Financial Daily from THE HINDU group of publications
Sunday, Jun 20, 2004
Financial Daily from THE HINDU group of publications Sunday, Jun 20, 2004 |
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Investment World
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Stocks Markets - Recommendation MRF: Hold B. Krishnakumar
On the go.
The performance of the tyre industry was affected in recent quarters by the sharp rise in raw material cost. But MRF's performance was not impacted significantly on this score. While the total raw material consumption did not see any significant increase, the profitability was dented by the rise in staff cost and other expensesOne advantage for MRF is the company's exposure the lucrative replacement market and a presence across almost all key segments of the tyre industry. MRF is a prominent player in the replacement market of the truck and bus tyre segment, the biggest in the industry. MRF's presence in the tractor tyre market, which was also buoyant during the period under consideration, too helped the cause. Besides, the reduction in the excise duty on tyres sold in the replacement market (effected in the last Budget; the benefit would have been available only partly in the corresponding quarter of the previous year) also appears to have mitigated the impact of input price rise. The increase in automobile production along with an improvement in exports helped the company clock a 19 per cent increase in turnover to Rs 619.3 crore. The operating profit margin, however, dropped to 10.6 per cent from 7.8 per cent owing to the rise in staff cost and other expenses. The soft interest rate regime resulted in a drop in interest cost from Rs 9.9 crore to Rs 7.9 crore, while depreciation cost remained almost unchanged. The post-tax earnings (excluding extraordinary income) dropped 24 per cent Rs13.2 crore. The company's performance would be strained on account of the sustained increase in input cost. The price of key inputs such as natural rubber, carbon black and tyre cord rose 30 per cent, which is likely to be reflected in the form of lower profitability for tyre producers. The recent developments in the natural rubber and international crude oil market do not indicate the possibility of any significant softening in price of these inputs. On the positive side, the demand for tyres from the replacement market is likely to improve this fiscal. The optimism stems from the fact that the replacement market demand typically lags the original equipment demand by 8-12 months. The recent recovery in the tractor industry is another major positive factor. The company is also taking steps to enhance its presence in the original equipment segment. MRF's share price declined over the past six months. The decline appears to be the reflection the overall bearish market trend in the recent months and the lacklustre performance of the tyre industry over the past few quarters. The implementation of the Golden Quadrilateral project and the increased preference for multi-axle trucks is likely to propel demand for tyres. From an investment perspective, MRF would rank as a top investment choice in the tyre industry. However, taking into account the near-term outlook and the present environment in the tyre industry, there is no compelling reason to take fresh exposures in MRF.
Long-term investors in MRF may hold on to the stock, as there appears to be limited downside risk from present levels. The progress of monsoon, the trend in natural rubber and crude oil price along with economic growth, are factors to keep a watch on. Any favourable development pertaining to these factors may be used to take exposures in MRF.
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