New Delhi, May 18 (IANS): Growth in domestic tractor sales volume might get limited to 3-5 per cent this fiscal on the back of strong second wave of Covid-19 infections and rising cases in hinterland, apart from high-base effect of last fiscal, said Crisil Ratings on Tuesday.

Accordingly, the agency said that trend is expected to take place despite the forecast of a normal monsoon auguring well for farm incomes and therefore tractor demand.

Besides, it pointed out that operating margins of tractor makers will shrink on an average by 200 basis points (bps) due to firming up of steel prices, which is the primary raw material and accounts for bulk of the cost.

However, the credit profiles of tractor makers will, continue to remain stable, supported by strong and almost debt free balance sheets, as well as robust liquidity.

"The already high base of last fiscal and severity of the second wave preclude significant tractor volume growth this fiscal," said Gautam Shahi, Director, Crisil Ratings.

"Several states have imposed lockdowns recently, and crucially, rural India has been less insulated this time around. Maharashtra, Uttar Pradesh, Haryana, Karnataka, Madhya Pradesh and Rajasthan, which account for over 50 per cent of tractor volumes, have seen a surge in infections."

Last fiscal, domestic tractor volumes logged a whopping 27 per cent on-year growth to a record 9 lakh units.

The growth, that time, was driven by strong government spend on rural schemes and an increase in farm incomes, supported by good monsoons.

Moreover, rural India was less impacted by the pandemic last fiscal and farmers redirected savings from spending on marriages, etc, towards tractor purchases, the agency said.

"Part of the good augury is expected to continue with forecast of a well-distributed and normal monsoon this year, too. This should benefit farm incomes and help sustain demand for tractors. An all-time high rabi-sowing and expected good kharif season, driven by healthy reservoir levels, will be supportive, too," the report said.

"Additionally, increased government spending in rural India and prospects of higher minimum support prices for 2021-22, should buoy rural incomes. Also, non-agricultural tractor demand (20-25% of demand), which moderated last fiscal, is expected to recover, supported by recovery in rural infrastructure and mining activities compared with last fiscal."

Furthermore, even as tractor volumes growth remains in positive territory, players in the sector have seen their cost of operations rise sharply as the price of the primary raw material, steel has appreciated sharply.

"Primary steel prices increased by over 60 per cent in the six months through April 2021, and are expected to remain strong in the near term, before easing in the second half."

"Although tractor players generally enjoy good pricing power, they are expected to absorb a part of the cost inflation given the sudden surge in steel prices."