A few months when this column talked about tractors (read: “muscle vs. machine”, Dec 28, 2018), it was extrapolated that the number of tractor sales by FY19 would stand somewhere between 55,000-57,000 units, dropping by 20 percent year on year. This number has now slid much further down. In fact, if one were to estimate based on 8MFY19 sales numbers, the year FY19 would generate 32 percent less tractor sales. That’s a slump if there ever was one.
Production of kharif crops has been down—cotton declining by 9 percent, rice by 4 percent, sugarcane by 15.9 percent in 1H (as per SBP) due to depressed international prices, and lower demand. There has been a decline in area under cultivation (down 7.7%) specifically in the southern region due to water shortage while lower application of fertilizer because of higher prices have both resulted in a morose year for agriculture in both kharif and rabi seasons (read: “Mediocrity Inc.” March 27, 2019). Lower agri credit disbursement is indicative of this—down 26 percent in 1H.
Tractor sales ultimately come down to agriculture demand, but there are other factors too. Though more than 90 percent of the inputs by tractor manufacturers are procured locally—tractor parts manufacturers import a lot of their inputs from abroad. The devaluation of rupee has wreaked havoc causing their costs to rise, which has caused costs of tractor manufacturers to rise, which has raised tractor prices for end-user farmers. Since only 5-10 percent tractors are bought on credit, farmers tend to be sensitive to even incremental increase in prices. But the 15 percent reduction in credit for agri machinery in 1H indicates that the reduction in demand has come for farmers buying on credit as well as cash.
Speaking to BR Research, Kashif Lawai, CFO Al-Ghazi Tractors claims that they are incurring massive cash flow problems since the government has not released refunds for sales tax of up to Rs2 billion for the company, and over Rs4 billion for the entire tractor industry. In the past couple of months, news reports have suggested that the tractor industry is fast losing jobs due to plant shut downs. Kashif could not quantify this, but he argued that when plants shut down, job losses are inevitable. The government needs to release the funds immediately, he says, since tractor companies are also facing significantly higher cost of borrowing due to continued policy tightening.
Comments
Comments are closed.