MRF March Quarter Earnings Review

The nation’s foremost tyre manufacturer, MRF, has reported a 67 per cent rise in net profits to Rs 150.13 crore in the March quarter of 2012 as against Rs 89.85 crore in the corresponding quarter of the previous year. On a sequential basis the net profits are up by 33 per cent from Rs 112.89 crore in the December 2011 quarter.

At the same time the topline has increased by 25 per cent on a yearly basis and 4 per cent on a quarterly basis to Rs 2,992.8 crore from Rs 2,383.79 crore and Rs 2,875.49 crore respectively. The reason for the stupendous rise in bottomline can be attributed to the softening rubber prices, which has helped the company to report an expansion in its operating and net profits margins. The healthy increase in automobile sales during the January-March quarter after the lull of CY11 has also helped MRF to post good earnings’ growth.

With natural rubber prices constituting nearly 45 per cent of the total raw material costs for tyre manufacturers like MRF, the sharp fall seen recently in global rubber prices to Rs 190-200 per kg from its peak levels of Rs 240-250 per kg seen in April 2011 has really helped to improve the scenario on the margin front. The extension of anti-dumping duty on imports of no-radial tyre from China and Thailand would also help improve the competitiveness for local Indian manufacturers. 

During the quarter the company has announced the commissioning of its new facility at Triuchirappalli in Tamil Nadu which has an installed capacity to manufacture 3.5 lakh car and truck radials. Going forward, the rubber prices are expected to remain near the current levels owing to surplus production in Indonesia and Thailand. This coupled with expectations of automobile demand to remain benign, we expect MRF and other leading tyre manufacturers to have a good run over the coming months. 

Despite the recent rally seen in the shares of MRF, the counter still hold the potential for upside as during the same period a year ago the shares under-performed on the bourses owing to negativity surrounding it with respect to a spike in raw material costs. At an annualised EPS of Rs 1,244.1 discounting its current share price of Rs 11,234.2 at a PE of 9x, we recommend investors to accumulate the counter at current levels for a desired target price of Rs 13,265 per share.