El Nino effect may weaken monsoon, hit India's tractor sector: HSBC

An HSBC report projects a subdued outlook for India's tractor sector due to El Nino's potential impact on the monsoon and rural demand. However, high reservoir levels and strong replacement demand are expected to provide some support to the sector.

El Nino to Subdue Tractor Demand

The outlook for India's tractor sector remains subdued in the coming years due to the anticipated El Nino effect, which may weaken the monsoon and weigh on rural demand, according to a report by HSBC. The report noted that the onset of El Nino and a high base are expected to keep tractor volume growth under pressure over FY26-FY28. HSBC estimates tractor volume CAGR of 0-2 per cent during this period, indicating muted expansion in the near term. It stated "The outlook for the tractor sector is now subdued, primarily due to the anticipated El Nino effect, which may weaken the monsoon this year".

Historically, El Nino years, or even the year following the event, have been associated with declines in tractor volumes due to weaker rainfall and lower farm income. The report highlighted that the weak monsoon outlook could affect rural sentiment and agricultural activity, thereby impacting tractor demand. An El Nino year is a climate pattern marked by the abnormal warming of surface ocean waters in the Pacific Ocean. Occurring irregularly every two to seven years, it weakens trade winds, alters global atmospheric circulation, and typically causes significant disruptions like droughts in some regions

Supportive Factors to Cushion Impact

However, the report also pointed out that several supportive factors may help cushion the sector. Reservoir levels across the country are currently 24 per cent above the long-term average, which is expected to support agricultural activity despite monsoon concerns. Elevated water levels are likely to benefit the upcoming Kharif crop sowing during March-April, although a strong El Nino could negatively affect the Rabi sowing season during October-November.

Strong Replacement Demand

The report further stated that replacement demand is expected to remain strong over the next two to three years. This is supported by a nearly 16 per cent CAGR in tractor volumes during FY09-FY14, as tractors sold during that period are now reaching replacement age. Replacement demand currently accounts for around 45 per cent of total tractor sales, providing stability to the industry even in a weak demand environment.

Long-Term Outlook Remains Positive

Despite the near-term challenges, HSBC highlighted that the long-term outlook for the tractor industry remains positive. India currently has around 11 million tractors, with penetration at about 7 per cent of total land parcels and around 47 per cent of eligible households with over 2 hectares of land.

So the report outlined that while El Nino-related monsoon uncertainty may limit tractor sales growth in the short term, strong reservoir levels and steady replacement demand are expected to provide some support to the sector. (ANI)

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