Healthy profits, modest capex to support credit risk profiles
Agricultural (agri) pump makers will see healthy revenue growth of 7-9% in fiscal 2025, supported by resilient domestic demand for conventional pumps and a surge in offtake of solar pumps, largely under the PM Kusum Scheme1. This will follow a likely revenue growth of 8-10% in the current fiscal.
Operating margin, too, will remain healthy, at 12-13% this fiscal and the next, riding on improving operating leverage and with prices of key raw materials remaining steady. This, along with steady working capital cycle and moderate capital expenditure (capex), will support credit risk profiles.
An analysis of five large agri pump makers, comprising nearly 55% of the sector's revenue estimated at ~Rs 6,000 crore for fiscal 2024, indicates as much. The sector is dominated by conventional pumps (grid-connected and diesel pumps) which have ~90% share, with the remaining comprising solar pumps.
Demand for agri pumps is largely resilient - a 'good' monsoon drives up farm incomes and pump purchases, buoyed by healthy kharif crops, while a 'deficient' monsoon necessitates the usage of pumps to irrigate rabi crops. This was also visible in the current fiscal wherein revenue growth has been volume-driven, triggered by higher sales of conventional pumps amidst uneven monsoons caused by the El-Nino conditions.
Says Anuj Sethi, Senior Director, CRISIL Ratings, "Factoring normal monsoons in fiscal 2025, revenue growth for the industry will largely be volume driven. While conventional pumps may see stable growth at 6-8%, solar pump volumes will grow at a faster clip of ~20% on-year, supported by expected reduction in pump prices."
Solar pumps are expected to become cheaper in fiscal 2025, as manufacturers pass on lower prices of solar modules, a key raw material forming ~65-70% of solar pump cost2. This, combined with rising order flows under the PM KUSUM scheme which is set to close in March 2026; will drive the double-digit volume growth expectations for next fiscal.
Steady growth in volumes of conventional pumps coupled with price of its key raw materials - pig iron, steel and copper (forming ~70-75% of total cost) remaining rangebound will keep operating profitability healthy at 12-13% this fiscal and the next (~12% in fiscal 2023).
Says Aditya Jhaver, Director, CRISIL Ratings, "Conventional pump makers are operating at 65-70% of capacity, and solar pump makers at ~40%, obviating the need for any large capex. This, along with healthy cash flow and stable working capital cycle, driven by timely receivables and moderate inventory, will keep credit profiles in the industry stable." |
