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MRF Tyres (MRF.BO): Market leader trading at normalized
multiples; initiate with Neutral
Investment view
We initiate coverage on MRF Tyres with a Neutral rating and a 12-month
1.2X FY12E (year-end September) P/B-based TP of Rs7029, implying 2%
downside potential.
(1) Largest operator with a diverse product mix: MRF Tyres is the
largest tyre manufacturer in the country with a diverse product mix that
includes heavy trucks and buses (about 51% of revenue), light
commercial vehicles (LCVs), passenger cars, tractors, and 2/3 wheelers.
The company is also a market leader in segments that include cars and
utility vehicles (UVs), LCV’s, and 2/3 wheelers.
(2) Raw material costs are likely to moderate: We expect 11% CAGR in
raw material costs per unit during FY10-FY13E vs. a historical average of
8% mainly driven by 15% CAGR in natural rubber costs (40% of revenue)
and 14% in nylon tyre chord fabric costs (NTC), which are driven by
rising crude prices (Exhibits 97-100).
(3) Revenue growth mainly driven by price increases: We expect prices
to increase by 7% CAGR during this period (historical average 4%) amid
a strong demand environment in the replacement market (Exhibits 101-
103).
(4) Impact of price increases on replacement demand is a key risk: We
believe the industry has been forced to undertake steep price increases
given abnormal increase in natural rubber prices over the past 2 years
and a weak balance sheet position. We believe this presents risks to
replacement demand cycle if customers choose to postpone purchases.
Valuation
Our target price is based on FY12E P/B, using the historical 5-year
average multiple of 1.2X. The stock is currently trading at mid-cycle on
P/E, P/B, and EV/EBITDA and our sensitivity analysis suggests that risks
are evenly balanced at current levels (Exhibits 89-95).
Key risks
Higher/lower-than-natural rubber prices, higher/lower-than-expected
crude oil prices through 2011E-2012E, higher/lower-than-expected tyre
pricing
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MRF Tyres (MRF.BO): Market leader trading at normalized
multiples; initiate with Neutral
Investment view
We initiate coverage on MRF Tyres with a Neutral rating and a 12-month
1.2X FY12E (year-end September) P/B-based TP of Rs7029, implying 2%
downside potential.
(1) Largest operator with a diverse product mix: MRF Tyres is the
largest tyre manufacturer in the country with a diverse product mix that
includes heavy trucks and buses (about 51% of revenue), light
commercial vehicles (LCVs), passenger cars, tractors, and 2/3 wheelers.
The company is also a market leader in segments that include cars and
utility vehicles (UVs), LCV’s, and 2/3 wheelers.
(2) Raw material costs are likely to moderate: We expect 11% CAGR in
raw material costs per unit during FY10-FY13E vs. a historical average of
8% mainly driven by 15% CAGR in natural rubber costs (40% of revenue)
and 14% in nylon tyre chord fabric costs (NTC), which are driven by
rising crude prices (Exhibits 97-100).
(3) Revenue growth mainly driven by price increases: We expect prices
to increase by 7% CAGR during this period (historical average 4%) amid
a strong demand environment in the replacement market (Exhibits 101-
103).
(4) Impact of price increases on replacement demand is a key risk: We
believe the industry has been forced to undertake steep price increases
given abnormal increase in natural rubber prices over the past 2 years
and a weak balance sheet position. We believe this presents risks to
replacement demand cycle if customers choose to postpone purchases.
Valuation
Our target price is based on FY12E P/B, using the historical 5-year
average multiple of 1.2X. The stock is currently trading at mid-cycle on
P/E, P/B, and EV/EBITDA and our sensitivity analysis suggests that risks
are evenly balanced at current levels (Exhibits 89-95).
Key risks
Higher/lower-than-natural rubber prices, higher/lower-than-expected
crude oil prices through 2011E-2012E, higher/lower-than-expected tyre
pricing
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