MRF - Outstripping yet again; retaining our Buy with a target price of Rs 43500.
MRF's Q1 FY17 revenue was flattish yoy because of competition (Chinese tyres) and lower realisations. Yet, its greater operating efficiency resulted in its highest-ever margin of 24.1%. We expect some shrinking in margins due to higher rubber prices. But, we believe the industry might very comfortably pass on the impact of rising rubber prices in coming quarters and protect its margins.
Q1 FY17 result analysis. At Rs. 34.8bn, revenue was flat yoy. This, we believe, was due to greater volumes and lower realisations. Lower rubber prices (than a year ago) aided the 140-bp gross-margin expansion. However, as staff and other expenses increased, EBITDA margin expanded only 40bps to 24.1% (the highest since FY09). PAT came at Rs. 4.9bn, up only 2% yoy.
Advantage market leader. Dominant in all segments as well as a leader in the replacement market, MRF is the only company commanding a premium in all categories. Despite stiff competition from Chinese imports, we expect it to race ahead of the industry due to its higher OE growth and its leading position in the replacement market. We expect 9% volume growth during FY16-18.
Higher rubber price vs. greater operating efficiency. With its greater efficiency, we expect MRF to protect its margins despite pressure on input costs, especially of rubber. Demand (especially rural) because of the good monsoon would enable higher bias capacity utilisation, which in turn would provide a cushion to margins in the context of rising rubber prices. Also, we believe that it would be able to pass on any increase in rubber prices owing to its leading position.
Valuation. We retain our estimates, and maintain a Buy. We value it at 10x FY18e and arrive at a price target of Rs. 43,500, implying 19% potential. Risks. Rising rubber prices.
Shares of MRF LTD. was last trading in BSE at Rs.36105 as compared to the previous close of Rs. 36116.45. The total number of shares traded during the day was 524 in over 385 trades.
The stock hit an intraday high of Rs. 36483.35 and intraday low of 35969.4. The net turnover during the day was Rs. 18976595.