Rating Criteria for Tractor Industry

Executive Summary
The products of India’s tractor industry range predominantly from 10 to 50 horse power (HP); they are
thus distinct from tractors and farm equipment worldwide. For the range of tractors manufactured in the
domestic market, India is among the largest markets in the world. Notably, Indian tractor industry is
dominated by domestic players. Moreover given the product-price dynamics, domestic manufacturers
are fairly competitive on price. Sales in the tractor industry are largely driven by bank credit. Factors
such as government policy on agriculture, National Bank for Agriculture and Rural Development
(NABARD) policies to promote farm mechanisation and bank credit extended towards agricultural sector
(primarily for tractor financing) play an important role in influencing the demand for tractors. The demand
of tractors for non-farm usage has been increasing where it is primarily used for haulage activities.

CRISIL’s approach to rating tractor manufacturers involves evaluating their business, management, and
financial risk profiles. The key parameters that CRISIL considers in evaluating a tractor manufacturer’s
business risk profile include the company’s market position and operating efficiency. Market position
assessment focuses on the company’s product profile, its geographical reach, the demand pattern, and
the level of competition in the industry. While analysing operating efficiency, CRISIL deals mainly with a
company’s cost structure. CRISIL also assesses financial and management risk parameters to arrive at
the final rating.

Scope
While the criteria for the broader category of manufacturing companies1 also apply to tractor
manufacturers, this article details the industry-specific factors impacting the credit risk profiles of these
companies.

Business, Financial, and Management Risk Parameters

CRISIL broadly considers the following parameters while assessing companies:

Business Risk

Financial Risk

Management Risk

These parameters, as relevant to tractor manufacturers, are explained in detail in the succeeding
section:

1
The detailed criteria is on the CRISIL website under the ‘Criteria and Methodology’ section—Rating Criteria for
Manufacturing Companies and CRISIL’s Approach to Financial Ratios.
 CRISIL’s Rating Criteria for Tractor Industry

BUSINESS RISK ANALYSIS

Market position
Product profile
There are broadly three product categories within the tractor industry based on power delivered by horse
power (HP): tractors delivering less than 30 HP, those delivering between 31 and 40 HP, and those
delivering more than 40 HP. In the >40-HP category, the bulk of volumes is in the 40-to-50 HP range.
The growth rate and growth prospects of each product category are different from those of others.
CRISIL assesses the product profile of the company in order to estimate its likely growth rates.

Geographical coverage
Each region in the country exhibits its own sales patterns (in terms of volumes) and growth potential.
CRISIL therefore assesses the company's geographical reach. Varying sales pattern is also linked
closely to geography, as each region has its own product requirements on account of differing soil
conditions. Given the growing international market for tractors, CRISIL also assesses the company's
export initiatives and its success and growth prospects in the export market.

Level of monsoons
Rainfall levels, both country-wide and region-wise, have a direct impact on sales volumes in the tractor
industry. The most widespread application of tractors is for agricultural use; haulage applications are
also increasing. The demand in any case is generated by the underlying agricultural activity for which the
monsoons are critical.

Demand-supply equations
Important constituents of CRISIL's analysis are the domestic demand-supply equations. The demand for
tractors is influenced by government policy pertaining to duties (mainly excise duties) and changes in
diesel prices. Factors such as government policy on agriculture, NABARD policies to promote farm
mechanisation and bank credit extended towards tractor financing play an important role in influencing
the demand for tractors. As part of its analysis, CRISIL projects several future demand-supply scenarios
to analyse the possible business pressures at different points of time. CRISIL also evaluates the product
categories within which the players have expanded capacities, and their future competitive positions.

Competition
Competitor analysis and positioning is an important constituent of CRISIL's market position analysis.
CRISIL factors in the market segments in which the company is present, its market position in each, the
competition, and likely changes in market position. This helps CRISIL analyse the company's present
and expected competitive position.

Distribution network
In the case of products such as tractors, which are bought directly by the final consumer, the most
important factors influencing purchase are reach, availability of spare parts and service effectiveness.
CRISIL, therefore, analyses factors such as the reach of the company's and competitors' distribution
networks, the support extended, exclusivity, service provided by the distribution networks, and the credit
periods involved.
Operating efficiency
Location
Location is an important factor in the analysis; this is because proximity to major vendors, ancillaries and
important markets lends a competitive edge to players.

Capacity utilisation and flexibility in manufacturing

While evaluating capacity utilisation, CRISIL assesses the flexibility available with the company to switch
between different ranges of products. This helps CRISIL evaluate the degree of versatility in the
company's operations.

Level of integration
The level of integration in the company's manufacturing operations helps CRISIL evaluate the company's
cost structure. Fully integrated operations ensure sustainability of supplies at various stages of the
production chain and provide reasonable control on the cost structure and product quality.

Ancillary and vendor network

CRISIL also assesses the strength of the company's ancillary and vendor network. This may be
understood from the available capacities, ability to deliver on time, quality of delivery, and the ability to
upgrade/change with the changing basic models.

Raw material
CRISIL analyses the company's raw material requirement from the perspective of availability and price
movements, to understand the cost structure. In addition, CRISIL also assesses the import content and
vendors of the company.

Channel inventory levels

CRISIL also analyses the level of channel inventory with dealers for all companies, because this helps
assess the actual retail demand and the impact of carrying costs on the manufacturer.

Technology and product development

The company's ability to launch new models/upgrades with varying performance characteristics (for
power and fuel efficiency) is also an important constituent in the analysis. As most tractor manufacturers
do not have foreign collaborations, they tend to outsource the manufacture of both components and
aggregates. A company's product development efforts are analysed with a view to evaluate the new
features, market segments addressed, and price-cost issues involved.

Productivity and quality issues

CRISIL also analyses issues such as productivity and labour relations, because these are integral to the
operations of a company. In addition, consistency and improvement in quality are assessed from both
the usability and costing angles. Labour relations are also analysed because they ensure that the
company's revenues are steady, and uninterrupted by production outages.
 CRISIL’s Rating Criteria for Tractor Industry

FINANCIAL RISK ANALYSIS

CRISIL, in its analysis of the financial risk profiles of tractor manufacturers, follows the standard criteria
used for all manufacturing companies (please refer to the criteria detailed in our publication, 'Rating
Criteria for Manufacturing Companies' and 'CRISIL's Approach to Financial Ratios').

MANAGEMENT RISK ANALYSIS:

CRISIL follows the standard criteria used for all manufacturing companies also in its analysis of
management risk for tractor manufacturers (please refer to our detailed criteria document, ‘Rating
Criteria for Manufacturing Companies’).

Conclusion
Thus, in CRISIL's opinion, the key success factors for players in the tractor sector include:

Presence in high growth segments

Geographical reach including export initiatives

Channel inventory management

Product development and consistency in quality
About CRISIL Limited

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are
India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks
and leading corporations.

About CRISIL Ratings

CRISIL Ratings is India's leading rating agency. We pioneered the concept of credit rating in India in 1987. With a
tradition of independence, analytical rigour and innovation, we have a leadership position. We have rated over
60,000 entities, by far the largest number in India. We are a full-service rating agency. We rate the entire range of
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Last updated: May, 2013

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