MRF: Hold

Recommendation:Hold

B. Krishnakumar

FOR the second year in a row, the automotive tyre major, MRF, has deteriorated. The slack economic growth and the firm trend in price of key inputs have affected the performance. For the year ended September 2001, the net turnover fell 10 per cent to Rs 1,718.04 crore.

Viewed in the context of an overall drop in the truck and bus tyre production, the 10 per cent drop in turnover is not all that surprising.

MRF derives a chunk of its revenues from the replacement market for truck and bus tyres. The persisting anaemic economic growth has affected the replacement market demand for truck and bus tyres.

The heavy commercial vehicle (HCV) output has seen some recovery in recent months.

This, however, is of no major consequence for MRF as it has a significant presence in the replacement market.

Moreover, in the truck and bus segment, the replacement market is the major volume driver compared to the original equipment segment.

Thus, the improvement in the HCV output has had little impact on both the MRF's performance and the overall tyre production.

The demand from other segments such as passenger cars and tractors has not been all that robust either.

While the tractor industry has been affected by dwindling demand, the passenger car output has not grown significantly this fiscal.

As a result, the demand for tyres and, by extension, MRF's turnover has been affected.

MRF has had also to contend with a relatively firm trend in the price of key inputs such as natural rubber and carbon black.

After a soft trend, the prices of natural rubber firmed up to around Rs 36 per kg in June and then declined to the current levels of about Rs 30.

The depreciation in the value of the rupee vis-`-vis the dollar impacted the prices of petro-based inputs such as carbon 5black and nylon tyre cord.

While the input costs firmed up, sluggish demand and rising competitive inhibited tyre companies from adjusting product prices to accommodate the rise in raw material prices.

As a result, raw material cost, as a proportion of net turnover, rose to 61 per cent from 57 per cent.

Thus, the operating profit margin declined to 11.58 per cent from 14.14 per cent for the year ended September 2000.

The decline in turnover and the drop in profit margins resulted in a 50.45 per cent drop in post-tax earnings.

For the year ended September 2001, MRF reported a post-tax earnings of Rs 31.74 crore. The per share earning, on the equity base of Rs 4.24 crore, works out to Rs.74.85.

The damage to the bottomline was mitigated by the 47 per cent drop in taxation provision for 2000-01.

The drop in earnings coupled with the decline in corporate tax rates has resulted in a lower taxation provision.

MRF's future prospects hinge on the recovery in the economic fundamentals and an improvement in automobile output.

Given that the decisive signals of an economic revival are not yet in sight, the company's performance is unlikely to improve in a hurry, at least in the near term.

The capacity overhang and the growing competitive pressure in the industry would hamper any significant jump in profitability.

From an investment perspective, fresh purchases may be deferred in MRF because of the lacklustre business prospects for the tyre industry per se.

However, taking into account the strong fundamentals, the entrenched presence in the industry and the sharp drop in share price over the recent months, shareholders can remain invested and use any price rally to clip exposures.