBFCs finance 66-68% of the LTV for a term up to three years (four years in some cases) with interest rates between
17-18%.
Around 90-92% of the total domestic tractor sales were financed during FY00-FY04. During the next few years, between
FY05-FY09, this proportion came down to 85-90%.
In FY11, only 75-80% of total tractors sales were financed. This typically means there was a higher proportion of cash sales than in FY09. The main reason for such a strong growth in the cash sales of tractors was the higher farm income and the b d h booming rural economy. Th main reasons f this were: i l
The
i for hi
Higher government MSP – The farmers realised higher amounts for their crops due to the higher MSP. This was predominantly in Uttar Pradesh and Andhra Pradesh. The highest cash sales were witnessed in the sugarcane belt in U.P.
NREGA: The rural employment guarantee has significantly added to rural India’s income This higher income has
India s income. led to the purchase of more earning assets.
Scarce and expensive labour: There has been a large migration of farmers from rural areas to urban areas, which, in turn, makes labour scarce and costly in rural areas. The dependence on machines is increasing every day. 22

Factors affecting tractor sales
Greater credit allocation to agriculture will boost tractor sales
From the fiscal period
2003-04 to 2008-09, the
Indian government increased its agriculture budget allocation significantly, by almost
300%.
Credit disbursements have already gone up from
Rs870bn in 2003-04 to about Rs2,500bn in 200708.

Between the fiscal period 2003-04 and 2008-09, the Indian government increased its agriculture budget allocation significantly, by almost 300%. The Rashtriya Krishi Vikas Yojana was launched in 2007-08, with an outlay of Rs250bn, to increase the growth rate of the agricultural sector to 4% per annum, during the Eleventh
Plan period.
Pl
i d
This included measures to increase the flow of credit to agriculture. Credit disbursements have already gone up from Rs870bn in 2003-04 to about Rs2,500bn in 2007-08, a threefold increase in credit, as a result of successive agriculture budgets. To strengthen the short-term co-operative credit structure, the government is implementing a revival package in 25 states involving a financial assistance of around Rs135bn. Furthermore, it has continued to provide interest subvention in 2009-10 to ensure that farmers get short-term crop loans up to
Rs300,000 at ~7% p.a..
The Agricultural Debt Waiver and Debt Relief Scheme for farmers, from the 2008 agriculture budget, was implemented by 30 June, 2008 as scheduled. The scheme has been able to restore institutional credit to indebted farmers. The total debt waiver and debt relief so far, amounts to Rs653bn, covering ~36 million farmers.

23

Our Top Pick: Mahindra & Mahindra Limited
In FY10, M&M became the largest tractor-selling company in the world
FY10
tractor selling

CMP – Rs683
TP - Rs811 (19%)
Recommendation - Buy

24

Company profile: Mahindra & Mahindra
M&M has always been a leader in the farm equipment sector. After acquiring Punjab Tractors Limited (PTL), it has further consolidated its position as the No.1 player in the country.
Historically, M&M tractors have outperformed the tractor industry during the last six years.
With a market share of almost 41%, we believe the company is well poised to take advantage of the growth in the tractor segment. segment
Land fragmentation (bifurcation of property and formation of nuclear families) is a major deterrent to tractor growth, but the new offering from M&M, ‘Yuvraaj’, targets this issue.

SOTP Valuation
M&M
Tech Mahindra
M&M Financial Services
Mahindra Lifespace
Mahindra Holidays & Resorts
MUSCO
Mahindra Forgings
Mahindra Navistar

Per share
696
36
45
7
20
1
4
2
811

The stock is currently trading at 12.8xFY14E. We maintain a BUY rating with a target price of Rs811 (upside of 19%)

