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

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MRF - Q2FY14 Result Update - Challenging quarter, Buy : Centrum

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Rating: Buy; Target Price: Rs31,700; CMP: Rs26,721; Upside: 18.7%



Traction to continue; Maintain Buy



We retain Buy on MRF with a revised TP of Rs31,700. Our confidence is
driven by its ability to maintain better than industry growth and
sustain strong margin profile as seen in the past few quarters. Our
recent interaction with dealers pointed to QoQ uptick in replacement
demand in a few pockets. Though the uptick is not broad based yet,
most dealers pan India expected revival in demand post monsoon.
Further, based on interaction with dealers and other tyre
manufacturers, we understand that pricing discipline was maintained
during the quarter and there was no increase in dealer margins or
price cuts. The recent correction in rubber prices and stable pricing
scenario in the replacement market bode well for margins across
players.

$ Interaction with dealers indicate stable pricing scenario: Based on
interaction with dealers and other tyre manufacturers, we understand
that pricing discipline was maintained during the quarter and there
was no increase in dealer margins or price cuts. Recent correction in
rubber prices and stable pricing scenario in the replacement market
bode well for margins across players.

$ Fall in rubber prices continues; to support margins in medium term:
Domestic rubber prices are currently trading at Rs127/kg (one of the
lowest in 5 years) and corrected by 27%/5% YoY/QoQ respectively.
Typically, the positive impact of correction in rubber prices is felt
with a quarter’s lag. Given the fact that 3QFY14 had seen a correction
of 14%/4% YoY/QoQ, its positive impact should be felt in this quarter.
Recent correction in rubber prices coupled with stable pricing should
help MRF in sustaining/expanding margins.

$ Replacement demand – mixed signals: Our recent interaction with
dealers pointed to QoQ uptick in replacement demand in a few pockets.
Though the uptick is not broad based yet, most dealers pan India
expected revival in demand post monsoon. Dealers in Maharashtra and
South pointed to strong recovery in replacement demand. Others were
also optimistic. Further, dealers indicated supply side constraints
for two- /three-wheeler tyres (specifically from MRF and CEAT). Given
the seasonally weak quarter due to monsoons, dealers expect sharp
recovery in 3QFY15.

$ Valuation and risks: We retain Buy with revised TP of Rs31,700 (10x
September’16E EPS). The overall sector has seen re-rating on the back
of favourable industry factors including sustained growth in
replacement demand, benign rubber prices and relatively stable pricing
environment. Further, rubber prices are currently at five 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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MRF: 4QSY2013 Result Update": Angel Broking,

For 4QSY2013, MRF reported a top-line growth of 5.1% yoy to `3,147cr. The
EBITDA margin has expanded by 214bp yoy to 13.8% due to a sharp fall in
rubber prices during the quarter. Raw material cost as a percentage of net sales
fell by 466bp yoy which although was partially offset by an increase of 122bp yoy
and 130bp yoy in other expenses and employee cost as a percentage of sales,
respectively. The net profit for the quarter increased by 11.7% to `184cr from
`165cr in 4QSY2012.
Low rubber prices to benefit margins: Domestic rubber prices have declined to an
average of `174/kg in SY2013 as compared to an average of `193/kg in
SY2012 and currently trade at `152/kg. This led to an expansion in EBITDA
margin by 394bp yoy to 14.6% during SY2013. Considering the estimated
surplus of 134,000 tonne in global natural rubber supply in 2013 as per a report
by the Economist Intelligence Unit, we expect rubber prices to remain at lower
levels which will help in stabilizing the company’s EBITDA margin.
Diversified portfolio with leading position: MRF’s diversified portfolio with leading
position in majority of the segments will help it in reaping early benefits of revival
in auto demand owing to expected easing of interest rate and recovery in
investment cycle post the outcome of general election.
Outlook and valuation: We expect MRF to post an 8.3% net sales CAGR over
SY2013-15 to `14,229cr while the EBITDA margin is expected to decline
marginally by 76bp and stabilize at 13.8% in SY2015. Consequently, the net profit
is expected to grow at 9.5% CAGR over SY2013-15 to `962cr. At the current market
price, MRF is trading at a PE of 7.8x its SY2015E earnings and at a P/BV of 1.4x for
SY2015E. We recommend an Accumulate rating on the stock with a revised target
price of `20,425, based on a target P/E of 9.0x for SY2015E earnings.

