MRF Ltd - Diversified Behemoth; Initiating Coverage :: Edelweiss PDF link

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MRF Ltd. is the largest player in the Indian tyre industry with a well-diversified presence across segments (2-wheelers, passenger cars, commercial vehicles and tractors). Over the last five years, the company’s strong brand image and diversified presence led to 19% revenue CAGR against 17% reported by the overall tyre industry with best–in-class EBITDA margin. MRF would be one of the beneficiaries of the demand upturn in the domestic auto industry, especially on the CV side. Natural rubber prices are expected to remain muted, as supply will continue to outpace demand over the next two years. Driven by the subdued prices of key raw materials (Rubber and Crude- reflected in Q2FY15 gross margins of peers), the company’s bottomline is expected to grow faster than its topline. Moreover, MRF was the first Indian company to venture into the defence space in 2008, being the sole supplier of tyres to the Indian Air Force (IAF) and Hindustan Aeronautics Ltd. (HAL) for the Chetak Helicopter.

Industry-leading growth driven by diversified presence, vast dealer network and strong brand recall

Over the last few years, when the domestic CV segment went through its toughest downturn, all major tyre makers in India suffered. But, with its leadership position across segments, MRF outpaced the overall industry growth as well as that of its peers. Over the last five years, the company’s revenue grew at 19% CAGR against 17%, 14% and 13% for CEAT, Apollo Tyres and JK Tyres, respectively. Moreover, due to comparatively higher growth, MRF’s revenue share in the domestic tyre industry improved to 29% in FY14 from 25% in FY10. Given the recovery in the domestic auto demand, we believe, MRF‘s topline would grow at 10% CAGR over FY14-17E.

Better mix + pricing power = Higher margins Vs peers

MRF’s exposure to the replacement market and non-CV market has aided the company to maintain best margin profile among its peers on a consistent basis. Higher contribution of replacement tyres (~76%), strong brand recall and better product mix has enabled it to garner higher gross margins while a diversified product mix has enabled it to maintain high utilization (which reduces EBITDA volatility during a downturn). MRF’s EBITDA margin has improved from 8.4% in SY11 to 14.9% in SY13 owing to a meaningful fall in key raw material prices (rubber and crude). Going forward, as the radialisation trend steadily picks up in the domestic CV segment, share of high-margin TBRs in the company’s total revenue is expected to double from 17% to ~33% by SY17E. We believe that MRF will be able to maintain industry-leading EBITDA margin on the back of scale, strong brand recall, higher pricing power and better product mix.

Financials

Financials (INR Crs)	SY13	SY14E	SY15E	SY16E	SY 17E
Net revenues	12,131	13,214	14,193	16,188	17,444
EBITDA	1,813	1,835	2,032	2,356	2,538
Adjusted profit	842	863	1,001	1,268	1,454
Diluted EPS (Rs.)	1,986.7	2,036.1	2,361.7	2,990.1	3,429.2
Diluted P/E (x)	16.4	16.0	13.8	10.9	9.5
EV/EBITDA (x)	7.8	7.8	7.0	6.0	5.6
ROAE (%)	26	21	20	21	20
ROACE (%)	30	26	26	29	31

LINK

https://www.edelweiss.in/research/MRF-Ltd--Diversified-Behemoth;-Initiating-Coverage/10005276.html