Tractor industry riding on the economic boom

India is in the global limelight these days. Narain Karthikeyan has made it into the Formula One circuit. Sania Mirza can claim great victories in tennis. India's cricket team was in full control of its test match against Pakistan.

India's agricultural sector is a participant in the boom underway. This week, we will look at the tractor industry and the growth opportunities it presents to investors.

The word tractor comes from a Latin word - "trahere" - meaning "to pull". Around the world, tractors are used for purposes other than farming, such as loading or in certain engineering activities. In India, tractors are used mainly for farming and for transportation.

India is the world's second largest market for tractors (after China). India was once a net importer of tractors, but after much hard work, it is a net exporter.

The market for tractors is highly dependent on the state of India's agricultural sector. The sector itself is highly dependent on the rains. Fortunately, the rain gods have been kind of late, which has translated into steady demand for new tractors.

Another form of kindness lavished on Indian agriculture has come from the government. As part of the government's plan to maintain India's annual GDP growth rate at seven to eight per cent, public servants have paid close attention to agriculture. After all, the sector does employ about 70 per cent of India's population.

The government's efforts to stimulate India's agricultural sector have included irrigation projects, giving farmers access to credit for new equipment, seeds and so on, subsidising the price of fertiliser, and training farmers in advanced methods. As a result, the sector has done well, and the tractor industry has benefited. Banks have also given assistance by making it easier for farmers to borrow money to buy tractors.

One can divide India's tractor market into segments based on the horsepower (HP) of the tractors' engines the unit by which engine power is measure. We can segment the market as follows: small tractors (21-30 HP), medium tractors (31-40 HP), large tractors (41-50 HP) and larger tractors (HP greater than 50).

Seventy-five per cent of India's tractor market is held by small- and medium-sized tractors. This is mainly because farmers' holdings tend to be on the small side.

Tractors in India tend to be far cheaper than those available in developed countries. This is partly because of lower costs of production and partly because Indian tractor makers have achieved economies of scale.

The recent budget provides additional good news for the tractor industry. Among other things, the budget maintains the zero per cent excise duty on tractors below 1,800 cc.

There are an estimated 11 tractors in usage per 1,000 hectares of gross cropped area (GCA). The world average is 19 tractors per 1,000 hectares of GCA meaning there is plenty of room for India's tractor industry to grow.

India's tractor industry grew 10.5 per cent last year. It is projected to grow 28-30 per cent this year. This phenomenal growth rate will be difficult to maintain.

Continued double-digit growth seems likely, however, given the industry's strong fundamentals, the easy availability of finance and the increasing mechanisation of Indian agriculture.

The Indian markets last week reached record highs. The market stood as high as 6,955 points but closed at 6,853 points for the week.

Banking stocks were in high demand last week because of the high growth expected in this sector. This sector was the top pick of FII's (foreign institutional investors) and buying was steady. Stocks in this sector gained about three to four per cent.

Pharmaceutical stocks saw some gains after a recent hammering. Stocks here rose two to three per cent.

Metal stocks also were in the thick of the action. The international prices of a few commodities increased dramatically, which in turn spurred stocks in this sector. Stocks here gained one to two per cent during the week.

The Indian markets are seeing a good run on the back of high liquidity and also because FII's are pouring in huge money here.

If this flow from FII's continues, we will see the markets sustaining their current levels and perhaps even breaking through the 7,000 mark.

Rising oil prices are, however, becoming a matter of concern for the world economy. This may affect growth rates.

The markets in the coming week may test the 7,000 point level. The trading range, however, will be between 6,600-7,000 points in the week to come.

The writer heads the Dubai office of Karvy Stock Broking Ltd.