25

Company profile: Mahindra & Mahindra
Overview
The Mahindra Group's Farm Equipment Sector (FES) produces amongst the top-three tractor brands in the world. It also holds the distinction of being the first tractor company globally to win the Deming Application Prize in 2003.
Mahindra & Mahindra acquired the majority stake in Punjab Tractors Limited (PTL) in early 2007. Benefits of this q j y j
(
) y acquisition include economies of scale, sourcing benefits and vendor rationalisation. Following the Mahindra–PTL merger in February 2009, PTL is now known as Swaraj Division. Today, the domestic market share of M&M is around
41%.
M&M has a subsidiary agricultural tractor manufacturing company in India, known as Mahindra Gujarat Tractor
Limited (MGTL).
A pioneer in the domestic industry
M&M has six state-of-the-art manufacturing plants (including two Swaraj plants) in India, two plants in China, three assembly plants in the US and one assembly plant in Australia.
Brand Mahindra sells a range of tractors that includes Bhoomiputra, Shaan, Sarpanch and Arjun Ultra-1, with each
Ultra 1,
(except Shaan) having a range of variants based on the horsepower (hp) and other attributes.
M&M sells its 15 hp to 60 hp category tractors in the domestic market.
The international operations of the Farm Equipment Sector are spread across 6 continents and are in around 25 countries. It has state-of-the-art manufacturing plants in India and China with a combined capacity to produce more than
230,000 tractors a year.
Besides these plants, there are assembly plants in the USA and Australia.
FES has more than 1,000 dealers world-wide. Currently, the tractors for the international market range between 25 and
125 hp.

26

Company profile: Mahindra & Mahindra
Increasing global presence
Mahindra USA (MUSA)
Mahindra USA (MUSA) is a wholly-owned subsidiary of M&M. It has reinforced its position in the 'compact' and 'utility' segments of tractors. The company has three assembly plants in the US: Houston (Texas), Calhoun (Georgia) and Redbluff (California).
Mahindra Australia
Mahindra Australia, based in Brisbane, offers a complete range of 2WD and 4WD compact tractors (20-30 hp range) and utility tractor models (45-80 hp range) along with attachments like loaders, back-hoes and mowers. These attachments can also be put to multiple uses.
Mahindra China Tractor Company Ltd. (MCTCL)
Mahindra China Tractor Company Ltd. (MCTCL), a joint venture between the Jiangling Motors Company Group and Mahindra &
Mahindra FES, started operations in July 2005. It is increasingly becoming a centre for M&M to further expand its product range and to develop more tractors for China and other overseas markets.
JV with Jiangsu Yueda Yancheng Tractor Manufacturing Co. (China)
In 2008, Mahindra acquired the majority stake in the third largest tractor company in China, by forming a Joint Venture (JV) with
Jiangsu Yueda Yancheng Tractor Manufacturing Co. Ltd. (Yancheng Tractor). Mahindra holds 51% in the JV. FES has footprints in many countries. Some of the major markets are in Africa (major countries: Nigeria, Mali, Chaad, Gambia, Angola, Sudan, Ghana and
Morocco), Latin America (Chile and Brazil), South Asian countries (Sri Lanka, Bangladesh, Nepal), Middle-East (Iran, Syria, etc.) and
)
(
)
( g p )
(
y
)
Eastern Europe (Serbia and Macedonia; FES entered the Turkey market in 2008).

27

Mahindra & Mahindra product portfolio
Bhoomiputra: ranges from 25 hp to 50 hp.
Sarpanch: ranges from 30 hp to 52 hp.
Arjun: ranges from 45 hp to 60 hp.
Shaan: This is a specialised multi-utility tractor from the M&M stable. This has been designed to look like a jeep and function like a tractor. It is specially made for haulage usage as well.
Swaraj Division: tractors range from 22 hp to 50 hp.
Yuvraaj: is the latest offering from M&M. It is a 15 hp tractor only targeted at agriculture by small and marginal farmers.
Tractor price list
15 hp - ~Rs162,000
30 hp - ~Rs330,000
50 hp - ~Rs485,000
60 hp - ~Rs525 000
~Rs525,000
The company regularly launches new products under these brands and upgrades its existing products from time to time under the slogan, “ENHANCE COMFORT, REDUCE EFFORT”.

28

Yuvraaj: The game-changer
This is the latest offering from M&M to cater to small and marginal farmers, which form ~82% of the total Indian farm households. As depicted in Slide 5, the tractor penetration in this category of farmers is only around one per cent. M&M has strategically planned to capture this market with Yuvraaj. At this point in time, there are no significant players who have a tractor in this segment (less than
20 hp).
M&M l launched thi product only i S h d this d t l in Saurashtra (G j ht (Gujarat) i N
t) in November 2009 and sold around 6000 t b d ld d tractors i FY11 Th company t in FY11. The plans to launch it in four to five states (Uttar Pradesh, Madhya Pradesh, Maharashtra, Rajasthan, Tamil Nadu) in FY12 and the rest of the country in FY13.
Priced at around Rs162,000, the Yuvraaj is the cheapest tractor available. It is clearly a high-volume, low-margin product and could well be the game-changer for M&M.

