Going for the till

Sonalika is looking to up the ante in the tractor market after ousting John Deere from fourth spot. Can it succeed?

It came as a complete surprise,” laughs Lachhman Das Mittal, referring to his debut last year on the list of the 100 richest Indians. With $785 million in his kitty, at 75th place, he is ahead of Naresh Goyal (Jet Airways), Onkar Kanwar (Apollo), Kiran Mazumdar-Shaw (Biocon) and Shobhana Bhartia (HT Media), among others. But clearly, this is not the achievement the 82-year-old Mittal is excited about. The founder and chairman of the Sonalika Group, whose company International Tractors (ITL) makes the Sonalika brand of tractors, beams when his son Amrit Sagar Mittal talks of how the company is climbing the ranks in the tractor market. “Last year, we displaced John Deere from the fourth place and we’re closing in quickly on Escorts,” says the ITL vice-chairman. “We grew by double digits last year even as the industry growth rate fell 3%,” adds the senior Mittal. Indeed, while market leader Mahindra & Mahindra’s (M&M) volumes fell 5% to 223,885 last fiscal, ITL saw sales climb 23% to 58,300.

The difference between M&M and Sonalika is still massive, but it’s not bad going at all for a company that entered the tractor business less than two decades ago. Where the top three players — M&M, Tafe and Escorts — have been around in the business for close to half a century, Sonalika, which has been selling farm equipment since the 1960s, began making tractors only in 1995. Today, it is among the top five manufacturers that together account for more than 90% of total industry volumes of 590,915 (see: Digging deep). And ITL’s growth run did not pass unnoticed. 

Private equity major Blackstone picked up 12.5% stake in the company last October for ₹520 crore, valuing the company at ₹4,200 crore. Now, the Delhi-headquartered ITL is moving to high gear: in the next two years, it wants to increase tractor sales to 100,000 units a year, establish a pan-India presence and race ahead of Escorts. Can it successfully plough its way to the top?

The reluctant tractor-maker

Ironically, LD never wanted to make tractors. In the 1990s, to appease farmers and dealers who bought Sonalika farm equipment and insisted the company’s portfolio was incomplete, he built just two tractors and sent them for six-month field trials with negative expectations. They came back with zero-defect reports, and a visit to the government testing facility in Bhopal yielded similar results. LD was still on the fence when some farmers visited him in Delhi. “One of them opened his turban, took out ₹5,000 and put it on my table. He said, “Your tractor was tested on my farm near Bhopal and I want to book the first machine.” After that, it would not have been right to still resist making tractors,” he recalls. The first workshop at Hoshiarpur, Punjab, was set up with ₹22 crore raised from Sonalika’s dealers. 

Three years later, LD received another visitor at his office, a European. “I thought he was a tourist, wanting to come in out of the sun for a while,” he says. Instead, he turned out to be a representative of Renault, surveying the Indian tractor market. Soon after, directors from the French company visited the Sonalika’s workshop in Punjab, but were very critical of the standards and processes. A return visit by LD and his sons to the Renault factory showed them why. They returned to Hoshiarpur, demolished the workshop and built a spanking new facility in the next six months.

A satisfied Renault then entered into a technical partnership with ITL in late 2000. There was no looking back after that. From 356 tractors in FY96, ITL today sells 164 times that number. The partnership with Renault ended in 2003 after the French company sold its tractor business to Class of Germany, but ITL has a new foreign partner, Yanmar of Japan, which also holds a 12% stake in the company. While that’s one reason for its successful run, it’s not the only one. 

A high-growth environment

A favourable environment has played a large role in Sonalika’s growth. Over the past 10 years, the tractor industry has seen double-digit growth for a better part: CAGR of over 20% between FY04 and FY07, barring a couple of years of negative and flat growth. What’s worked in its favour is the increasing “tractorisation” of Indian agriculture — from 14.4 tractors per 100 operational landholders in 2002, the number more than doubled to 31.1 by 2007, according to a Kotak Institutional Equities report. AM Sahni, former deputy CEO of M&M Swaraj division, lists the reasons that led to this dramatic change. “Many new states such as Madhya Pradesh, Bihar and Andhra Pradesh have become significant markets. Then, non-farm usage has also come up, for landfills, construction activity, pulling water tanks, etc. Labour shortage due to MGNREGA is also resulting in mechanisation and there is some demand from the bottom of the pyramid segment for low horsepower (HP) tractors,” he says. Certainly, with minimum support prices for agriculture nearly doubling in the past seven years, more farmers are able to own sophisticated farm equipment, including tractors (see: Green bounty). 