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.

Technicals: Astrazenca pharma, MRF, Pidilite, Karur Vysya Bank, PNB, Bank of Baroda:: Business Line

Investment Focus - MRF is a value buy ::Business Line

Demand for trucks, cars and bikes remains subdued. However, benign raw material prices have put some auto component makers in a sweet spot.

As a result, these companies are witnessing an expansion in operating profit margins and good growth in profits this earnings season. MRF, the market leader in the Indian tyre industry with a market share of 27 per cent, is one such company. For the quarter ended March 2013, net sales dropped by 3 per cent to Rs 2,906 crore, compared with the March 2012 quarter, but net profit vaulted 40.6 per cent to Rs 211 crore. Operating margins expanded from 10.9 per cent a year ago to 15.3 per cent this quarter.

With material costs accounting for as much as 70 per cent of the turnover for the tyre manufacturer, the business is highly raw material-intensive. Hence, the softening of natural rubber prices in recent times can deliver a sizeable margin boost. From Rs 190-200 a kg during the same time last year, domestic prices of the RSS 4 variety of rubber, are now down to about Rs 160 a kg. International prices have dropped too and the Government has recently done away with the proposal to hike import duty on rubber.

The surplus availability of natural rubber in world markets in 2013-14, as estimated by the International Rubber Study Group, suggests that raw material costs may continue to decline over the next few quarters.

The fact that tyres have a sizeable replacement market where companies have more pricing power is another positive for MRF. Considering tyres are replaced every three years, the robust volume growth in the auto industry in 2009-11 implies that the tyre replacement demand for those vehicles will come up now.

In the last few months, truck owners have been postponing replacing tyres, with poor market conditions. However, the mild improvement expected in the economy this year, combined with a normal monsoon, could improve freight traffic. Higher demand for plying goods will in turn help truck owners pass on the cost increases to customers.

Finally, the company will benefit from the fast improving radialisation levels in commercial vehicle tyres. From about 15 per cent two years ago, the proportion of radial tyres stands at 20-25 per cent currently. Radial tyres bring in higher realisations than cross-ply tyres. MRF’s new plant for car and truck radials became operational in 2012.

Hence, investors with a one-two year perspective can buy the MRF stock. Though the stock trades at a high absolute price at Rs 13,588, it trades at a reasonable valuation of 7.5 times the company’s estimated earnings for FY2014.

