MRF
Performance Highlights
Y/E Sept. (` cr) Net sales EBITDA EBITDA margin (%) Reported PAT 1QSY12 2,875 258 9.0 113 1QSY11 2,167 243 11.2 103 % chg (yoy) 32.7 5.9 (226)bp 9.7 4QSY11 % chg (qoq) 2,620 181 6.9 395 9.8 42.6 206bp (71.4)
BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Automobile 3,988 0.7 10,005 / 5,527 4,727 10 18,145 5,505 MRF.BO MRF IN
`9,407 `11,343
12 Months
MRF reported revenue growth of 32.7% yoy to `2,875cr during 1QSY2012. The companys EBITDA margin contracted by 226bp yoy to 9.0% from 11.2% in 1QSY2011 on account of increased raw-material cost on the back of higher rubber prices. The company reported net profit growth of 9.7% yoy to `113cr in 1QSY2012 as compared to `103cr in 1QSY2011. Increasing demand and radialization to improve future prospects for MRF: Growing demand in the tyre industry is expected to give a momentum to the companys revenue going forward, since MRF is a market leader in the Indian tyre market. Moreover, we expect the companys EBITDA margin to expand due to an industry shift to radialization across all tyre segments. Also, rubber prices have declined by ~31% from `243/kg in April 2011 to `185/kg as on February 20, 2012 this would further lead to margin expansion. Thus, we expect EBITDA margin to expand by 186bp over SY2011-13E, from 8.3% in SY2011 to 10.1% in SY2013E. Outlook and valuation: We expect MRFs revenue to post an 18.6% CAGR over SY2011-13E, aided by a conservative 8.5% CAGR volume growth and a ~7.5% increase in realization over the same period. However, adjusted net profit is expected to witness a CAGR of 25% over SY2011-13E to `534cr. At `9,407, MRF is trading at PE of 7.5x its SY2013E earnings. We maintain our Buy recommendation on the stock with a revised target price of `11,343, based on a target P/E of 9.0x for SY2013E earnings.
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 27.0 12.0 26.2 34.8
3m 13.0 45.2
1yr
3yr
Key financials
Y/E Sept. (` cr) Net Sales % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoIC (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research
SY2010 7,453 31.6 348 39.7 11.0 820 11.5 2.4 22.8 28.0 0.7 6.4
SY2011 9,743 30.7 343 0.0 8.3 808 11.6 1.7 14.9 16.0 0.6 8.3
SY2012E 11,883 22.0 456 33.1 9.6 1,076 8.7 1.5 16.5 20.3 0.6 5.8
SY2013E 13,710 15.4 534 17.2 10.1 1,260 7.5 1.2 17.3 18.2 0.5 5.2
Shareen Batatawala
+91- 22- 3935 7800 Ext: 6849 shareen.batatawala@angelbroking.com
1QSY12 2,875 2,110 73.4 118 4.1 390 13.6 2,618 258 9.0 32 65 3.9 165 5.7 52 31.5 113 3.9 4 266.2
1QSY11 2,167 1,509 69.6 100 4.6 315 14.5 1,924 243 11.2 21 76 4.8 151 7.0 48 31.9 103 4.7 4 242.7
yoy chg (%) 32.7 39.8 17.9 24.0 36.1 5.9 52.1 (14.5) (17.3) 9.0 7.6
4QSY11 2620 1,921 73.3 120 4.6 398 15.2 2,439 181 6.9 27 68 2.7 88 3.4 177 201.1 (484.1)
qoq chg (%) 9.8 9.8 (1.8) (1.8) 7.3 42.6 19.2 (5.2) 47.2 86.8 (70.7)
SY11 9,743 7,107 72.9 447 4.6 1385 14.2 8,938 805 8.3 93 248 25 489 5.0 274 56.0 404.2
SY10 7,453 5,015 67.3 371 5.0 1249 16.8 6,636 817 11.0 63 261 42 535 7.2 181 33.8 0.0 354 4.8 4 835.2
% chg 30.7 41.7 20.3 10.8 34.7 (1.4) 47.4 (5.0) (39.7) (8.5) 51.9
9.7
(573) (21.9) 4
(119.7)
619 6.4 4
74.9
9.7
(1,352)
(119.7)
1,461
74.9
Investment rationale
Indian tyre industry Demand, a growth driver
The Indian tyre industry has a size of `30,000cr (as of September 2011), of which exports contribute `3600cr. The industry is classified into commercial vehicle tyres (71%) and passenger vehicle tyres (22%). Commercial vehicle tyres include medium and heavy commercial vehicles (MHCV, 55%), light commercial vehicles (LCV, 8%) and tractors (8%). Passenger vehicle tyres include passenger cars and MUVs (12%), motorcycles (7%) and scooters (3%). The three major segments of the tyre industry are original equipment (OE, 26%), replacement (63%) and exports (11%). The performance of the industry is influenced by the replacement segment due to a larger share of truck tyres (71%) in the product mix. The industry is a raw-material intensive industry, with raw material constituting about 66% of sales turnover and 70% of operational cost.
