MRF Ltd

BSE: 500290 | NSE: MRF | ISIN: INE883A01011 
Market Cap: [Rs.Cr.] 17,488.16 | Face Value: [Rs.] 10
Industry: Tyres

Management Discussions
MANAGEMENT DISCUSSION AND ANALYSIS

The core business of MRF is manufacturing, distribution and sale of tyres for variouskinds of vehicles. The management discussion and analysis given below discusses the keyissues for various sectors of the business.

Tyre Industry Structure and Development

The Indian economy had a challenging year in fiscal 2013-14, ending with an annualgrowth rate of around 4.7%, fractionally higher than in the previous year. The growth wassubdued because of poor performance of the mining, manufacturing, construction, trade,hotels, transport, storage and communication services sectors. According to CMIE, thegrowth in India’s real GDP is expected to improve to 5.5% in 2014-15 with theIndustrial sector projected to show an acceleration. Investment demand in India is likelyto pick up gradually in 2014-15 as more projects are cleared and land acquisition processbecomes easier post implementation of the new land acquisition act. Fast tracking of newprojects is expected to boost construction activity, generate new employment and createfresh demand for cement, steel and machinery. Consequently, this is expected in turn, toboost demand for the automotive sector especially for commercial vehicles. Since thedemand for tyres as a category is a function of the overall growth of the economy,particularly growth in the automotive and transportation sectors, this augurs well for thetyre industry in the new fiscal.

The turnover of the Indian tyre industry is estimated to be around Rs.47,000 crore in2013-14 and is dominated largely by the commercial vehicle segment consisting of heavy,light and small commercial vehicles. The next largest segment is passenger vehiclesconstituted by cars, SUV’s, motorcycles and scooters. The Farm and Off The Road (OTR)segments consisting of the tractor front and rear tyres, tractor trailers and OTR tyresare the other important segments in the market.

Traditionally, tyres are classified as cross-ply (bias) and radial based on thetechnology deployed in their manufacture. In India, the commercial tyre segment continuesto be dominated by cross-ply tyres due to road conditions, loading patterns and the highinitial cost of radials. There is a steady growth in radialisation across segments withthe highest in passenger cars (98%) followed by heavy commercial vehicles (25%) and lightcommercial vehicles (22%).

The tyre industry consists of three distinct markets namely replacement,institutional/OEM and exports. By value, replacement accounts for approximately 60% of theindustry with Institutional/OEM and exports making up 22% and 18% respectively. While inthe commercial and farm segments replacement sales forms a major chunk, bothInstitutional/OEM and replacement sales play an almost equal role in the passengersegment. Of the total tyres produced in India, the top ten tyre companies account fornearly 90% of the volume. The tyre industry provides direct and indirect employment tomore than a million people, comprising of dealers, retreaders and truck operators. Thetrucking business is controlled by nearly 2.6 million small operators.

The major factors affecting the performance of the Indian tyre industry are thesluggish growth of the economy, interest rates, fuel prices, natural rubber prices andimport duty on rubber.The tyre industry is also directly affected by the performance ofthe vehicle manufacturing sector which in turn is dependent on the overall economicgrowth. During 2013-14, there has been a dip of 8% in the production of both light andheavy commercial vehicles while the drop was a sharp 37% in the newly emerging smallcommercial vehicle segment. Passenger car production also saw a decrease of 3%, whereasSUV’s registered an increase of 9% over the previous year. In two wheelers, scooterswitnessed a 33% increase whilst motorcycle production grew at 12%. The farm sector alsorecorded an 8% increase in production over 2012-13.

Opportunities and Threats

The worldwide recession is giving way to growth and the global economic recovery hasstarted, albeit very slowly. The hope of better performance in the coming years shouldbring some cheer to Indian companies as the present economic outlook in India, though yetsomewhat uncertain, is optimistic about robust growth.

In recent years, several multinational tyre companies have entered the Indian marketwill intensify with significant competition and could potentially cause a glut inthe Indian market in the near future.

Despite several representations to the government, the inverted tax issue is yet to beresolved. It is imperative that duty concessions should be extended to the imports of rawmaterials by the tyre manufacturers as their performance is impacted by key raw materialcosts like those of natural rubber and petroleum derivatives. At present, rubber and crudeoil prices are weak and this will ease the strain on the margins of tyre companies in theshort run. However, a permanent reduction in rubber import duties is required to ensurelong term health of the Indian tyre industry as price volatility of key raw materialscould return and clearly, there are limits as to how much of such cost escalations can bepassed on to the end customers, especially to OEMs/institutional buyers, who are extremelyprice sensitive.

