The March quarter results of one of the country’s foremost tyre makers, MRF Ltd, mirrored the state of the industry. Profit numbers were marginally lower than consensus estimates. Riding the auto boom, revenue for the period rose 34.3% from a year before. Sequentially, too, revenue grew 10%—a combination of increased tonnage (volumes) and a 6% increase in tyre prices.
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But, as expected, the revenue surge did not improve profitability. It’s well-known that the tyre industry has been scalded by rising raw material prices in the last 12-18 months. At about 72% of sales, raw material costs were higher by 600 basis points year-on-year (y-o-y) and by 260 basis points quarter-on-quarter (q-o-q). A basis point is one-hundredth of a percentage point.
Soaring rubber prices remain the key reason-the average rubber price during the March quarter was about Rs 210 per kg, against Rs 140 a year ago and Rs 170 in the preceding quarter. Fuelling this was the rise in crude prices, which has a ripple effect on crude derivatives used in making tyres. Thankfully, the firm’s operating leverage and cost control translated into lower other expenses and employee costs as a percentage of sales.
Operating profit margin for the March quarter dipped 250 basis points y-o-y and 200 basis points q-o-q to 9.3% of sales. “Price increases were unable to protect margins, as the cost increase was far higher,” says Koshy Varghese, executive vice-president of MRF, adding that with rubber prices having risen higher to Rs 240 per kg in the last fortnight, the firm would be forced to increase tyre prices by 10-12% in the current year to sustain profitability. So far, markets have absorbed price increases, though hikes in interest rates and other cost-push factors are a threat to the auto sector and its ancillaries.
About 20-25% of MRF’s revenue comes from the original equipment segment, where prices are negotiated with auto firms where its brand equity is its strength. The balance revenue accrues from the replacement segment.
Net profit fell by about 12% y-o-y and 6% q-o-q on account of raw material cost pressures. The firm has a healthy debt-equity ratio of 0.6 and interest service coverage ratio is about 12 (ratio of profit before interest and tax to the interest outflow).
MRF’s fundamentals are healthy and its profitability is among the best in the industry. Apollo Tyres Ltd, another large player in the segment, has also toed a similar line with falling profitability in the last six quarters, while others such as Ceat Ltd and JK Tyre and Industries Ltd have reported narrower profit margins.
The MRF stock’s low liquidity on the bourses has kept institutional investor interest low in the counter. In the last one year, shares that trade at Rs 6,561 apiece have underperformed the broader market indices and may continue to do so, unless cost pressures ease.
Graphic by Paras Jain/Mint
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