29

Quarterly performance: Farm equipment sector

Source: Company, Dolat Capital

30

Financials: Farm equipment sector

Source: Company Dolat Capital
Company,

31

Financials: Auto sector

Source: Company, Dolat Capital

32

M&M: Standalone financials
Profit & Loss Account
Year to (Rs mn)

Cashflow Statement
FY10

FY11

FY12E

FY13E

FY14E

Net Sales

186,021

234,937

300,570

344,663

397,162

PAT

Raw Materials

123,462

162,639

220,017

252,293

290,723

Add: Depreciation

Employee Cost

11,985

14,456

17,058

19,616

22,559

Add: Interest expense

278

(503)

144

144

144

Other Expenses

21,022

23,280

26,450

30,330

34,950

Less: Other income

(1,994)

(3,095)

(3,871)

(4,397)

(4,982)

156,469

200,375

263,525

302,240

348,232

Change in working capital

(3,903)

3,379

1,833

(931)

(117)

29,552

34,562

37,045

42,423

48,931

0

0

0

0

0

1,994

3,095

3,871

4,397

4,982

Cash flow from operations

18,967

30,540

29,709

31,038

36,808

278

(503)

144

144

144

Change in fixed assets

(8,592)

(10,830)

(15,000)

(15,000)

(15,000)

3,708

4,139

4,815

5,680

6,685

Change in investments

(6,116)

(29,273)

(12,000)

(15,000)

(15,000)

28,468

35,196

35,957

40,996

47,083

Other income

1,994

3,095

3,871

4,397

4,982

7,590

8,575

9,169

10,454

12,006

Others

908

1,175

0

0

0

20,878

26,621

26,788

30,542

35,077

Cash flow from investing activities

(11,806)

(35,833)

(23,129)

(25,603)

(25,018)

Change in debt

(11,726)

(4,749)

0

0

0

(6,238)

(8,026)

(8,014)

(8,014)

(8,014)

7,274

10,319

0

0

0

(278)

503

(144)

(144)

(144)

Total Expenditure
EBITDA
Other Income
Interest
Depreciation
PBT
Total tax
PAT
Less: Adjustments
Adjusted PAT

0

0

0

0

0

20,878

26,621

26,788

30,542

35,077

Year to (Rs mn)

Others

Dividend & dividend tax
Change in equity & share premium
Interest paid
Other Adjustments

FY10

FY11

FY12E

FY13E

FY14E

20,878

26,621

26,788

30,542

35,077

3,708

4,139

4,815

5,680

6,685

5,410

(4,082)

0

0

0

(5,557)

(6,035)

(8,158)

(8,158)

(8,158)

1,688

(11,286)

(1,578)

(2,723)

3,632

Opening cash and cash equivalents

15,744

17,432

6,146

4,568

1,845

Closing cash and cash equivalents

17,432

6,146

4,568

1,845

5,476

Cash flow from financing activities
Change in cash & cash equivalents

Source: Company, Dolat Capital

33

M&M: Standalone financials
Balance Sheet

Ratios
FY10

FY11

FY12E

FY13E

FY14E

66.4

69.2

73.2

73.2

73.2

6.4

6.2

5.7

5.7

5.7

Total expenses

84.1

85.3

87.7

87.7

87.7

EBIDTA

15.9

14.7

12.3

12.3

12.3

PAT

11.2

11.3

8.9

8.9

8.8

ROCE

20.4

21.6

19.7

19.5

19.3

ROE

31.9

29.4

23.8

22.9

22.2

Debtor days

21

20

19

19

19

Inventory days

22

22

22

21

21

Net Working capital

Creditors days

93

84

80

80

78

Current Assets

Working capital days

11

2

(10)

(11)

(9)

Year to (Rs mn)
Equity capital
Reserves & Surplus
Net worth
Minority interest y FY10

