(Vipul Sharma/Mint)
(Vipul Sharma/Mint)

Decline in margins, growth headwinds are likely to weigh on MRF stock

  • Sales to the replacement market yield more margins than to original equipment manufacturers
  • MRF shares have tumbled from the 52-week high and now quote close to the 52-week low

MRF Ltd, India’s largest tyre maker, wobbled through tough times in the March (Q4 FY19) quarter. Along with weak auto sales and higher natural rubber prices, the company also had to steer through a workers’ strike at one of its plants.

The result: it failed investors on operating performance. Ebitda (earnings before interest, taxes, depreciation and amortization) margin plunged 310 basis points from the year-ago period. A basis point is one-hundredth of a percentage point.

Even the 6.2% year-on-year revenue growth was lower than expected.

Then, there were cost pressures. Raw material costs increased by 130 basis points to 60.9%.

This was perhaps because of the 13% rise in rubber prices and the impact of volatile crude oil prices during 2018.

Meanwhile, other expenses jumped by 200 basis points, though the management has not explained why.

Hence, the March quarter Ebitda of 571.2 crore was 13% lower year-on-year, and about 10% below the average of eight Bloomberg brokerage firms.

As a result, March quarter’s net profit dropped 15% year-on-year to 299 crore.

MRF has stood the test of time as the market leader in India for 32 years and among the top-20 global tyre manufacturers. Yet, the company faces headwinds similar to those of its peers. The two-wheelers and passenger vehicle sub-segments decelerated, while commercial vehicle sales swung between the first and second halves of the year, said the company.

The outlook, too, is cautious. “The Indian economy could find its growth story potentially challenged by deficits within its current account, because of variability in global oil prices," MRF said a media release.

That’s not all. Cost pressures are likely to continue, given the uncertainty of crude oil prices in the near-to-medium term as crude oil derivatives such as carbon black and synthetic rubber comprise a significant share of costs for tyre producers.

This apart, most tyre makers are facing a challenge because of the rise in trade receivables that mirror the liquidity crunch in the economy.

Further, analysts say that MRF may be ceding market share in the replacement market as some of its peers have fared better in the past few quarters.

Sales to the replacement market yield more margins than to original equipment manufacturers.

MRF shares have tumbled from the 52-week high and now quote close to the 52-week low. Even so, its current market price of 53,765.55 discounts its FY20 estimated earnings by about 16 times, a sharp contrast to the subdued single-digit earnings growth forecasts for the next two years.

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