Trading On margin

MRF Note – Sell: RM headwinds weighed on performance



The stock is currently trading at 21.6X Consolidated EPS for FY2023E, which is expensive.

MRF announced an Ebitda T4FY21 of Rs 7.5 billion (+ 31% year-on-year), 9% below our estimates due to headwinds from RM. Revenue increased 31% year-over-year, lower than reported by competitors. Headwinds from RM and a lower mix will continue to put pressure on margins going forward. According to our estimates, the company lost market share in the M & HCV segment during fiscal year 2021, which is of concern. Maintain the sale with a revised FV of Rs 69,150 (from Rs 78,000). The stock is currently trading at 21.6X Consolidated EPS for FY2023E, which is expensive.

T4FY21 Ebitda 9% lower than estimated due to headwinds in the RM
MRF announced a T4FY21 Ebitda of Rs 7.5 billion (+ 31% year-on-year), 9% below our estimates due to headwinds from RM, partially offset by better-than-expected revenue growth. Revenue grew 31% year-on-year (5% above estimate), which is likely due to (i) a double-digit increase in the aftermarket segment and (ii) a strong recovery in the OEM segment . We would like to note that CEAT reported a 50% year-over-year increase in volume and Apollo Tires (stand-alone operations) reported a 49% year-over-year increase in volume during Q4FY21. The EBITDA margin stood at 15.7% (year-on-year, -540 basis points quarter-on-quarter), 230 basis points below our estimate of 18.0% due to headwinds of the RM.

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Gross margin decreased 630 basis points qoq in Q4FY21 due to (i) an increase in RM basket and (ii) weaker product mix (higher mix of OEM segment), partly offset by price increases taken in December. Other expenses only increased by 14% year-on-year (31% year-on-year revenue increase), mainly due to a sharp reduction in advertising, promotion and travel expenses. Depreciation charges increased 12% year-on-year as the company commissioned its new factory in Gujarat. The reported PAT amounted to Rs 3.2 billion (-52% year-on-year) as of Q4FY21, 18% below our estimate due to a shortfall in EBITDA.

Reduce FY2022-23E EPS by 11-16%; SELL remains with a revised FV of Rs 69,150
We have reduced our EPS estimates for fiscal year 2022-23E from 11% to 16%, due to lower EBITDA margin assumptions due to headwinds in the RM. Tire companies have delivered strong operating performance over the past three quarters, driven by strong growth in the replacement segment and benign RM costs (through Q3FY21). However, going forward, we expect gross margins to remain under pressure due to (i) RM cost pressures and (ii) lower product mix (higher OEM segment mix). In addition, MRF lost market share in the M & HCV segment during fiscal year 2021, which is of concern. Maintain Sell; Fair value revised to Rs 69,150 (against Rs 78,000 previously), valuing the share on the basis of BPA 18X March 2023e estimates. At CMP, the stock is trading at 21.6X consolidated EPS for fiscal 2023rd, which is expensive.

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