Rating: Buy; Target Price: Rs28,100; CMP: Rs24,332; Upside: 15.4%
Stellar performance, maintain Buy
We retain Buy on MRF with a revised TP of Rs28,100. Though, we were
expecting EBITDA margin to expand QoQ by ~100bps, reported margins
surprised us positively for 3QFY14 at 14.7% vs. our est. 13.5%. It is
encouraging to note that gross margins expanded YoY and QoQ by 124bps
and195bps respectively. In the backdrop of CEAT tyres’s EBITDA margin
dropping by 239bps/198bps YoY/QoQ during the quarter, MRF’s
performance was outstanding. Based on interaction with dealers/other
tyre manufacturers, we understand that pricing discipline was
maintained during the quarter and there was no increase in dealer
margins or price cuts in the replacement market.
$ Operating performance surprises positively: Despite the challenging
environment, revenues at Rs.33.4bn grew 9.4% YoY but remained flat
QoQ, though it was lower than our expectations of Rs34.6bn. However,
EBITDA margins at 14.7% expanded by 215bps QoQ (contracted 119bps
YoY). It is encouraging to note that, gross margins at 36.3% expanded
by 124bps YoY and 195bps QoQ. Reported PAT stood at Rs2,302mn, higher
than our estimate by 10% on account of positive surprise at the
operating level despite higher tax rate.
$ Management points to sustaining margins at current levels: In a
post-results press interview (Source: CNBC), management indicated that
1) margins will be maintained at current levels of 14.7%, 2) its focus
on replacement market (currently 72% of sales) helped volume growth
during the quarter, 3) Going forward, it expects employee cost at
current levels, 4) it was currently operating at full capacity but
hinted that capex spend will kick-in in a phased manner.
$ Outlook on rubber prices continues to remain benign: Domestic rubber
prices averaged Rs144/kg in 3QFY14 (Rs149/kg in 2QFY14) and is
currently Rs142/kg. According to the Association of Natural Rubber
Producing Countries, the surplus in global natural rubber market in
2014 will be 78% higher than estimated (652k MT in 2014 v/s 366k MT)
due to weak demand environment and excess production expected in
Thailand. For 2014, world output may rise to 12.2mn tons vs.
consumption of 11.5mn tons. On the back of this, prices of
international rubber may continue to slide and remain under pressure
in the near term. There are indications that worldwide production will
outpace demand over the next two years.
$ Valuation and risks: We maintain Buy with a revised TP of Rs28,100
(9.5x June’16E EPS). The overall sector has seen re-rating on the back
of favourable 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 four 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.
Thanks & Regards
��
Stellar performance, maintain Buy
We retain Buy on MRF with a revised TP of Rs28,100. Though, we were
expecting EBITDA margin to expand QoQ by ~100bps, reported margins
surprised us positively for 3QFY14 at 14.7% vs. our est. 13.5%. It is
encouraging to note that gross margins expanded YoY and QoQ by 124bps
and195bps respectively. In the backdrop of CEAT tyres’s EBITDA margin
dropping by 239bps/198bps YoY/QoQ during the quarter, MRF’s
performance was outstanding. Based on interaction with dealers/other
tyre manufacturers, we understand that pricing discipline was
maintained during the quarter and there was no increase in dealer
margins or price cuts in the replacement market.
$ Operating performance surprises positively: Despite the challenging
environment, revenues at Rs.33.4bn grew 9.4% YoY but remained flat
QoQ, though it was lower than our expectations of Rs34.6bn. However,
EBITDA margins at 14.7% expanded by 215bps QoQ (contracted 119bps
YoY). It is encouraging to note that, gross margins at 36.3% expanded
by 124bps YoY and 195bps QoQ. Reported PAT stood at Rs2,302mn, higher
than our estimate by 10% on account of positive surprise at the
operating level despite higher tax rate.
$ Management points to sustaining margins at current levels: In a
post-results press interview (Source: CNBC), management indicated that
1) margins will be maintained at current levels of 14.7%, 2) its focus
on replacement market (currently 72% of sales) helped volume growth
during the quarter, 3) Going forward, it expects employee cost at
current levels, 4) it was currently operating at full capacity but
hinted that capex spend will kick-in in a phased manner.
$ Outlook on rubber prices continues to remain benign: Domestic rubber
prices averaged Rs144/kg in 3QFY14 (Rs149/kg in 2QFY14) and is
currently Rs142/kg. According to the Association of Natural Rubber
Producing Countries, the surplus in global natural rubber market in
2014 will be 78% higher than estimated (652k MT in 2014 v/s 366k MT)
due to weak demand environment and excess production expected in
Thailand. For 2014, world output may rise to 12.2mn tons vs.
consumption of 11.5mn tons. On the back of this, prices of
international rubber may continue to slide and remain under pressure
in the near term. There are indications that worldwide production will
outpace demand over the next two years.
$ Valuation and risks: We maintain Buy with a revised TP of Rs28,100
(9.5x June’16E EPS). The overall sector has seen re-rating on the back
of favourable 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 four 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.
Thanks & Regards
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