Source: Angel Research; Note: Industry includes Apollo Tyres, MRF, Goodyear India, JK Tyre and CEAT, @TPD stands for tonne per day, *As on February 22, 2012
The current capacity of the tyre industry in India is ~22.6lakh MTPA with an assumption of 352 working days, thus leading to revenue per MT of `2.6lakh. Assuming a 9% CAGR for the next three years, the capacity is expected to increase by ~6.7lakh tonnes to ~29.3lakh tonnes in FY2014E. Currently, investment for expansion of one TPD is `6.1cr, of which `5cr is capex requirement and `1.1cr is working capital requirement. Hence, the total investment required for the next three years is `11,569cr. With the assumption of 1:1 debt-equity ratio and 20% dividend payout for the next three years, net profit for FY2014E is expected to stand at `2,410cr, resulting in PE of 3.9x its earnings.
Cross-ply 2.0 1.0 1.0 0.9 1.9 4.6 4.2 0.4 0.1 0.1 0.2 0.1 0.1 9.0 13.6 15.8
Radial 5.0 5.0 1.1 6.1 5.5 4.4 1.1 0.2 0.3 0.6 0.2 0.4 20.6 13.6 15.8
Manufacturing of radial tyres is far more capital intensive than cross-ply tyres as investment per TPD for radial is almost 3.2x of cross-ply at `6.1cr. Radial tyres are priced ~20% higher than cross-ply tyres. Taking into account the differences in capital requirements and the consequent impact on asset turnover, interest costs and depreciation, to generate similar RoCE and RoE, tyre companies would need to earn EBITDA margin of ~21% as compared to about 9% being earned on cross-ply tyres. This assumption also implies a 5% higher operating expense per TPD in absolute terms for radials. Hence, we expect margins to increase in the long term, thus leading to a 25% CAGR in net profit over SY2011-13E.
Financial performance
Exhibit 4: Key assumptions
SY2012E Change in tyre realization Change in rubber price
Source: Angel Research
6.0 -
Earlier estimates SY2012E 11,368 8.5 972 SY2013E 12,685 9.3 1,206
Revised estimates SY2012E 11,883 9.6 1,076 SY2013E 13,710 10.1 1,260
(` cr)
8000 6000 4000 2000 0 SY2008 SY2009 SY2010 SY2011E SY2012E SY2013E Revenue (LHS) Revenue growth (RHS)
15 10 5 0
(%)
20
(` cr)
(` cr)
(%)
800 600 400 200 0 SY2008 SY2009 SY2010 SY2011E SY2012E SY2013E EBITDA (LHS) EBITDA margin (RHS)
6 4 2 0 200 100 0
(`)
Feb-08 Price
Feb-09 2x 5x
Feb-10 8x
Feb-11 11x
Feb-12
(%)
300
FY2013E SY2013E
Risks
Volatile rubber prices: Rubber is the major raw material used in the manufacture of tyres. Rubber price was at a high of `243/kg in April 2011; however, prices have come down to `185/kg as on February 20, 2012. Increased volatility in rubber prices would have a direct impact on the companys EBITDA margin and consequently the profit. Exhibit 11: Rubber price trend
300 250 200 12 9 6
(`/kg)
150 100 50 0
Rubber price
Source: Rubber Board (*MTD)
*Feb-12
Mar-11
Aug-11
May-11
Nov-11
Dec-11
Apr-11
Jul-11
Feb-11
Sep-11
Oct-11
Jun-11
Jan-12
(%)
The company
MRF manufactures rubber products such as tyres, tubes, flaps, tread rubber and conveyor belts. The company is a market leader in the tyre industry with a ~30% market share currently.
Apollo tyres
MRF Ltd
JK tyres
Ceat tyres
Goodyear Tyres
MRF is also a leader in the passenger car tyre segment with a 20.3% market share and holds a second position in the MHCV segment with a ~19.5% market share.
10
11
Key Ratios
Y/E Sept.
Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover Inventory / Sales (days) Receivables (days) Payables (days) WC (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 1.0 2.7 3.6 0.3 0.7 6.3 0.7 1.5 8.8 0.9 2.7 6.0 1.0 2.3 4.6 1.0 2.3 4.5 2.3 71 44 78 61 2.2 42 37 54 48 2.4 54 40 53 41 2.7 57 49 65 48 2.7 57 49 63 51 2.4 57 49 63 53 11.2 14.7 13.2 19.6 26.1 20.0 21.9 28.0 22.8 11.8 16.0 14.9 15.5 20.3 16.5 15.1 18.2 17.3 4.7 0.7 2.8 9.1 4.3 1.0 13.8 7.6 0.6 3.7 17.9 4.6 0.3 22.4 7.5 0.7 3.1 15.0 4.1 0.7 23.0 5.7 0.7 2.8 11.0 2.8 0.9 18.7 6.9 0.7 2.6 11.9 4.5 1.0 19.0 7.1 0.7 2.3 10.8 4.4 1.0 17.2 326.9 326.9 23.4 586.7 586.7 29.2 819.6 819.6 58.3 808.4 808.4 25.0 1,075.7 1,075.7 1,834.9 30.0 6,464.9 1,260.3 1,260.3 2,247.4 30.0 7,695.3 28.8 12.9 3.6 0.2 1.0 12.5 2.1 16.0 8.0 2.9 0.3 0.8 6.5 2.2 11.5 6.6 2.4 0.6 0.7 6.4 1.7 11.6 6.8 1.7 0.3 0.6 8.3 1.3 8.7 5.1 1.5 0.3 0.6 5.8 1.1 7.5 4.2 1.2 0.3 0.5 5.2 1.0
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E-mail: research@angelbroking.com
Website: www.angelbroking.com
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
MRF Ltd. No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
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