After three robust years till FY19, tractor sales have shifted to reverse gear so far this fiscal year. The weak start to the monsoon may accentuate the decline in tractor sales.

On Monday, tractor sales for June of market leader Mahindra and Mahindra Ltd (M&M) underscored pessimism on the Street. The company, which commands 40% share of the domestic tractor market, posted 19% fall in sales. Combined with the double-digit decline in sales in April and May, the June quarter sets the tone for a weak FY20.

In April, brokerage firms had lowered tractor sales growth estimates for FY20 to 5-6%, even with the assumption of a normal monsoon.

A report by Kotak Securities Ltd said: “Until 26 June, the 36.8% deficit in rainfall has been the worst since 2014, when deficit was a tad higher at 38.4%."

Reports also said that this time around, spatial distribution has been unimpressive, too, with 28 out of the 36 sub-divisions receiving deficient rainfall.

This comes on the back of a decline in average crop prices, be it vegetables, cereals or pulses. A report on the tractor industry by Icra Ltd highlights that the third advance estimate of crop production indicates a decline in rabi crop output, coupled with poor kharif sowing.

Agri-sector analysts also point out that the western and southern regions of the country are worse off compared to others.

Note that signs of rural distress and weakness in farm sector incomes were already visible in tractor sales. M&M has been posting a year-on-year decline in sales from December. Peer Escorts Ltd has been reporting a decline in sales from March 2019.

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True, price hikes helped to improve realizations compared to a year ago. But weak sales, lower operating leverage, the cost of high inventory and a rise in commodity prices took a toll on profit margins in the March quarter. Most companies reported a 100-150 basis point drop in Ebit margin year-on-year last quarter. Ebit is earnings before interest and tax.

Weak operating leverage in the June quarter, along with weak farm sentiment, will continue to take a toll on margins in the quarters ahead. Worse, slowdown in non-farm activities, such as infrastructure and construction, also weighed on rural incomes, thereby adding to the overall gloom.

Given this scenario, hopes are pinned on a pickup in rainfall after June. “Although tractor sales were likely to be weak in the first half of FY20, we have forecast a slight recovery in the latter half. However, a weak monsoon poses a risk to this," said Bharat Gianani, an analyst at Sharekhan Ltd. Shares of M&M and Escorts have fallen 18% and 19%, respectively, so far this year, more than the 13% drop in the Nifty Auto index.

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