Photo: Ramesh Pathania/Mint
In spite of its size and strong brand equity, MRF Ltd has not been spared Chinese competition that has created havoc in the domestic tyre industry. Net revenue at Rs.3,482 crore was flat compared with a year back and was lower than estimates on the Street. The few analysts who track the stock reckon that the reason could be a combination of lower prices and sales volumes during the quarter.
But then, as is the case so often, the tyre maker surprised positively on profitability. The quarter’s operating profit atRs.840 crore was a significant beat on analysts’ forecast and also a tad higher than the year-ago period.
The company saved on raw material costs, which were about 140 basis points lower than a year ago. However, it was in line with the industry trend this quarter where tyre makers have reported better profit margins in spite of a spurt in rubber prices. The firms might have used their low-cost inventory of rubber. A basis point is 0.01%.
But this also means that the impact of higher rubber prices might be felt in the forthcoming quarters. Also, the crude oil price has been northbound from a year ago, which will have a bearing on operating profitability. In any case, MRF clocks the highest operating margin in the segment. The June quarter’s rock solid 24% margin was slightly higher than what the company reported a year ago but surpassed theBloomberg forecast of 22.2%.
Robust operating performance led to a net profit of Rs.490 crore, which beat the forecast on the Street by 33%. MRF’s stock at Rs.36,689.30 discounts its FY2018 earnings per share estimate by about seven times. This is reasonable, given that it is in line with industry price-to-earnings ratio, but commands a premium position. Any favourable change in key input prices such as rubber or higher sales volumes wil have a positive impact on the stock.