MRF: Deflating performance

Recommendation:Sell

B. Krishnakumar

THE automotive tyre major, MRF, reported a depressed financial performance for the six months ended March 2000.

The turnover inched up by just 2 per cent to Rs. 1,118.67 crores. This flat trend indicates the subdued demand for the company's products.

MRF has a major presence in the replacement market of the truck and bus and the tractor and passenger car segments as well. However, the bulk of the company's revenues comes from the truck and bus segment. In the six months ended March 2000, the demand for truck and bus tyres was driven more by the original equipment segment rather than the replacement market.

Besides, the demand from the tractor segment tapered off during this period, because of which MRF reported a flat topline growth. The performance would have been worse but for the steady demand from the car market.

The input costs have been rising steadily, resulting in a decline in the operating profit margin. The prices of key inputs, such as natural rubber, carbon black and nylon tyre cord, have risen steadily in recent months, while the company has not raised product prices. As a result, the OPM declined to 12.72 per cent from 14.18 per cent.

The interest cost remained stagnant at Rs. 32.44 crores (Rs. 34.41 crores) while the depreciation provision rose Rs. 51.42 crores from Rs. 47.10 crores. The commissioning of the new plant at Pondicherry appears to have pushed up the depreciation charge.

The decline in the profit margin coupled with the rise in the depreciation and interest costs pulled down MRF's post-tax earnings. For the six months ended March 2000, it dropped 27 per cent to Rs. 40.93 crores. On the equity base of Rs. 4.24 crores, the annualised per share earnings work out to Rs. 193.

As for the future prospects, the company's performance is likely to remain subdued because of the relatively flat demand from the replacement market. Moreover, the profit margins would be under greater pressure if the company sticks to the decision of not raising prices. The recent changes in the excise duty structure on tyres sold in the replacement market would further strain the profitability. Given this backdrop, shareholders could look for opportunities to exit from MRF. The stock trades at Rs. 1,314.

Lupin Lab: Improving its mix

Lupin Laboratories declared a sharp growth in the net profit for the nine months ended March 31 (the company's financial year is from July to June).

The growth in net profit came on the heels of an increase in the share of higher-value formulations (drugs in the ready-to-consume form) in the total sales.

The sales for the nine months ended March was Rs. 537 crores, up Rs. 21 crores (4.06 per cent) from the Rs. 516 crores recorded in the corresponding previous period. The increase in the total income was by around the same proportion, up Rs. 539 crores from the previous periods Rs. 517 crores.

The total operating expenditure for the period was Rs. 453 crores, up Rs. 5 crores (1.11 per cent -- this was responsible for the marked increase in profit.

The operating profit margin also improved this year to 16.14 per cent against 13.34 per cent in 1998-99. The primary reason for Lupin's higher profitability is that the company derives an increasing proportion of revenue from downstream products -- formulations. Lupin has a powerful presence in two therapeutic categories -- anti-TB and cephalosporins. It is the market leader in the anti-TB segment and the category is also the highest contributor to its formulation portfolio.

Lupin sees cephalosporins as an ideal segment to penetrate the global generic market. The entry strategy and the penetration level in the global cephalosporin market will be critical to Lupin's profitability in the coming years. Lupin's domestic cephalosporin formulation business grew 14 per cent in the first nine months of this year. In the developed market, Lupin's European operations have commenced through its collaborator, Merck Generics.

Lupin paid out Rs. 39 crores as interest for the first nine months, more or less in line with interest expense of the previous corresponding period. The depreciation expense was flat at Rs. 9 crores. The combined impact of higher operating profit and flat interest and depreciation expense led to a sharp increase in net profit.

The net profit (excluding the provision for tax) for the nine months ended March 31 was Rs. 37.71 crores, up Rs. 15.7 crores (71.33 per cent) in relation to the previous year's net profit for the first nine months. The net profit margin was 6.99 per cent for this year vis-a-vis 4.25 per cent the previous year. Shareholders can consider staying invested to capitalise on the possible gains that may accrue from Lupin's move into downstream products and the potential in the generics market.