Stock Review: MRF TYRES

 

MRF Tyres, the largest tyre manufacturer by revenue, has outperformed its peer group in the quarter ended March '11 by recording double-digit growth in the topline and a lower-than-expected decline in the bottomline. However, despite the betterthan-expected financial numbers, the stock of the company has underperformed the BSE benchmark Sensex in the past one month. This is due to the relentless increase in rubber prices, which is a major input cost for the tyre companies.

Even though tyre companies have revised product prices twice in the past six months, the net impact on the operating margin is not huge due to the high differential between the product and the raw material costs. So, tyre companies may continue to face pressure on the operating margin in the coming quarters with the expected increase in rubber prices.

MRF sales grew by 34% over the quarter ended March '11, with improved demand in the passenger cars and commercial vehicles, which contributed less than half to the volume beside improvement in replacement demand. This segment grew by 18% for the similar period on year on year basis. But profitability was dented by almost two folds increase in the raw material cost, which accounts for three fourths of the total operational cost.

 

Operating profit grew by 10% to . 234 crore, which is higher than the previous quarter. Although raw material cost is up 51%, moderation in other operational costs has resulted in growth in the operating profits. With an increase in outlay in interest and depreciation costs, MRF net profit has declined by 6% in the same period. Rubber prices shot up by 40% to . 56/kg, which has resulted in contraction of operating by 200 basis points.

According to the Rubber Board of India, natural rubber production is expected to be 9 lakh tonnes compared to consumption of 9.7 lakh tonnes in the year ended FY11, which can augment the pressure on rubber prices in the coming quarters.

Further, with a rise in inflation cost, the cost of owing a vehicle may increase, which can dent automobile demand in the coming quarters.

Being a segment leader, with high market share in commercial vehicle, the company can sustain the growth momentum in the coming quarters. So, an investor can take a wait and watch approach for MRF as well as other companies in this industry and keep a tab on rubber prices to take the exposure in the tyre stock in the near term.