MRF Ltd (MRF)-Waiting for the automobile upswing (Buy Rs1655)
(Indian Stock Market- Investment Ideas May 29, 1999 )
mrftyres.com
Investment rationale
MRF is a leading Indian tyre company. It has a presence in almost all the segments of the industry and a leader in most of them. The company has an installed capacity of 11.9mn tyres pa. It has a market share of 19%, 37%, 36% and 25% in bus and truck, car, jeep and LCV tyres respectively. In the two wheeler market, it has a market share of 32% and 30% in scooter and motorcycle segments respectively. The company is focussed on the truck & bus tyres segment, which forms the bulk of the market. Last year, MRF successfully launched Zigma VT for 800 cc cars and Nylogrip Plus for scooters and two wheelers.
The management has a track record of consistent sales growth and capacity expansion without any dilution, funded by internal accruals. MRF has aggressively expanded its capacity over the years, built a strong brand and created an unmatched distribution infrastructure. The installed capacity increased by almost 50% from 7.9mn tyres pa in F9/95 to 11.9mn tyres pa in F9/98.
The tyre sector has been adversely affected due to the general slowdown in economy, and in particular automobiles. However, tyre companies were able to improve operating profits due to soft raw materials prices, mainly natural rubber and carbon black. The increase in custom duty on natural rubber, nylon tyre cord fabrics and carbon black will have an adverse impact on the margins in the coming years.
Major expansion in the pipeline, at a cost of Rs2.3bn, which includes Rs660mn investment at Pondicherry, Rs578mn at Arakkonam, Rs396mn at Madak, Rs379mn at a new facility at Kottayam and Rs269mn at the Goa plant. This will increase its manufacturing capacity by 20% by F9/2000.
MRF will face limited competition not only from domestic players but also from foreign majors like Bridgestone and Goodyear. The foreign players are entering the radial car tyre segment (5% of the total tyre market). Access to the latest technology gives them edge over the domestic players but it will take them some time to build a strong marketing and distribution infrastructure.
Valuation
The stock is trading at 5.7x F9/2000 EPS and 3.0x F9/2000 cash EPS. Given its capex plans for the next two years, we prefer looking at cash EPS growth and cash P/E. The company's cash EPS will grow from Rs465 in FY98 to Rs564.9 in FY2000, a growth of about 21.5%. Considering the quality of management, a well-established brand and unmatched marketing network, it is ideally placed to reap the benefits in the event of a turnaround in the automobile sector. The stock will significantly outperform the market, once the signs of economic revival become clear.
Background
MRF began as a partnership firm in 1946, which was converted into a limited company in 1961. A tyre plant was set up at Tiruvottiyur in 1963, in collaboration with Mansfield Tire and Rubber Company, USA, which subscribed to 25% of the company's equity. In FY86, it diversified into the manufacture of conveyor belts in collaboration with Industrial Pirelli of Italy. It also manufactures Funskool toys in collaboration with Hasbro, a leading US toy maker.
Financial Highlights
Rs mn 09/94 09/95 09/96 09/97 09/98 09/99P 09/00P
N sales 8,624.4 11,809.5 15,850.3 16,682.8 17,647.5 18,431.6 21,196.3
Oth.Inc 37.7 64.7 44.8 62.8 214.3 250.0 250.0
PBIDT 989.4 1,295.0 1,937.8 2,417.8 3,234.5 3,291.2 3,747.4
Ad.OPM(%) 11.0 10.4 11.9 14.1 17.1 16.5 16.5
Financial expenses
(340.0) (418.3) (640.1) (825.0) (734.4) (700.0) (680.0)
Depreciation
(258.7) (347.1)(495.8) (767.5) (949.0) (1,043.9) (1,148.3)
Provision for tax
(183.0) (226.0) (320.0) (200.0) (528.0) (526.1) (671.7)
Profit after tax
207.7 303.5 481.9 625.3 1,023.1 1,021.2 1,247.4
EPS(Rs) 49.0 71.6 113.6 147.4 241.2 240.8 294.1
Cash EPS 110.0 153.4 230.5 328.4 465.0 486.9 564.9
Rs mn 09/94 09/95 09/96 09/97 09/98 09/99P 09/00P
Equity capital
42.4 42.4 42.4 42.4 42.4 42.4 42.4
Net worth
1,381.0 1,646.4 2,069.0 2,652.3 3,605.1 4,556.3 5,733.8
Total debt
2,229.8 3,746.1 4,841.4 6,104.9 5,675.9 5,338.7 5,018.4
Total fixed assets
1,815.9 2,578.6 3,830.1 4,908.4 4,976.5 5,476.5 5,976.5
Investments
177.6 212.0 230.8 247.0 271.4 271.4 271.4
Working capital
1,617.3 2,601.8 2,849.4 3,601.8 4,033.0 4,147.1 4,504.2
Capital employed/deployed
3,610.8 5,392.5 6,910.3 8,757.2 9,280.9 9,895.0 10,752.1
RONW % (post tax)
15.0 18.4 23.3 23.6 28.4 22.4 21.8
ROCE % (pre tax)
20.2 17.6 20.9 18.8 24.6 22.7 24.2
Key ratios estimates
09/94 09/95 09/96 09/97 09/98 09/99P 09/00P
PAT margin (%) 2.4 2.6 3.0 3.7 5.8 5.5 5.9
EPS growth (%) - 46.1 58.8 29.8 63.6 (0.2) 22.1
Cash EPS growth (%) - 39.5 50.3 42.5 41.6 4.7 16.0
Book value (Rs) 325.6 388.2 487.8 625.4 850.0 1,074.3 1,351.9
Price/ BV (x) 5.4 4.5 3.6 2.8 2.1 1.6 1.3
DPS (Rs) 9.0 9.0 14.0 10.0 15.0 15.0 15.0
Dividend yield (%) 0.5 0.5 0.8 0.6 0.9 0.9 0.9
Shrikant Biyani |