FY11

FY12E

FY13E

FY14E

2,910

3,276

3,276

3,276

3,276

75,358

99,858

118,632

141,160

168,223

78,268

103,134

121,908

144,436

171,499

0

0

0

0

0

28,802

24,053

24,053

24,053

24,053

107,104

127,187

145,961

168,489

195,552

27,385

33,860

44,045

53,365

61,680

9,642

9,859

9,859

9,859

9,859

Total fixed assets

37,027

43,719

53,904

63,224

71,539

Investments

63,980

93,253

105,253

120,253

135,253

Total debt
Total

Net block
Capital WIP

60,424

61,435

68,589

73,190

87,689

Inventories

11,888

16,942

18,936

21,369

24,624

Debtors

12,581
,

13,547
,

17,433
,

18,956
,

21,844
,

Cash & bank

17,432

6,146

4,568

1,845

5,476

Other Current Assets

18,523

24,799

27,652

31,020

35,745

Current Liabilities & Provisions

51,965

67,676

78,242

84,634

95,385

Creditors

30,868

43,658

52,804

58,027

66,866

3,132
,

3,959
,

2,536
,

2,421
,

2,780
,

Provisions

17,965

20,059

22,902

24,186

25,739

Net Deferred Tax Assets

(2,403)

(3,544)

(3,544)

(3,544)

(3,544)

% of net sales
Raw material costs
Employee costs

Asset based ratios (%)

Turnover ratios (days)

Growth ratios (%)

0

0

0

145,961

168,489

195,552

15.3

EPS

125.5

13.2

0.6

14.0

14.8

98.8

11.1

2.7

14.6

15.3

EPS

35.9

40.6

40.9

46.6

53.5

CEPS

42.2

46.9

48.2

55.3

63.7

134.5

157.4

186.1

220.5

261.8

9.4

10.8

10.8

10.8

10.8

P/E

19.0

16.8

16.7

14.7

12.8

P/CEPS

16.2

14.5

14.2

12.4

10.7

5.1

4.3

3.7

3.1

2.6

1.4

1.6

1.6

1.6

1.6

13.8

13.5

12.6

11.1

9.5

2.2

2.0

1.6

1.4

1.2

1.2

0.9

0.9

0.9

0.9

0.3

0.1

0.1

0.0

0.1

D/E ratio

0
127,187

15.2

14.5

Quick ratio

41
107,104

14.7

7.2

Current ratio

Total

27.9

17.0

Yield (%)

Miscellaneous Exp

26.3

231.3

P/BV

Other liabilities

43.9

EBITDA

0.4

0.2

0.2

0.2

0.1

73.4

(50.4)

186.4

212.4

243.8

Net Sales

CEPS
Per share (Rs)

BV
DPS
Valuations (x)

EV/EBITDA
EV/sales
Solvency ratios

Interest coverage ratio

Source: Company, Dolat Capital

34

Other Key Players: an Overview

35

Escorts Limited
CMP – Rs73
TP - Rs85 (16%)
Recommendation - Buy

36

Company profile – Escorts
Escorts has a tractor manufacturing capacity of 98,940 tractors per annum, which is the highest in Asia at one location. Its manufacturing operations are divided into three plants: a components plant, a tractor assembly plant, a crankshaft and hydraulic plant. Since inception, it has manufactured over one million tractors.
The tractor assembly plant is divided into two lines: the Farmtrac Line and the Powertrac Line. The Farmtrac Line is a composite line that h h has machining as well as assembly activities f engines, transmissions and tractors, whereas on the P hi i ll bl i ii for i i i d h h Powertrac Li
Line, only l assembly activities for engines, transmissions and tractors are being carried out.

Company volume growth versus industry growth

Source: Dolat Capital, CMIE

37

Escorts: Financials
Profit & Loss Account
Year to (Rs mn)

Cashflow Statement
FY10

FY11

FY12E

FY13E

FY14E

Year to (Rs mn)

FY10

FY11

FY12E

FY13E

FY14E

Net Sales

25,980

33,783

41,234

44,946

49,408

PAT

286

1,320

1,264

1,083

1,238

Raw Materials

17,741

23,225

29,841

32,541

35,771

Add: Depreciation

480

532

487

522

529

Employee Cost

2,815

3,296

3,737

4,223

4,772

Add: Interest expense

Other Expenses

4,330

4,812

5,621

5,958

6,598

Less: Other income

24,886

31,333

39,199

42,722

47,142

1,094

2,450

2,035

2,224

2,266

Total Expenditure
EBITDA

860

181

372

268

92

(821)

(19)

(19)

(50)

(50)

Change in working capital

4,502

(1,417)

413

216

29

Others

3,110

0

0

0

0

Other Income

821

19

19

50

50

Cash flow from operations

8,416

597

2,516

2,039

1,838

Interest

860

181

372

268

92

Change in fixed assets

(6,526)