Segment wise and Product wise Performance

During the period 2013-14, MRF achieved a sales turnover of Rs.14,641 crore. This is anincrease of 8.9% over the previous year. Across the board, there was an overall increasein all segments adding up to a 5% increase in total tyre production. In the heavycommercial vehicle segment, the increase was 9% over the previous year while lightcommercial vehicle tyres increased by 4% in this period. In the motorcycle and scootersegments, the increase was 3% and 6% respectively. The passenger car group remained flat.

Exports

Overall business climate around the globe continued to show signs of a slowdown similarto the trends in 2012-13. The situation has in fact worsened with prices dropping furtherand the supply – demand equation clearly showing signs of a glut in the market.Mining across countries showed a sharp decline, erratic weather patterns affectedagriculture and political stalemate/ turmoil also took its toll on many of our key marketsleading to lower business activity and demand.

Your Company has traditionally held on to its market share in heavy and lightcommercial bias segments and continued to do so this year against all odds. Softening ofraw material prices has given us some head room to pass on support to our channel partnersagainst very aggressive competition and still post a good growth in profit over theprevious year. Revenues however grew only by a nominal 3% over 2012-13.

MRF was awarded the "Highest Export Award [Auto Tyre Sector]" by the AllIndia Rubber Industries Association yet another time during the period under review.

Outlook

The automobile industry has seen a sluggish phase for the second consecutive year in2013-14. It is hoped that in tandem with the expected resurgence in the Indian economy,the vehicle manufacturing sector will see a slow but sure turnaround in the new year whichwould in turn have a positive bearing on tyre demand. In the interim, the replacementmarket continues to prop up the tyre industry demand. As observed earlier, the capacityaugmentation in the tyre industry would further fuel competition and this could putpressure on margins, especially in the truck radial segment.

Performance of the Company

The sales turnover of the Company during the year increased by around 8.9% fromRs.13445 crore in 2012-13 to Rs.14641 crore in 2013-14. Earnings before depreciation andinterest (EBIDTA) amounted to Rs.1994 crore against Rs.1796 crore in the previous year.After providing for depreciation and interest, the profit before tax for the year ended30th September, 2014 was Rs.1339 crore as compared to Rs.1227 crore in the previous year.After making provision for income-tax, the net profit for the year stood atRs.898 crore ascompared to Rs.802 crore in the previous year.

Internal Control Systems and their Adequacy

The Company has adequate internal control systems in place and also has reasonableassurance on authorizing, recording and reporting transactions of its operations in allmaterial respects and in providing protection and safeguard against misuse or loss ofassets of the Company. The Company has in place, well documented procedures coveringfinancial and operational functions commensurate with the size and complexities of theorganization.

Some of the salient features of the internal control system in place are:-

i. Following the statutory and applicable Accounting Standards and Policies.

ii. A robust ERP system connecting all plants, sales offices and head office enablingseamless data and information flow. This is constantly reviewed to enhance the internalcontrol check points.

iii. Preparation of annual budget for operation and service functions and monitoringthe same with actual performance at regular intervals.

iv. All assets are properly recorded and procedures have been put in place to safeguardagainst any loss or unauthorized use or disposal.

v. Internal audit department carries out periodic audit at all locations and functions.

vi. The observations arising out of internal audit are periodically reviewed at theAudit Committee meetings along with follow up action.

vii. Periodic presentations are made to the Audit Committee on various operational andfinancial risks faced by the Company and action plan of the Company to mitigate the same.

Discussion on Financial Performance with respect to Operational Performance

(Rs. Crore)
2013-14 2012-13
Sales 14641 13445
Other Income 73 37
Total Income 14714 13482
Profit before taxation 1339 1227
Provision for taxation 441 425
Profit after taxation 898 802

The price of natural rubber has softened during the second half of the year. However,this reduction is partly offset by increase in overheads like wages, freight etc. Theoperations of the Company predominantly relate to manufacture of rubber products such astyres, tubes, flaps, tread rubber and conveyor belt and this constitutes the majorbusiness segment. Other business operations of the Company are dealing in sports goods andother products, which do not contribute significantly to the total revenue of the Company.

Risks and Concerns

As per the Annual Report released by The Ministry of Finance, Government of India, GDPgrowth rate clocked in the Fiscal year 2013-14 was about 4.7% coupled with negative growthrate in manufacturing segment. The estimated GDP growth rate for the year 2014-15 (byMarch 2015) is in the range of 5.4% to 5.9%. This low economic growth and infrastructuregrowth rate has adversely impacted the Indian automotive industry and consequently, tyreindustry is largely impacted by low demand from OEMs and replacement market. In truck andbus segment, many global players have invested in India with large capacities. Due to lowoff take in this segment, there is a possibility of an excess capacity build up which willimpact the industry in general. This is further compounded by slow pace of radialisationin India.

The year witnessed softening of raw material prices especially natural rubber. However,the continuance of such lower prices cannot be predicted.

