For 4QFY2016, MRF beat our estimates on the EBITDA and bottom-line fronts.
The top-line for the quarter remained flat on a yoy basis at Rs3,330cr (it declined
marginally by 0.9% yoy). Raw material cost as a percentage of sales declined by
589bp yoy to 53.6%, thus aiding EBITDA margin expansion by 530bp yoy to
23.4%. Depreciation expense grew by 12.2% yoy to Rs125cr and other income grew
by 209.3% yoy to Rs77cr. As a result, the net profit jumped by 45.4% yoy to Rs461cr.
Replacement market demand affected by Chinese imports, OEM recovery to
continue: The recovery in demand from OEMs has been slow despite better
numbers from the MHCV side. This is because 2W/3W and tractor performance
has been sub-par due to deficient monsoons and dampened rural sentiments.
Additionally, surge in import of cheaper Chinese tyres is eating into the share of
domestic players, including MRF, in the TBR replacement market. However
recovery is expected in MHCV replacement cycle on the back of strong OEM sales
in the last one year. We expect MRF to benefit from its diversified product portfolio
and strong presence in the replacement market across all segments.
Low rubber prices to aid margins: During 4QFY2016, the price of rubber in the
domestic market declined by 5.9% yoy to Rs118/kg; rubber currently trades at
~Rs114/kg in the domestic market. Considering the high global inventory levels,
cheaper synthetic rubber and lower demand from China, we expect rubber prices to
remain at lower levels. This will help the company in maintaining its EBITDA margin.
Outlook and valuation: We expect net sales to be at Rs14,488cr in FY2017E, while
the EBITDA margin is expected to be at 21.1% in FY2017E. On the back of better
margins, the net profit is expected to be at Rs1,611cr in FY2017E. At the current
market price, MRF is trading at a PE of 10.5x its FY2017E earnings and at a P/BV
of 2.0x for FY2017E. We have an Accumulate rating on the stock with a target
price of Rs45,575 based on a target P/E of 12.0x for FY2017E.

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