(300)

(300)

(300)

(300)

Depreciation

480

532

487

522

529

Change in investments

1,315

(500)

(1,000)

(500)

(500)

PBT

575

1,813

1,097

1,484

1,696

821

19

19

50

50

Total tax

290

490

(153)

401

458

12

0

0

0

0

PAT

286

1,323

1,251

1,083

1,238

Cash flow from investing activities

(4,377)

(781)

(1,281)

(750)

(750)

Change in debt

(4,382)

0

(500)

(1,688)

(1,832)

(109)

0

(120)

(164)

(176)

0

149

69

0

0

(860)

(181)

(372)

(268)

(92)

Less: Adjustments
Adjusted PAT

0

3

(13)

0

0

286

1,320

1,264

1,083

1,238

Other income
Others

Dividend & dividend tax
Change in equity & share premium
Interest paid
Other Adjustments

1,794

0

0

0

0

(3,557)

(32)

(922)

(2,119)

(2,099)

540

(216)

312

(830)

(1,011)

Opening cash and cash equivalents

1,423

1,964

1,748

2,060

1,230

Closing cash and cash equivalents

1,964

1,748

2,060

1,230

219

Cash flow from financing activities
Change in cash & cash equivalents

Source: Company, Dolat Capital

38

Escorts: Standalone financials
Balance Sheet
Year to (Rs mn)
Equity capital

Ratios
FY10

FY11

FY12E

FY13E

FY10

FY14E

805

954

1,023

1,023

1,023

13,446

14,766

15,910

16,830

17,892

FY11

FY12E

FY13E

FY14E
72.4

% of net sales
Raw material costs

68.3

68.7

72.4

72.4

Employee costs

10.8

9.8

9.1

9.4

9.7

Total expenses

95.8

92.7

95.1

95.1

95.4

EBIDTA

4.2

7.3

4.9

4.9

4.6

PAT

1.1

3.9

3.1

2.4

2.5

ROCE

3.9

7.3

8.7

6.2

6.6

ROE

2.4

8.8

7.7

6.2

6.7

Debtor days

81

54

55

54

52

Inventory days

51

42

42

43

42

Net Working capital

Creditors days

111

90

85

87

87

Current Assets

Working capital days

49

23

24

17

8
9.9

Reserves & Surplus
Net worth
Minority interest y 14,251

15,720

16,933

17,853

18,915

401

401

401

401

401

4,020

4,020

3,520

1,832

0

Total

18,671

20,140

20,853

20,085

19,316

Net block

15,597

15,365

15,178

14,956

14,727

123

123

123

123

123

15,720

15,488

15,301

15,079

14,850

1,067

1,567

2,567

3,067

3,567

Total debt

Capital WIP
Total fixed assets
Investments

11,716

15,261

17,523

16,961

17,512

Inventories

3,294

4,392

5,154

5,394

5,929

Debtors

4,261
,

5,743
,

6,598
,

6,742
,

7,411
,

Cash & bank

1,964

1,748

2,060

1,230

219

Other Current Assets

2,198

3,378

3,711

3,596

3,953

10,190

12,533

14,896

15,380

16,971

4,917

6,503

7,460

8,135

8,943

Asset based ratios (%)

Turnover ratios (days)

Growth ratios (%)

6,380
,

7,095
,

Provisions

1,372

790

266

865

934

302

302

302

302

302

57

57

57

57

57

18,671

20,140

20,853

20,085

19,316

Net Deferred Tax Assets
Miscellaneous Exp
Total

NM

289.5

(10.7)

(14.3)

14.3

480.5

104.5

(12.7)

(7.6)

10.0

EPS

3.6

13.8

12.4

10.6

12.1

CEPS

9.5

19.4

17.0

15.7

17.3

177.0

164.8

165.5

174.5

184.9

1.1

0.0

1.0

1.4

1.5

P/E

37.2

13.6

5.9

6.9

6.1

P/CEPS

13.9

9.7

4.3

4.7

4.3

0.7

1.1

0.4

0.4

0.4

0.9

0.0

1.4

1.9

2.0

11.6

8.3

4.4

3.6

3.2

0.5

0.6

0.2

0.2

0.1

1.1

1.2

1.2

1.1

1.0

0.2

0.1

0.1

0.1

0.0

0.3

0.3

0.2

0.1

0.0

Interest coverage ratio

7,169
,

1.9

EPS

D/E ratio

5,241
,

9.3

Quick ratio

3,901
,

9.0

(16.9)