Human Resources

The Company has a dedicated team to cater to the growing talent requirements. We have arobust graduate engineer recruitment process which has helped us attract some brightyoungsters from the professional campuses in the country. They were put through awell-designed training programme, consisting of both classroom sessions and on the jobtraining in our manufacturing units before being placed in supervisory roles. Lateralhires are taken through an orientation programme to equip them to settle down in theirroles quickly. First line managers had undergone a leadership development programmecovering technical, managerial and leadership skills. An advance supervisory developmentprogramme has been initiated to build capability among the first line supervisors andengineers in order to equip them to take up future responsibilities.

An intensive training programme on team building and collaboration using outward boundtraining methodology, to enhance the team cohesiveness and collaboration mind set amongworkmen was implemented during the year. Leadership training for union leaders and opinionmakers continued through the year, thereby keeping with our commitment of shaping thefuture of our plants. Keeping an eye on our ever growing needs, our section heads weretaken through an executive development programme.

We have been able to keep our employees motivated and dedicated through our policies,HR initiatives and various welfare measures. The total employee strength as on 30thSeptember, 2014 was 15,457.

The industrial relations scenario remained cordial throughout the year in all ourmanufacturing units. Several HR and industrial relations initiatives implemented by theCompany have significantly helped in improving the work culture, enhancing productivityand enriching the quality of life of the workforce. Our initiatives with our workforceacross the plants have helped us build a strong common thread with them.

Corporate Social Responsibility

MRF continues to contribute to the development of our society through various socialwelfare initiatives.

Education:

The Company continues to extend support in the education of under privileged childrenin backward areas. We strongly believe education to be a means to bring positive change inthe lives of people, especially in the rural areas.

We make our presence felt in the villages through our focus on educating the young andrendering assistance in developing the capabilities of children and inculcating in them,values which will help them become a responsible member of society.

The Company has conducted many talent enrichment programmes and organised functions forchildren to display their talent, thereby harnessing their skills. We have recognisedthose meritorious students, thereby encouraging other children to emulate their peers whohave done well academically.

Driver Development:

MRF Institute of Driver Development continues to provide training to develop drivers inlight and heavy commercial vehicles. The training curriculum is modified at regularintervals to keep pace with the technological advancement in the automobile industry. Thedrivers trained at the Institute are able to handle the latest vehicle models. Thetraining also covers driving in different situations/conditions, vehicle maintenance,break down fault identification, first aid, lessons in hindi language, tips in fuelsaving, the adverse effects of alcoholism/drug addiction etc.

The objective of the institute is to give job opportunities to under privilegedyoungsters and in the process, provide society with large numbers of competent drivers whoare needed to ensure that the economy keeps moving. The Institute turned out 370 driversduring the year including 198 drivers who underwent a refresher course. Placementassistance is provided to the drivers to get them engaged by leading transporters.

Health & Rural Infrastructure:

The Company conducted numerous medical camps and health awareness programmes in therural areas. We have also extended assistance to the government when they conductedcommunity/health programmes in the villages. This is in line with our belief that ahealthy workforce drives economic growth. Furthermore, we have also rendered a helpinghand in maintaining public lawns and providing solar street lights.

Cautionary Statement

Statements in the Management Discussion and Analysis describing the Company’sobjectives, expectations or forecast may be forward looking within the meaning ofapplicable laws and regulations. Actual results may differ materially from those expressedin the statement. Important factors that could influence the Company’s operationsinclude global and domestic supply and demand conditions affecting selling prices offinished goods, input availability and prices, changes in government regulations, taxlaws, economic developments within the country and other factors such as litigation andindustrial relations.

   
Futures & Options Quote
Expiry Date :
23,669.60    [100.30] ([0.42]%)
Instrument: FUTSTK
Expiry Date: 31-Jul-2014
Open Price: 23,833.85
Average Price: 23,670.81
No. of Contracts Traded: 33
Open Interest: 33,500
Underlying: MRF
Market Lot: 125
Previous Close: 23,669.60
Day's High | Low: 23,900 | 23,545.30
Turnover (Cr.): 9.76
Open Int. Change: 0,500 ([1.47]% )
Key Information

Key Executives:

K M Mammen , Chairman & Managing Director

Arun Mammen , Managing Director

K M Philip , Whole-time Director

Rahul Mammen Mappillai , Whole-time Director


Company Head Office / Quarters:

New No 114,
Greams Road,
Chennai,
Tamil Nadu-600006
Phone : Tamil Nadu-91-44-28292777 / Tamil Nadu-
Fax : Tamil Nadu-91-44-28295087 / Tamil Nadu-
E-mail : mrfshare@mrfmail.com
Web : http://www.mrftyres.com

Registrars:

MRF Ltd
New No. 114,Old No. 124,Greams Road,Chennai - 600 006

 
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