Mahindra defers Chennai tractor factory plan

Mahindra & Mahindra, the world's fourth largest tractor maker, has deferred its plan to build a Rs 400 crore tractor facility in Chennai on apprehensions that tractor sales may slow, a top company executive has said.

"We have postponed our plans for an integrated plant in Chennai which was supposed to come up inside the company's research facility following the downturn in the industry," Anjani Kumar Choudhari, president, farm equipment sector, Mahindra & Mahindra, said.

Mumbai-based Mahindra's tractor facility in the southern Indian city was expected to produce 145,000 units a year.

Indian auto makers are deferring plans to build new factories as demand for vehicles fall owing to high interest rates and rising fuel prices. The Reserve Bank has raised the cash reserve ratio nine times to 8.25 per cent since January 2007 to help Finance Minister P Chidambaram curb inflation.

On earlier occasions too, automotive projects of majors including truck and bus maker Ashok Leyland, two-wheeler leader Hero Honda had put their proposed greenfield ventures on hold on the back of a weakening market. Growth of commercial vehicles was near flat at just a 4 per cent rise in sales while sales of two-wheelers slumped to a negative growth of 8 per cent last fiscal.

"We are going to witness a flat to 5 per cent growth in sales of tractors during this year. Finance (availability) will be the key issue," admitted Choudhari. The industry sold 302,241 units last year as compared to 318,328 units sold in the previous year. The current financial year will be a tough season for tractor manufacturers, claim auto analysts tracking the segment.

According to the latest figures for April provided by M&M, the company saw a decline of 4.20 per cent in sales, selling just 8,679 units against 9,060 units in the same month of the previous year.

Growth in market share for the company (excluding that of Punjab Tractors) was negligible during the last year. The company maintained its full year domestic market share at 29.9 per cent. In addition the company saw a decline of 4.7 per cent in sales at 90,509 tractors during the same period even as the industry witnessed a decline of 5.1 per cent.

Punjab Tractors (PTL), which was bought over by M&M last year for nearly Rs 1,400 crore, has huge spare capacity at its plant. The brand produces just 28,000 tractors currently, less than half of its total installed capacity of 60,000 units a year. PTL branded tractors sells mostly in the northern market and has about 10 per cent market share.

"The reason we wanted to set up a base in Chennai was because of the relative lower presence of our brand in the southern market. We have facilities in the north, central and the west but not in the south (of the country)," Choudhari said.

Piyush Parag, analyst, Religare Securities, said, "There are major concerns over the financing part (of tractors). There was a steep rise in the NPAs (non-performing assets) last season and following this banks may reduce their exposure even further in the segment. In addition if the monsoon is irregular this year then sales of tractors will further fall." Rising material costs will also continue to dent the margins of the company during the year too. Last year M&M had passed on the full price hike in materials cost of Rs 15,000 to the customer. Costs of steel has doubled in the last three years claim industry experts. M&M's share price slipped by 2.26 per cent to close at Rs 592.50 a share on the Bombay Stock Exchange, as compared with yesterday's close of Rs 606.20 a share.