Current ratio

Other liabilities

22.1

123.9

Yield (%)

Creditors

30.0

NM

P/BV

Current Liabilities & Provisions

(2.0)

EBITDA

0.8

7.8

4.8

4.8

14.2

Net Sales

CEPS
Per share (Rs)

BV
DPS
Valuations (x)

EV/EBITDA
EV/sales
Solvency ratios

Source: Company, Dolat Capital

39

Company profile: TAFE Limited
Tractor and Farm Equipment (TAFE) is among the top five tractor manufactures in the world. TAFE was incorporated in 1960 in
Chennai, India, in collaboration with Massey Ferguson (now owned by AGCO Corporation, USA). TAFE acquired the Eicher tractors business in 2005, its engine plant at Alwar and transmissions plant at Parwanoo, through a wholly-owned subsidiary, TAFE
Motors and Tractors Limited.
TAFE h f has four tractor manufacturing plants i I di i Ch f i l in India, in Chennai, B i Bangalore, M d l Madurai and Bh i d Bhopal. I h a total capacity of 80 000 l It has l i f 80,000 tractors per annum.

Company volume growth versus industry growth

Source: Dolat Capital, CMIE

40

Company profile – John Deere Pvt Ltd
John Deere India Private Limited is a subsidiary of Deere & Company, USA, in India. Its factory, located near Pune, manufactures
5000 Series agricultural tractors. It manufactures tractors in the range of 35-75 hp.

Company volume growth versus industry growth

Source: Dolat Capital, CMIE

41

Company profile – ITL
International Tractors Limited (ITL) was incorporated in 1995 to manufacture tractors. ITL is manufacturing various Sonalika brand tractors from 30 hp to 90 hp, and CLASS brand tractors from 70 hp to 90 hp. ITL is one of the top tractor-selling companies in India. These tractors are also exported to various countries including South Africa, Australia, Zimbabwe, Sri Lanka, Canada,
Bangladesh, Algeria, Zambia, Senegal, Ghana, etc. It has a total capacity of 42,000 tractors per annum.

Company volume growth versus industry growth

Source: Dolat Capital, CMIE

42

Appendix: Agricultural and irrigated area in India

Feb-06

Feb-02

Feb-98

Feb-94

Feb-90

Feb-86

Feb-82

Feb-78

Feb-74

Feb-70

Feb-66

Feb-62

Feb-58

Feb-54

%

Percentage of area under agriculture
44
43
42
41
40
39
38
37
36
35

Source: Dolat Capital, CMIE

2006

2003

2000

1997

1994

1991

1988

1985

1982

1979

1976

1973

1970

1967

1964

1961

1958

1955

50
45
40
35
30
25
20
15
10
5
0
1952

%

Percentage of agricultural land under irrigation

Source: Dolat Capital, CMIE

43

Appendix: Global agri-commodity price movement
Rice (5% broken), Bangkok

Wheat (No.1 western red spring), St.Lawrence

(US$/tonne

(US$/tonne)
800

Mar-08

Mar-09

Mar-10

Mar-09

Mar-10

Sugar (Raw), World

Mar-00

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

Mar-00

0

Mar-08

100

Mar-07

200

Mar-06

300

Mar-05

400

Mar-04

500

Mar-03

600

Mar-02

700

Mar-01

1,000
900
800
700
600
500
400
300
200
100
0

Cotton, North Europe

(US cent/kg)

(US cent/kg)
250

70
60

200

50
40

150

30

100

20

50

10

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

Mar-10

Mar-09

Mar-08

Mar-07

Mar-06

Mar-05

Mar-04

Mar-03

Mar-02

Mar-01

Mar-00

Mar-00

0

0

Source: Dolat Capital, CMIE

44

Appendix: Minimum support prices (India)
Minimum support price for wheat

Minimum support price for rice
(Rs/Quintal)
1,200

(Rs/Quintal)
1,200

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

0
2010

0
2008

200
2006

200
2004

400

2002

400

2000

600

1998

600

1996

800

1994

800

1992

1,000

1990

1,000

Minimum support price for sugar
(Rs/Quintal)
200
150
100
50

SS10

SS09

SS08

SS07

SS06

SS05

SS04

SS03

SS02

SS01

SS00

SS99

SS98

SS97

SS96

0

Source: Dolat Capital, CMIE
Note: SS – sugar season

45

Buy
ACCUMULATE

Name

Sector

REDUCE

Upside above 20%

Tel. No.

