Karachi, June 14, 2022 (PPI-OT): Support toward rural income to drive tractor volumes
The government has announced a number of measures in favour of support to farmer income in the Federal Budget FY23, which are expected to directly benefit the tractor industry. The key budgetary measures are abolishment of sales tax on tractors and agri seeds such as maze, canola and sunflower.
Though the anticipation of price cuts in tractors may delay tractor orders in the near term, we expect the benefit of zero sales tax on tractors passed on to farmers to lead to higher demand in the coming months, coinciding with the start of sowing season for Rabi crops from 2QFY23.
Among the OEMs, higher rural income is expected to provide support to INDU’s sales volume as the company enjoys a strong customer base in the rural areas (50% of total sales). A key risk is rejection of Finance Bill proposals that offer tax incentives given IMF’s pressure to meet the ambitious tax revenue targets.
Reduction in GST to boost sales volume
The government has announced a number of measures in favour of support to farmer income in the Federal Budget FY23, which are expected to directly benefit the tractor industry. The GoP in the Federal Budget has proposed to reduce GST from current 5% to 0%. If the measure is approved, we expect that the tractor companies will likely pass-on the benefit of lower taxes to consumers.
Looking back, in the Federal Budget FY17, the same government had announced a reduction in GST for tractors from 10% to 5%, as a result of which tractor prices had witnessed a decline of Rs35k-80k. Simultaneously, sales volume during the same period jumped to 54,339units, up 64% YoY. We anticipate the measure to drive volumes in a similar fashion during FY23.
Moreover, the Finance Minister had also mentioned addressing sales tax refund issues faced by the tractor industry in the Budget speech, which would resolve the sector’s working capital matters. Currently the industry’s sales tax refunds have stacked up to around Rs9bn, out of which more than Rs6bn is due to be paid to MTL, while AGTL’s pending amount accumulates close to Rs3bn.
Sales tax exemption on seeds to improve farmer income
Demand for tractors is highly correlated with farmer income and overall performance of the agriculture sector. In a bid to improve farmer income, the government has exempted sales tax on seeds such as maze, canola, and sunflower among others, which is expected to further drive sales for tractors on the back of higher rural income. Among the OEMs, higher rural income is expected to provide support to INDU’s sales volume as the company enjoys a strong customer base in the rural areas (50% of total sales).
Outlook
Going forward, the Budgetary announcement would likely delay tractor orders in the short term as farmers may await measures to be implemented. We expect demand to gain more momentum as the aforementioned measures come into effect along with the start of sowing season for Rabi crops during 2QFY23. A key risk is rejection of Finance Bill proposals that offer tax incentives given IMF’s pressure to meet the ambitious tax revenue targets.
Despite sowing season for Kharif crops coming to an end, we expect the recent increase in minimum wheat support price to strengthen farmer income and support tractor sales in the upcoming quarters. Moreover, price hikes announced by tractor manufacturers during Mar-2022 are expected to offset the impact of rising inflation and keep margins stable for the ongoing quarter.