Ind-Ra expects agriculture gross value added (GVA) to grow 2.9 per cent yoy in FY17 (FY16: 1.2%; FY15: negative 0.2%).
The agency expects overall volume growth to be lower in 2HFY17 (around 14%). The currency demonetisation would have a negative impact on the tractor sales in the next couple of months, post which demand is likely to normalize aided by the government focus to boost liquidity in the rural areas on a priority basis.
However, Ind-Ra observes that the industry growth in 1HFY17 has not been uniform across the country, with southern and western India seeing high double-digit growth, while growth in the northern and central India was muted. Thus, a strong uptick in growth in the northern and central markets could lead to a higher growth rate for the year.
The agency said that currency demonetisation has impacted farmers’ seeds and fertiliser purchases. If the cash crunch prevails for a longer time, it may lead to lower agriculture GVA and may have a more pronounced impact on tractor sales volumes in FY17.
Overall the Southwest monsoon situation in 2016 was much better than the previous two years and is likely to aid volume growth for the industry. The other indicators such as area sown under kharif crops as well as advance estimates of food grain production have also seen an improvement, indicating improved agricultural production this year.
The improved agricultural output should aid the loan asset quality in the tractor segment where delinquency levels have shot up. While the normalisation of asset quality is likely to be a prolonged affair, given the severity of the problem, the trends should be encouraging. The improved prospects should persuade larger participation from banks and non-banking finance companies, increasing the finance penetration and thereby aiding sales.
Sector companies are likely to see a margin expansion of up to 300bp due to operating leverage benefits. Most sector companies have adequate capacities to grow over the next two to three years, resulting in low capex requirements primarily for new product launches as well as maintenance capex. Thus, the credit profile is likely to remain strong and further improve in FY17. Improvements in revenue and operating margins would result in higher cash flows for sector companies in FY17.