Upside above 5% and up to 20%

Email ID

Principal

SELL

Name

Upside up to 5%
Negative Returns

Sector

Tel. No.

Email ID

Midcap

+9122 4096 9753 nehals@dolatcapital.com

Dhaval Sh h
Dh
l Shah

Capital Goods
C i lG d

+9122 4096 9 26 dh
9122
9726 dhaval@dolatcapital.com l@d l i l

Analysts

Purvag Shah

+9122 4096 9747 purvag@dolatcapital.com

Research

Nehal Shah

research@dolatcapital.com

Amit Khurana, CFA

+9122 4096 9745 amit@dolatcapital.com

Head of Research
Senior Analysts

Associate

Amit Purohit

FMCG & Media

+9122 4096 9724 amitp@dolatcapital.com

Bhavin Shah

Pharma & Agro+9122 4096 9731 bhavin@dolatcapital.com chem Hardick Bora

Pharma & Agro

+9122 4096 9748 hardickb@dolatcapital.com

Priyank Chandra

Oil & Gas

+9122 4096 9737 priyank@dolatcapital.com

Hetal Shah

Financials

+9122 4096 9725 hetals@dolatcapital.com

Rahul Jain
R h lJ i

IT Services
S i

+9122 4096 9754 rahul@dolatcapital.com h l@d l t it l

Mahvash A i
M h h Ariyanfar E f Economy, Midcap +9122 4096 9736 mahvash@dolatcapital.com
Mid
h h@d l t it l

Rakesh Kumar

Financials

+9122 4096 9750 rakesh@dolatcapital.com

Pranav Joshi

Financials

+9122 4096 9706 pranavj@dolatcapital.com

Ram Modi

Metals & Mining +9122 4096 9756 ram@dolatcapital.com

Praveen Kumar

IT Services

+9122 4096 9723 praveen@dolatcapital.com

Sameer Panke

Construction

Rohit Natarajan

Construction

+9122 4096 9751 rohit@dolatcapital com rohit@dolatcapital.com +9122 4096 9757 sameer@dolatcapital com sameer@dolatcapital.com 46

Sales

Tel. No.

Email ID

Derivatives Team

sales@dolatcapital.com

Head of Derivatives
Aadil R. Sethna
A dil R S th

Janakiram K
J
ki
Karra

+9122 4096 9712
9122

janakiram@dolatcapital.com j ki
@d l t it l

Vikram Babulkar

+9122 4096 9746
+9122 4096 9735

kapil@dolatcapital.com

Email ID

+9122 4096 9708
9122

aadil@dolatcapital.com dil@d l t it l

vikram@dolatcapital.com

Kapil Yadav

Tel. No.

Derivatives Sales Traders
Chirag Makati
Mihir Thakar

Head – Dealing
Equities
P. Sridhar

+9122 4096 9728

sridhar@dolatcapital.com

+9122 4096 9702-03 chiragm@dolatcapital.com
+9122 4096 9701

mihir@dolatcapital.com

+9122 4096 9733

derivativesinfo@dolatcapital.com prachi@dolatcapital.com Quantitative Research
Prachi Save

Equity Sales Traders +9122 4096 9797

l t di @d l t it l salestrading@dolatcapital.co m

Derivatives Research

Parthiv Dalal

parthiv@dolatcapital.com

Bloomberg Id

+9122 4096 9705

dolatcapital@bloomberg.net dolatcapital@vsnl.com Board Lines
Fax Lines

+9122 4096 9700
+9122 2265 9200
+9122 2265 0410
+9122 2265 1278

Production Staff
Paresh Girkar
Rajesh Shinde

+9122 4096 9742
+9122 4096 9743

pareshgirkar@dolatcapital.com reajesh@dolatcapital.com This report contains a compilation of publicly available information, internally developed data and other sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated are accurate and the opinion given are fair and reasonable, we do not take any responsibility for inaccuracy or omission of any information and will not be liable for any loss or damage of any kind suffered by use of or reliance placed upon this information.
For Pvt. Circulation & Research Purpose only.

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