Q1FY24 Review: MRF: Underperformance vs peers has paused

4 Aug 2023 , 01:24 PM

MRF’s Q1 Ebitda beat analysts of IIFL Capital Services estimate by 26%, driven by higher topline and sharper-than-expected improvement in margins. Margins expanded due to fall in key input costs (rubber, crude) and price hikes. In recent years, MRF’s margin lead over peers had come off sharply due to dilution in revenue mix, and delayed price hikes vs competition, as MRF tried to stem market-share loss. Now that the market-share loss has paused, Q1 marked MRF’s ascent towards margin leadership. In analysts of IIFL Capital Services recent Tyre sector report, they had highlighted that MRF’s revenue and margin underperformance vs peers has bottomed. They increase their revenue and margin assumptions, leading to EPS upgrade of about 10% in FY24/FY25. Despite the company-level turnaround, analysts of IIFL Capital Services retain their REDUCE rating as: i) They expect Q1 to mark the last leg of upcycle in the Tyre sector margins, and ii) the stock is expensive, relative to peers. 

Q1 results much stronger than expected: 

Revenue grew 13% YoY and 10% QoQ, coming in 7% above analysts of IIFL Capital Services estimates. YoY revenue growth was driven more by both price hikes and volumes. Gross margin (GM) improved 180bps QoQ to 38.8% (170bps beat), due to price hikes and fall in input costs. Ebitda margin rose 290bps QoQ to 17.6% (260bps beat). Absolute Ebitda/PAT came in 26%/44% above their expectations. 

Underperformance vs. peers has paused: 

MRF underperformed peers on revenue growth over FY17-FY22, after outperforming peers in the preceding 10 years. This was due to loss of mkt-share in 2W and lack of ramp up TBR. Over this period, MRF lost its margin leadership. Starting FY23, MRF’s market-share loss trend seems to have paused. With confidence on market-share protection, the company has started its ascent towards margin leadership. 

Retain REDUCE as industry profitability peaking out: 

Tyre industry Ebitda margins started recovering in mid-FY23, after being under pressure in FY22 and most of FY23. The current industry margins are above average and Ebitda/MT at highs. Analysts of IIFL Capital Services expect Tyre industry margins to peak in Q1FY24, as rubber and crude have both inched up from lows. Hence, they retain their REDUCE rating on the stock, also factoring in MRF’s premium valuation vs peers (20x FY25 vs peers at 14-15x). Their TP of Rs100,700 is based on 18x Jun’25 EPS (no change in target PE).