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Recommendations India

MRF 3QSY2014 performance highlights and results update

July 25, 2014, Friday, 15:11 GMT | 10:11 EST | 18:41 IST | 21:11 SGT
Contributed by Angel Broking

For 3QSY2014, MRF reported a good set of numbers. Its top-line grew 9.4% yoy to Rs.3,337cr, above our estimate of Rs.3,218cr. The raw material cost as a percentage of sales declined by 124bp yoy to 63.7%. Though the EBITDA margin declined by 119bp yoy to 14.7%, it expanded by 215bp on a sequential basis. The net profit for the quarter came flat on a yoy basis at Rs.230cr but it was 8.2% higher than our estimate of Rs.213cr.

Diversified portfolio coupled with strong replacement demand to drive revenue: MRF’s diversified portfolio, with a leading position in a majority of the segments, will help it in reaping early benefits of revival in auto demand. This would be on the back of improved consumer sentiments after the general elections. Further, robust growth in the auto industry during FY2009-12 provides huge opportunity in replacement market, which will aid revenue growth for the company.

Low rubber prices to aid margins: During 3QSY2014, the price of rubber in the domestic market declined by 14.4% yoy; rubber currently trades at Rs.140/kg in the domestic market. 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. This will help the company in stabilizing its EBITDA margin.

Outlook and valuation: We expect MRF to post a CAGR of 8.6% in net sales over SY2013-15 to Rs.14,312cr, while the EBITDA margin is expected to be at 15.1% in SY2015. Consequently, the net profit is expected to grow at a CAGR of 13.7% over SY2013-15 to Rs.1,036cr. At the current market price, MRF is trading at a PE of 9.8x its SY2015E earnings and at a P/BV of 1.8x for SY2015E. We have revised our recommendation on the stock to Buy with a target price of Rs.29,332 based on a target P/E of 12.0x for SY2015E.