MRF margins weaken as raw material costs overshadow robust tyre demand

Investment View and Valuation

In its August 11, 2026 results update, Motilal Oswal Financial Services (MOFSL) reiterated its Sell recommendation on MRF, citing sustained margin pressure, modest expected earnings growth and valuations that it considers expensive relative to the company’s return profile.

MOFSL’s target price is Rs 1,13,936, based on 19 times FY28E EPS. The target implies 13 per cent downside from the CMP of Rs 1,31,125.

Q1 FY27 Financial Performance

MRF reported standalone Q1 FY27 revenue of Rs 8,291.6 crore, up 10 per cent year on year and in line with MOFSL’s estimate. Demand from OEMs was buoyant as vehicle sales increased across segments, while replacement demand also remained robust.

However, higher input costs constrained profitability. EBITDA declined 8 per cent year on year to Rs 948.6 crore, 9 per cent below MOFSL’s estimate. The EBITDA margin contracted 220 basis points year on year to 11.4 per cent, versus the broker’s 12.6 per cent expectation. Raw-material cost increased to 67.3 per cent of sales in Q1 FY27, compared with 63.4 per cent in FY26.

Reported Q1 FY27 PAT declined 2 per cent year on year to Rs 474.4 crore and was broadly in line with MOFSL’s estimate. The in-line profit outcome was aided by other income of Rs 191.5 crore, materially above the broker’s Rs 140 crore estimate, despite weaker-than-expected operating profitability.

MRF implemented price increases and cost-management actions during the quarter, which partly mitigated cost inflation. Nevertheless, MOFSL stated that raw-material prices remained firm amid the Middle East conflict and that the effect of higher costs on margins was likely to continue.

Demand Outlook and Key Operating Factors

Management remained cautious on the demand outlook because of the risk of a sub-normal monsoon. MOFSL also identified rising raw-material costs and supply-chain disruption associated with the Middle East crisis as key near-term headwinds.

These factors, alongside continuing margin pressure, underpin MOFSL’s expectation of only 1 per cent earnings CAGR over FY26 to FY28E.

The positive operating offsets identified in the report are continued strength in OEM and replacement demand, along with effective price and cost-management measures.

Earnings Estimates and Return Outlook

MOFSL reduced its FY27E consolidated EBITDA estimate by 2.1 per cent to Rs 4,659.5 crore and its adjusted PAT estimate by 3.4 per cent to Rs 2,181.9 crore. Its FY28E estimates were unchanged.

MOFSL expects RoCE to decline from 11.8 per cent in FY26 to 9.7 per cent in FY27E before recovering to 10.3 per cent in FY28E.

Key Risks to the Investment Case

• Persistent input-cost inflation.
• Supply-chain disruption associated with the Middle East crisis.
• A weaker demand environment linked to monsoon conditions.
• Insufficient price increases to offset higher costs.

Valuation Metrics

At the CMP, MRF trades at 25.5 times FY27E EPS and 21.9 times FY28E EPS. MOFSL considers these levels expensive given its assessment of subpar returns and limited earnings growth.