MRF: Cut exposure

Recommendation: Cut exposure

B. Krishnakumar

AUTOMOTIVE tyre major, MRF, has reported yet another quarter of depressed financial performance.

The company has been riding through a rough patch in the last few quarters due to a demand slowdown. Though the commercial vehicle segment saw robust growth in 1999-2000, it did not have a positive impact on MRF as the company does not have a major presence in the original equipment segment of the tyre industry.

Since early 2000, the automobile sector has been passing through a depression. Automobile production has slowed down, across segments, including commercial vehicles, passenger cars and tractors. This has affected the demand for tyres from the original equipment segment. Considering that MRF is a major player in the car radial segment, the slowdown in passenger car sales appears to have affected its performance.

Similarly, the tractor segment, where MRF has a major presence, has been witnessing a down trend. This has weighed down MRF's performance. While the demand from the OE segment has dried up, the offtake from the replacement market has not been robust. The slower economic growth and drop in industrial production have affected the demand for tyres from the replacement market.

In this backdrop, the 42 per cent decline in post-tax earnings reported by MRF (for the quarter ended December 2000) is not all that bad. It is, in fact, commendable that the company sustained a flat trend in the turnover despite the sluggishness in demand. For the quarter ended December 2000, the turnover inched up to Rs 570.57 crore from Rs 567.90 crore in the corresponding previous period.

While the turnover remained flat, the prices of key inputs such as carbon black, synthetic rubber and tyre chord have been firm in recent months. Given the slowdown in demand and the mounting competitive pressures, MRF, as also other tyre producers, have not been able to raise prices to accommodate the rise in input costs.

As a result, the profitability of almost all tyre companies was hit this fiscal. MRF's operating profit margin declined to 9.08 per cent from 11.7 per cent. Given that the tyre industry is characterised by high volumes and low margins, the decline in profitability on a flat trend in turnover would have a major cascading impact on the bottomline. This is reflected in MRF's performance too. The company's post-tax earnings declined by about 42 per cent to Rs 9.64 crore.

The performance would have been worse but for the savings in interest cost and the drop in tax provision. In any case, MRF's performance appears better than that of peers such as Apollo Tyres and Ceat. While Apollo Tyres' net profit declined by about 90 per cent for the quarter ended December 2000, Ceat reported a net loss.

Given that there are no signs of a sustained recovery in the industrial sector or automobile production, MRF's performance in the near term is unlikely to see any major improvement. From an investment perspective, it would be safer to clip exposures in MRF as also other tyre companies. Taking into account the fundamentals and strong presence of MRF in the sector, fresh buying may be contemplated on declines.