January 26, 2016

mrf results analysis

My analysis of MRF's latest quarter results and long-term trend in financial performance:

MRF will need better management of challenges from Chinese competition and benefits from raw material cost decline to optimise volumes growth

MRF, the largest domestic tyre manufacturer in the country, reported a fall of 2.9 per cent 3 per cent in its stand-alone net sales in the December 2015 quarter to Rs 3,256 crore, compared to the same quarter a year ago. The profit after tax grew by 19.9 per cent to Rs 388 crore.

The tyre company saw the share price of MRF drop sharply, from Rs 37,708 to 35,659 at close to 2.50 pm, in a just few minutes after it announced its latest quarter results to the stock exchanges. The stock closed the day with a loss of 0.7 per cent at Rs 36,010, compared to the previous trading day.

In a flash research update note on Monday, B&K Securities analysts said that MRF reported weak revenue figures due to recent price cuts, weak truck & bus replacement demand and competition from Chinese imports.

The cost of raw materials consumed by the tyre company came down on by 11 per cent on a year-on-year basis in the December 2015 quarter. This helped MRF protect its operating profit margin to 23.4 per cent in the latest quarter, compared to the previous two quarters when it was 23.9 per cent (June quarter) and 25.7 per cent (September quarter).

According to Mayur Milak, research analyst at Anand Rathi Securities, the main pressure before tyre companies was to do with volumes growth since there is weak replacement demand and stiff competition from Chinese tyres.

The long-term numbers indicated that MRF had scope to shore up its volumes growth if its price cuts get aggressive. From the December 2014 onwards, MRF has seen a YoY fall in the cost of raw materials consumed in every quarter. Take a look at the YoY rate of fall in the raw materials cost – 2.6 per cent in December 2014 quarter, 12.6 per cent (March 2015), 8.6 per cent (June 2015), 8.6 per cent (September 2015) and 10.7 per cent in the latest December 2015 quarter.

Challenges grow for MRF
Yearly growth rates show erratic long-term trend
Net sales (YoY % growth)PAT (YoY % growth) Net Sales (Rs cr)PAT (Rs cr)
Source: Capitaline, Company filing. Analysed by FCRB

The company did not reveal the details of the trend in the selling price of its tyres for the 2-wheeler and truck-cum-bus segments, and it is difficult to ascertain exactly how much of the raw material cost reduction is being passed on to the consumers and how much is it able to compete with the Chinese tyres in the market. The raw material cost to net sales ratio of MRF has come down significantly from 60-66 per cent levels in the four quarters upto December 2014 to 51-57 per cent levels in the last four quarters.

In terms of profitability, the tyre company’s yearly growth rate of 19.9 per cent in the December 2015 quarter was the lowest in the last six quarters. But the PAT margins have grown in these quarters from 9.4 per cent (September 2014 quarter) to 13.8 per cent (September 2015 quarter). The latest quarter’s PATM saw a slippage to 11.9 per cent.

In Monday’s financial results disclosure, as a note to accounts, MRF disclosed that it had not made any provision yet for stocks damaged due to recent floods in Chennai, as the company was still assessing the damage.

The B&K research update noted that its concerns on excess capacity in truck and bus segment bias remained for all the tyre companies. “In our view, in short to medium term, MRF is better placed than other domestic peers due to high exposure to  less competitive 2W tyre market and relatively less exposure to TBR, in which currently there is surge in import from China,” it said.


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