In fact, it is cheaper to run a 15 HP tractor than own bullocks, according to the Kotak report. Easy availability of credit is another reason why tractor penetration has improved — close to 95% of all tractors in the country are sold on credit and less paperwork and easy terms makes the decision to buy a tractor simpler. And where conventional markets such as Punjab, Haryana and western Uttar Pradesh have been saturated for decades, the shrinking replacement cycle of tractors (from 10-12 years to 8-10 years) means replacement demand has been growing at 8% in these markets.

So much for the industry. What has ITL done to increase Sonalika’s sales? “A great advantage was that we had already been making farm equipment for decades. We knew first-hand what farmers required,” says AS Mittal, adding that features such as ability to withstand continuous use, lower maintenance and higher pulling power helps Sonalika tractors stand out. There’s also ITL’s aggressive approach in the markt, points out a senior executive from New Holland Tractors. “Sonalika has always offered heavy discounts and exchange schemes to gain market share,” he says.

Dealers in Punjab, Sonalika’s stronghold, agree, although AS Mittal categorically denies being a market disruptor. “Price doesn’t bring volumes. Similar products are usually in a price band with a difference of ₹7,000-8,000, which hardly matters since most farmers get their tractors financed. What matters is performance and resale value,” he points out. Analysts and competitors don’t agree fully — their take is that while ITL was definitely playing the price and discounts game earlier, it has let up now as it wants to be seen as a responsible, national brand. 

According to industry observers, rising non-farm demand for tractors (for pulling luggage convoys at airports, at construction sites, etc.) has also worked in Sonalika’s favour as it has products in the above 50 HP segment, which today account for 27% of its total sales. Shishir Kumar, senior analyst with Icra, points out that non-farm usage of tractors make up 30% of overall industry demand, and that’s quite a large number.

However, Sonalika will now have to face the heat from M&M, which, too, has invested ₹350 crore in a completely new platform, M Star, that will roll out models in the above 50 HP category. Rajesh Jejurikar, chief executive, tractor and farm mechanisation, M&M, was quoted in the media, saying, “Clearly, 50 HP and above is the emerging segment and will grow. M Star has been conceptualised to leverage and grow that segment.” For now, though, the momentum is with Sonalika. Virendra Jain, a tractor dealer at Dabra in Madhya Pradesh, switched from selling Escorts to Sonalika in 2005. “Times have changed. Sonalika, with its high HP models, is a big hit in my area,” he explains. But will that be enough to sustain and indeed accelerate the momentum in the coming years? 

Stepping on the gas

Sonalika is certainly not short on ambition. Between FY11 and FY13, it sold an additional 13,709 tractors and wants to sell three times that much in the next two years. How does it plan to achieve that? For starters, it is ramping up capacity. In 2010, a greenfield manufacturing facility was commissioned at Fatuah, Bihar, with a capacity of 20,000 units a year, while last year the Hoshiarpur factory was expanded by 20,000. “By December, we will double capacity at Hoshiarpur, from 75,000 to 150,000,” adds AS Mittal. The Bihar plant was ITL’s first step outside Punjab, a two-pronged strategy to augment capacity as well as reach. “We want to extend our green revolution from the north-west to eastern Uttar Pradesh, Bihar, Jharkhand, West Bengal, Odisha and the north-east,” declares LD Mittal. The dealer and service network is also being expanded, from 700 to over 1,000 touchpoints in the next two years. “There should be a dealer within 25 kms of a farmer,” explains AS Mittal. 

But the big push for Sonalika will have to come from south India, where it has only a marginal presence. “Well-irrigated regions such as Punjab, Haryana and west UP are not as vulnerable to the monsoon as the rest of the country and hence, volumes here are less volatile. With South and West being large-volume markets, typically, when growth is strong in these markets, overall industry volume growth remains strong,” points out Icra’s Kumar. Breaking into new markets won’t be easy. Where Sonalika has built a reputation for itself in the north thanks to its farm equipment, it’s an unknown, untested entity in the south. M&M has a market share of 48% in south India and 46% in west India, while Tafe has 23% and 20%, respectively. ITL’s share: 5% in south and 9% in the west. 

Changing mindsets in the south won’t come easy for Sonalika. P Govindarajan is a farmer from Tavariampakkam village in Tamil Nadu’s Kanchipuram district who grows paddy and vegetables on his 12-acre plot. He bought a Mahindra 575 DI last year to replace his 10-year-old tractor, also a Mahindra. “I have heard of Sonalika, there are one or two tractors in nearby villages. I saw no reason to try it since I have had a good experience with Mahindra,” he says. LD Mittal doesn’t appear bothered by such steadfast customers. “Loyalty is created by quality and performance. When they see better product, loyalties will change,” he says.

