MRF- Result Update - Stays on course; maintain Buy: Centrum

Rating: Buy; Target Price: Rs 21,000, CMP: Rs 17,559; Upside: 20%



Stays on course; maintain Buy



Stays on course; maintain Buy

We retain Buy on MRF with a revised TP of Rs21,000 driven by upward
revision in earnings and PE expansion. Our confidence is driven by its
ability to maintain better than industry growth and sustain strong
margin profile. On a QoQ basis, MRF’s revenue growth was 3% against a
drop for the industry. Also, margin profile continues to remain strong
at 13.8% vs. peers  avg. of 12.5% excluding MRF. We believe MRF is
better placed to ride the recovery expected over FY14E-FY15E led by
the pickup in replacement demand and higher OEM growth.

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$ Operational highlights: Despite challenging environment and increase
in rubber prices (up 4%/12% YoY/QoQ), revenues at Rs.31.5bn grew 5.1%
YoY and 3.1% QoQ and gross margins expanded by 466bps/108bps YoY/QoQ
respectively. EBITDA margins stood largely in line at 13.8% vs. our
est. of 13.5% despite better than expected gross margin expansion due
to higher staff cost and other overheads. We believe that sharp
increase in staff cost QoQ (5.7% vs. 5% QoQ) was on account of long
term wage settlement at its Kottayam plant. PAT stood at Rs1.84bn vs.
our est. of 2bn due to higher tax incidence at 39% vs. est. 33%.



$ Market leadership with strong brand loyalty: Interaction with
dealers indicates that MRF is the undisputed leader in 2W, 3W and LCV
categories. 3W users say the preference for MRF is largely driven by
longevity of tyre life (1.5 yrs for MRF vs. 8-9m for others). Though
3W segment is not significant, it stands as a testimony to MRF’s
strengths. Further, MRF has been able to create a dedicated and well
entrenched distribution channel (the company has a network of 9,155
dealers – 1.5-2x that of peers of which 4,500+ are exclusive MRF
dealers, i.e. 50-55% of total vs. 8-10% for competitors).



$ Pricing premium across most segments: Driven by strong brand
loyalty, the company enjoys pricing premium across most automotive
segments. In LCV and 2W categories its premium is 8-10%, and in the 2W
segment it is at a premium to even Michelin. Also in PCR and T&B
segments its premium is 1-2%. However, it retails at a discount of
12-15% to foreign players in both PCR and T&B radial segments. In the
Truck segment, dealers said pricing played a critical role in buying
decisions



$ Valuations and risks: We maintain Buy with a revised TP of Rs21,000
(earlier Rs17,216) driven by upward revision in earnings and PE
expansion (8x from earlier 7x).  The overall sector has seen a
re-rating on the back of favorable industry factors including
sustained growth in replacement demand despite weak OE demand, benign
rubber prices and relatively stable pricing environment. Further,
rubber prices are currently at three year lows and lend visibility to
strong margin profile for the industry in the medium term. Key risks:
1.) Longer than expected replacement cycle and 2) Increased price
competition from Michelin and Bridgestone.

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