Sizzling Stocks: MRF, Adani Power, ::Business Line

MRF :: CENTRUM WEALTH: Top 10 Diwali Picks

MRF is a thematic play on booming automobile population in India which has almost doubled in the last 10 years. Further, it draws nearly 75% of its sales from the replacement market which remains largely unaffected by fluctuations in the industrial economy. MRF is fast growing and the first Indian tyre company to cross the Rs.10,000 crore mark in revenues. Its branded sales are expected to double to Rs.20,000 crore in next 3 to 4 years;
MRF has the highest market share of 23.2% in the overall domestic tyre industry. For the period FY2006-2011 (September year ended), Net sales have increased 2.6x from Rs.3,724 crore to Rs.9,735 crore and volumes have increased more than 1.5x from 21.6 million units to 34.3 million units. During Q3FY2012, MRF’s revenue grew 17% YoY while its PAT increased 152% YoY on the back healthy margins. NR prices which were down 15.4% YoY during June quarter at around Rs.193/kg, helped improve EBIDTA margins by 450bps YoY to 10.9%;
The average prices of natural rubber (NR), which is a key raw material for tyres was down 16.9% YoY and 9.1% QoQ for the quarter ended September 2012 at Rs.175/kg. Currently, NR prices are quoting around Rs.174 and despite this decline, realizations remained firm with most companies increasing prices by 4%-5% in the September quarter itself. The expected appreciation in INR is likely to apply some further downward pressure on domestic prices of NR through cheaper imports. Also the government has imposed definitive anti-dumping duty on import of non-radial bias tyres (used in buses and trucks) from China and Thailand for a period of 5 years. We expect another 5%-10% fall in NR prices on account of slowdown in the developed countries;
We believe MRF would be the major beneficiary of the fallen prices and expect the company to spend around Rs.3,000 crore in FY2013 on rubber procurement. A 5% fall in rubber prices would improve the company’s earnings by Rs.375 per share. We expect MRF to maintain margins around 10%-11% and report better results for next few quarters;
MRF’s promoter holding is only 26.95% and is highly fragmented with as many as 114 individual holding this stake. Strategic investors (including financial institutions) hold another 28.87% as on September 30, 2012. As such we believe that MRF can be an attractive target for acquisition going forward. An analysis of some of the acquisitions in the tyre industry across the world, reveals that deals have taken place at valuations of around 6x-9x EV/EBIDTA. MRF is currently trading at ~4.5x its FY2013E EV/EBIDTA levels, signaling a significant discount to global valuations;
MRF is trading at low valuations due to poor stock liquidity. We firmly believe that the company needs to expand its existing tiny equity base (42.41 lakh shares for a market cap of Rs.4,200 crore) and improve its liquidity by issuing bonus / share split or both. The stock has fallen by 10.9% from its 52 week high and at the current price of Rs.10,304, is trading at 7.9x its FY2012E EPS of Rs.1,300 and 6.9x its FY2013E EPS of Rs.1,500. We re-iterate buy on the stock with a fair value of Rs.12,750;

Angel Broking - MRF - RU2QSY2012 - Result Updates

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MRF - RU2QSY2012

52-WEEK BLOCKBUSTER - MRF ::Business Line

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Goldman Sachs:: MRF Tyres : Market leader trading at normalized multiples

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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

Stock Strategy: Consider going short on ACC, MRF : Business Line

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ACC (Rs 981): Last week's carnage triggered a fresh selling in ACC, changing its outlook to negative. ACC now finds a crucial support at Rs 970, and a close below that could weaken it to Rs 858 first and then even to Rs 814. Only a close above Rs 1,134 would change the medium-term outlook positive for the stock. ACC faces an immediate resistance Rs 1,015 and the next at Rs 1,080.
F&O pointers: ACC futures closed at Rs 981, a wide discount with respect to the spot close at Rs 992. This indicates fresh accumulation of short positions. The ACC March futures are trading at a wider discount. Options are not that active to discern any view. However, rollover to February series is quite healthy at 76 per cent.
Strategy: Consider going short on ACC February futures with a tight stop-loss at Rs 1,015 (stop-loss closing day basis).
MRF (Rs 6,191): The stock has been on the downtrend for quite sometime. The recent fall below the crucial support level turned even the long-term outlook negative for MRF. Only a close above Rs 7,880 would change the outlook to positive for the stock. The immediate support and resistance appear at Rs 5,600 and Rs 6,650. One more close below the Rs 6,150 would take it down to its next support level.
F&O pointers: This is among the less active counters in the futures segment. The MRF futures closed at a premium (Rs 6,191) to the spot (Rs 6,158). It witnessed unwinding of long positions on Friday, which dragged the counter further. None of the options are active.
Strategy: Consider going short on MRF February futures with tight stop-loss at Rs 6,220 (closing day basis, spot price) for an initial target of Rs 5,600.
Note: Risk-averse traders can stay away from both the strategies.

Consider going short on ACC, MRF: Business Line

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Consider going short on ACC, MRF

K.S. Badri Narayanan

ACC (Rs 981): Last week's carnage triggered a fresh selling in ACC, changing its outlook to negative. ACC now finds a crucial support at Rs 970, and a close below that could weaken it to Rs 858 first and then even to Rs 814. Only a close above Rs 1,134 would change the medium-term outlook positive for the stock. ACC faces an immediate resistance Rs 1,015 and the next at Rs 1,080.