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MRF 1QSY2014 performance highlights and results update

February 14, 2014, Friday, 17:59 GMT | 12:59 EST | 22:29 IST | 00:59 SGT
Contributed by Angel Broking

For 1QSY2014, MRF reported a top-line growth of 5.8% yoy to Rs.3,201cr, slightly higher than our estimate of Rs.3,106cr. The EBITDA margin came in at 13.1%, a marginal drop of 24bp yoy. The raw material cost as a percentage of net sales declined by 171bp yoy which was offset by a rise in employee cost and other expenses as a percentage of net sales by 103bp and 91bp, respectively, on a yoy basis. The interest cost for the quarter came in higher than our estimate at Rs.59cr. Consequently, the net profit for the quarter came flat on a yoy basis at Rs.180cr, 13.6% lower than our estimate.

Diversified portfolio coupled with strong replacement demand to drive revenue: MRF’s diversified portfolio with leading position in majority of its 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 elections. Further, robust growth in auto industry during FY2009-12 provides huge opportunity in replacement market which will aid in revenue growth for the company.

Low rubber prices to aid margins: During 1QSY2014, the domestic rubber price declined by 8.8% yoy and currently trades at Rs.144/kg. Considering the estimated surplus of 200,000 tonne in global natural rubber supply in 2014 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.

Outlook and valuation: We expect MRF to post a 6.1% net sales CAGR over SY2013-15 to Rs.13,659cr while the EBITDA margin is expected to increase by 73bp and stabilize at 15.3% in SY2015. Consequently, the net profit is expected to grow at 12.7% CAGR over SY2013-15 to Rs.1,019cr. 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 Rs.21,639, based on a target P/E of 9.0x for SY2015E earnings.