Markets
MRF stock hits new high on solid Q1, but there is caution ahead
Summary
- With rising crude oil and rubber prices, sustaining operating margin at this level will be a tall ask for MRF
The MRF Ltd stock is on a roll. The stock had surpassed the Rs100,000-mark around mid-June, making MRF the first Indian company to do so in absolute value terms. Since 5 July, the shares have closed above the ₹100,000 mark each trading day.
Maintaining the tempo, the MRF stock hit a new 52-week high of ₹1,11,775.95 apiece on Friday as investors gave a thumbs up to the June quarter (Q1FY24) performance beat on key metrics. For example, revenue at ₹6,323.3 crore exceeded consensus estimates of ₹5,900 crore, likely aided by stable domestic demand and market share gains.
“Post couple of quarters of underperformance, MRF Q1FY24 results came in significantly above street with revenue/Ebitda/adjusted profit after tax beat of 7%/28%/54%," said a Yes Securities Ltd first cut note. “Positive response to recent new product launches both in two-wheelers and commercial vehicles should have helped volume outperformance, we believe," it added.
Easing raw material prices, improved operating leverage along with price hikes helped the company’s operating margin, which expanded to 17.6% in Q1 from 14.7% in Q4FY23.
But investors should not get carried away because with rising crude oil and rubber prices, sustaining operating margin at this level will be a tall ask for the company.
"Also, with muted demand trends in replacement segment, we expect competitive intensity to inch up, which may put pressure on profitability. Overall, we expect Ebitda margins to peak out during the quarter and will moderate to 16% in Q4FY24E and 15% over FY2025-26E," said a Kotak Institutional Equities report.
Against this backdrop, the stock has rallied by around 26% so far in 2023, marginally beating the Nifty Auto index.
After the sharp run-up, valuations have become pricier. At FY25 price-to-earnings estimates, the stock is trading at a multiple of 22 times, showed Bloomberg data. In comparison, peers Apollo Tyres Ltd and Ceat Ltd trade at multiples of nearly 13 times and 21 times, respectively.
And that’s not the only problem.
According to analysts at Motilal Oswal Financial Services Ltd, MRF’s competitive positioning in the sector has weakened over the past few years, which reflects in the dilution of pricing power in the PCR and TBR segments. “This, coupled with the impact of the planned capex, should limit the expansion in return ratios. We expect MRF’s return ratios to see a relatively lower uptick versus peers over the next two years as its RoE is expected to reach 11.9% by FY25 (versus Apollo Tyres/Ceat estimated at 13.3%/17.6%)," added the report. RoE is return on equity.
