Deere to Mahindra Gain as Farmers Lose Workers: Corporate India

Mahindra & Mahindra Ltd., India’s biggest tractor maker, forecasts it will outperform the industry this fiscal year as a shortage of farm hands, rising labor costs and the best monsoon rains in six years drives demand.

The automaker’s tractor sales will exceed the industrywide growth forecast of as much as 12 percent, Rajesh Jejurikar, chief executive officer of Mumbai-based Mahindra’s farm equipment business, said in an interview by phone. Capacity utilization at the company, which operates seven tractor plants in India, is “very high,” he said, declining to give details.

Cultivators are losing farm hands to a government employment guarantee program to work on projects such as roads and canals encouraging demand for tractors from Mahindra to Deere & Co. An increase in labor costs to harvest crops in the world’s second-most populated nation is also prompting tillers to look at mechanization amid a bountiful monsoon season that is forecast to lift production of crops such as cotton and wheat to a record.

“Because of the big shortage of labor, farmers are opting for greater mechanization as well as higher horse power tractors,” said Jejurikar. “When you have a good monsoon, there is a huge boost in sentiment as well as improved cash flows for farmers.”

Tractors, SUVs

Mahindra’s local tractor sales rose a record 24 percent to 128,626 units in the six months ended September. The farm equipment business accounted for 20 percent of its revenue in the year ended March, while its automotive business including sport utility vehicles contributed 61 percent, according to data compiled by Bloomberg.

The surge in tractor sales comes as industrywide passenger vehicle deliveries are poised for the first drop since 2002.

Deliveries of tractors in India will rise at a compounded annual pace of as much as 9 percent over the next five years as the government backs rural development and farm mechanization, coupled with scarcity of labor and moderate ownership, according to Subrata Ray, senior group vice president at ICRA Ltd., part owned by Moody’s Investors Service.

That’s encouraging other manufacturers to expand in India.

Deere, the world’s largest farm-equipment maker, this month opened an $80 million factory, its second, in the central Indian state of Madhya Pradesh. The plant will make tractors for local demand as well as exports, the company said on Oct. 22.

“In the long run, there will be increased competition and that may affect margin, but in the short term we don’t see too much pressure,” said Shaukat Ali, an analyst with Quantum Securities Ltd. “If there is a significant capacity build up, in slow periods there may be pricing pressure.”

Monsoon Boost

With more than half the cultivated area in India being rainfed and the four-month monsoon season accounting for about 70 percent of total rainfall, a good monsoon boosts farm output. India received the highest rainfall since 2007 in the season that extends from June 1 to Sept. 30, according to the nation’s meteorological department.

Production of food grains in the 2013-14 season will probably reach a record as planting expanded after the rains covered the entire nation early, Agricultural Minister Sharad Pawar said last month. India is the world’s second-largest grower of rice, wheat, cotton and sugar.

“The last two years were bad for the tractor industry,” said S. Sridhar, the chief executive officer for agricultural machinery at tractor maker Escorts Ltd. “The monsoon at a record changed that as it put sentiment at a high.”

Availability, Costs

Cultivators in the country face another problem. The proportion of total workers employed in agriculture declined to 54.6 percent in 2011 from 58.2 percent in 2001, according to the latest Census data.

Labor costs in farming have risen 20 percent annually in the past three years, according to a report in August by the Commission for Agricultural Costs and Prices.

India guarantees 100 days of employment a year to rural households, giving an adult member unskilled manual work. About 80 million people got such work in the year ended March, according to the government website. The average wage per day per person increased to 125 rupees this year, compared with 114.5 rupees in the 12 months ended March 2012.

These factors are prompting cultivators to use more mechanized implements including tractors and harvesters. Escorts and Mahindra are banking on customers shifting to higher horsepower tractors.

“Because Mahindra has a wide range of tractors and large number of dealers, it stands to gain from the increase in demand,” said Umesh Karne, an analyst at Brics Securities Ltd. in Mumbai. “Other manufacturers tend to be restricted either in terms of product range or in geographical reach.”

Mahindra, which says it has the biggest share of the market at about 41 percent, has more than 900 dealers.

Tractor Range

The company offers a range of tractors starting from the 15-horsepower Yuvraj to 85-HP Arjun International. It plans to unveil a “brand new platform” as early as the end of fiscal 2014, Pawan Goenka, president of Mahindra’s automotive and farm equipment segments, said in a call with investors in August.

Mahindra said in August its profit grew about 35 percent from the segment and operating margin expanded by more than 1 percent.

“Tractors are a cash cow for Mahindra,” said Basudeb Banerjee, an analyst at Quant Broking Pvt. in Mumbai. “This year, the tractor segment will prop up the declines in the utility vehicle business for Mahindra.”

In contrast, the automaker’s passenger vehicle deliveries plummeted 13 percent to 125,264 units as buyers in cities stay away from showrooms amid weaker economic growth and accelerating inflation. The company has laid off 1,000 contract employees as well as instituted no-production days to counter the slump in demand for its sport utility vehicles and cars.

Earnings Estimates

Shares of Mahindra gained 0.1 percent to 868.90 rupees at the close in Mumbai. The stock has declined 6.7 percent this year, compared with a 3.2 percent gain in the S&P BSE Auto Index.

The automaker’s net income will probably be little changed in the 12 months ending March from a year earlier, according to the median of seven analysts’ estimates compiled by Bloomberg. Sales will increase 22 percent, faster than the pace a year earlier, according to the estimates.

Mahindra is counting on its tractor business to benefit from a surge in demand from villages.

“The rural economy is doing well,” said Jejurikar. “Sentiment plays a very important role in rural sales and this year is positive on a variety of factors.”

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