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Business News/ Money / Stellar growth in MRF net profit due to low input prices
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Stellar growth in MRF net profit due to low input prices

Stellar growth in MRF net profit due to low input prices

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Auto sales volumes picked up only in the second half of the company’s fiscal but steady growth in the replacement market contributed to revenue growth. Sales grew despite the company facing labour problems at its factories in Arakkonam, Tamil Nadu, and Puducherry in the past few months.

However, riding the benefit of low raw material costs, a blessing for all tyre makers until April, MRF’s operating profit margin expanded by 4 percentage points to 12%. This was in contrast to a 2 percentage point drop in margins in FY08 over FY07. Raw material costs as a percentage of sales fell to around 62% in FY09 compared with 70% in the previous year.

MRF’s operating profit grew by 69% to Rs690 crore in FY09 compared with a contraction of around 7% in FY08. Its net profit jumped by about 76% to about Rs251 crore. The company posted a 75% growth in earnings per share at around Rs393, mainly on account of a low base effect.

The stock price has in the last one year trebled to around Rs6,100, reflecting industry sentiment. Yet, the company is not on the radar of most analysts, despite being the largest player in the tyre industry, due to its illiquid stock profile. Besides, analysts say that the management is hardly inclined to capitalize the reserves to issue a bonus or a stock split, which is a negative from an investor perspective. With an equity capital of Rs4.24 crore, reserves as of 30 September stand at Rs1,357 crore.

Most tyre companies are expected to post a sales growth of about 15-20% during FY10, riding the smart turnaround in the auto sector, seen since September. However, there is no indication of rubber prices softening, which will start showing in margins for MRF, probably from the first quarter of FY10. There could be also an increase in tyre prices as a result, but this is unlikely to offset the entire hike in costs.

Hence, analysts’ consensus is that profit growth rate for FY10 would be much lower than that seen in the current year, at around 20%.

Write to us at marktomarket@livemint.com

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Published: 21 Dec 2009, 10:53 PM IST
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