Still, if ITL is to achieve its stated goal of 10% market share in south India this year, perhaps it would do well to first bring mechanics over to its side before targeting farmers. Sahni concurs. “It is always better to expand slowly in new markets and build aftersales network alongside. Entering a new market requires all-round attention: you need to check unsold inventory, improve processes at the dealer-end and energise your teams as well,” he advises.

The Mittals are well aware of the challenges and have already taken the first steps to gain a foothold in the south. In the past year, warehouses have been set up in Vijaywada, Warangal, Hughli and Madurai; the company has also entered into five new C&F agreements and reduced the transportation time to dealers from one month to just three days. “We have also approached all four state governments in south India for land and Karnataka has already given us an offer. Once we hear from all states, we will select the best offer and build a plant in south India,” says LD. Sahni points out that owning a plant in the region is not a necessary condition for success. “Tafe is No.1 in Rajasthan but it doesn’t have an assembly line up north and Massey Ferguson used to sell well in Punjab but was manufactured in the south. Similarly, Swaraj sells outside Punjab as well. Depots and warehouses can serve you well as long as you do all other things well,” he says.

Cyriac Matthew, senior managing director, Blackstone, does not read too much into Sonalika’s perceived weakness. “They are a very strong regional player, a very well-run family business that can become national,” he says, pointing to the results of the due diligence the fund did before putting in money. Besides conducting over 30,000 surveys across different markets and different products, the PE fund went as far as buying older Sonalika tractors and testing them before making investments. “Sonalika scored very high on all parameters,” points out Matthew. 

For its part, ITL says the crucial part of its strategy in the south will be to demonstrate its product and its utility. To this effect the company has been holding demonstrations in local communities, showing off the tractors’ pulling power. ITL is also pushing its 50HP-plus tractors in this market, since soil in the region is harder and needs more effort. All of which should help it grow. 

Beyond borders

Already, revenue has gone up three-fold in the past six years, while PAT has jumped six times even as tractor sales volumes doubled (see: Bumper harvest). And, this is a zero-debt company. “We put even our own dividends back into the company,” says LD Mittal proudly. His son points out that Blackstone investment “wasn’t really required for expansion” but adds, “You are known by the company you keep”. Indeed, father and son say they “would like Blackstone to interfere” in ITL’s working — improving processes and systems as ITL prepares for its second growth phase.

In the next five years, rising outlay towards agriculture schemes and higher mechanisation are expected to keep the industry’s overall volume CAGR at 8-9%. But ITL is also looking at a much higher share of exports to grow above the industry average. ITL already exports to about 70 countries and has set up assembly lines in Nigeria, Cameroon, Algeria, Brazil and Argentina, co-owned with local distributors. LD believes Sonalika tractors are a perfect fit in these markets: “Farmers there want simple and robust machines that they can repair themselves. Our machines meet those criteria,” he says. Now, the idea is to focus on higher HP tractors and reach out to developed markets in Europe and the United States. 

There’s a good reason for looking outside India — a tractor sold overseas fetches 30% higher margin than a unit sold locally. Currently, ITL has international sales of about 10,000 tractors a year, which accounts for 17% of its revenues. Going forward, AS Mittal wants 30% of the increased sales of 100,000 tractors to come from exports. In volume terms, however, ITL is only 5th in the pecking order. 

International players as well as Indian companies with international collaborations have been using the country’s low-cost manufacturing base to cater to markets outside as well. The result: John Deere, Tafe, M&M and New Holland are all ahead of ITL in exports from India. But there is opportunity in this challenge, believes Kumar of Icra. “Overall export volumes are not high, just around 70,000. So, the potential is high for all players,” he points out. But Sonalika will need to do more than just export if it is to achieve its targets.

Mittal is not worried, though. “We are at just 10% in India [marketshare]. By expanding reach and network, it shouldn’t be difficult to get to 15-16%,” he says. Much of that will depend on the Mittals winning friends and influencing customers in the hinterland. LD Mittal feels Sonalika has not one but two points in its favour. “When a promoter runs a company, he uses not only his brain but also his heart. Two, in professionally-run company, it takes months for a proposal to be implemented. Here, we sit in the evening with a cup of tea and next morning, it’s implemented,” he declares. Given their ambitions, looks like the Mittals will be drinking a lot of tea in the months to come.