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Home >Markets >Mark To Market >MRF tyres may have muscle, but its valuations need to lose fat

Shares of MRF Ltd, India’s largest tyre manufacturer, have had a rough ride since they peaked at 81,425 a little more than two years ago in April 2018. The stock now trades at 65,335, or 20% lower than the 2018 peak. This puts it in a far better place than peers, such as Ceat Ltd and Apollo Tyres Ltd, whose shares have fallen 55% and 62% from their 2018 peak.

There are multiple reasons for the outperformance, but it is also true that MRF’s shares are fairly expensive. The stock’s price-to-earnings ratio (P-E) is at 19.5 times using FY20 earnings, according to estimates by Kotak Institutional Equities. In comparison, the P-E of competitors Apollo Tyres Ltd and Ceat Ltd are about 14 times.

“We remain concerned about the increase in competitive intensity in the two-wheeler segment. (MRF’s) valuations are expensive and don’t factor in risks related to decline in profitability over the medium term," the broker said in a note late last month.

A question of valuation
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A question of valuation

The company ended financial year 2019-20 on a decent note, as the decline in revenue was not as sharp as feared and gross margins were better than estimates. Soft rubber prices aided a sharp expansion in gross margins.

However, investors should look beyond these numbers, considering the disruption caused by the coronavirus crisis. The slowdown in the automotive industry because of the pandemic does not augur well for both original equipment manufacturers and replacement segments for tyres.

Despite this, MRF’s shares have been flat this year, while the shares of Apollo Tyres and Ceat have lost 29.5% and 8.54%, respectively.

Also, most tyre stocks rallied after the Directorate General of Foreign Trade moved some categories of tyres from the free list to the restricted one in June. There are expectations that this move could improve revenue prospects for the tyre sector.

This may give a near-term boost to the industry, but analysts are not sure of its long-term impact. Importers may rework their strategies, thus limiting gains for domestic tyre companies, they said.

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