Investment Period 12 Monthssmartinvestor.business-standard.com/BSCMS/PDF/mrf_240212.pdf · Growing demand in the tyre industry is expected to give a momentum to the company’s revenue

Please refer to important disclosures at the end of this report 1

Y/E Sept. (` cr) 1QSY12 1QSY11 % chg (yoy) 4QSY11 % chg (qoq)

Net sales 2,875 2,167 32.7 2,620 9.8

EBITDA 258 243 5.9 181 42.6

EBITDA margin (%) 9.0 11.2 (226)bp 6.9 206bp

Reported PAT 113 103 9.7 395 (71.4)

Source: Company, Angel Research

MRF reported revenue growth of 32.7% yoy to `2,875cr during 1QSY2012. The company’s EBITDA margin contracted by 226bp yoy to 9.0% from 11.2% in 1QSY2011 on account of increased raw-material cost on the back of higher rubber prices. The company reported net profit growth of 9.7% yoy to `113cr in 1QSY2012 as compared to `103cr in 1QSY2011.

Increasing demand and radialization to improve future prospects for MRF: Growing demand in the tyre industry is expected to give a momentum to the company’s revenue going forward, since MRF is a market leader in the Indian tyre market. Moreover, we expect the company’s EBITDA margin to expand due to an industry shift to radialization across all tyre segments. Also, rubber prices have declined by ~31% from `243/kg in April 2011 to `185/kg as on February 20, 2012 – this would further lead to margin expansion. Thus, we expect EBITDA margin to expand by 186bp over SY2011-13E, from 8.3% in SY2011 to 10.1% in SY2013E.

Outlook and valuation: We expect MRF’s revenue to post an 18.6% CAGR over SY2011-13E, aided by a conservative 8.5% CAGR volume growth and a ~7.5% increase in realization over the same period. However, adjusted net profit is expected to witness a CAGR of 25% over SY2011-13E to `534cr. At `9,407, MRF is trading at PE of 7.5x its SY2013E earnings. We maintain our Buy recommendation on the stock with a revised target price of `11,343, based on a target P/E of 9.0x for SY2013E earnings.

Key financials Y/E Sept. (` cr) SY2010 SY2011 SY2012E SY2013E

Net Sales 7,453 9,743 11,883 13,710

% chg 31.6 30.7 22.0 15.4

Net Profit 348 343 456 534

% chg 39.7 0.0 33.1 17.2

EBITDA (%) 11.0 8.3 9.6 10.1

EPS (`) 820 808 1,076 1,260

P/E (x) 11.5 11.6 8.7 7.5

P/BV (x) 2.4 1.7 1.5 1.2

RoE (%) 22.8 14.9 16.5 17.3

RoIC (%) 28.0 16.0 20.3 18.2

EV/Sales (x) 0.7 0.6 0.6 0.5

EV/EBITDA (x) 6.4 8.3 5.8 5.2


BUY CMP `9,407 Target Price `11,343

Investment Period 12 Months

Stock Info

Sector

Bloomberg Code

Shareholding Pattern (%)

Promoters 27.0

MF / Banks / Indian Fls 12.0

FII / NRIs / OCBs 26.2

Indian Public / Others 34.8

Abs. (%) 3m 1yr 3yr

Sensex 13.0 (0.8) 105.7

MRF 45.2 61.6 471.6

Beta 0.7

AutomobileMarket Cap (` cr) 3,988

52 Week High / Low 10,005 / 5,527Avg. Daily Volume 4,727Face Value (`) 10BSE Sensex 18,145Nifty 5,505Reuters Code MRF.BO

MRF IN

Shareen Batatawala +91- 22- 3935 7800 Ext: 6849

[email protected]

MRF Performance Highlights

Company Update | Automobile

February 22, 2012

MRF | Company Update

February 22, 2012

2

Exhibit 1: 1QSY2012 performance

Y/E Sept. (` cr) 1QSY12 1QSY11 yoy chg (%) 4QSY11 qoq chg (%) SY11 SY10 % chg

Net Sales 2,875 2,167 32.7 2620 9.8 9,743 7,453 30.7

Net raw material 2,110 1,509 39.8 1,921 9.8 7,107 5,015 41.7

(% of Sales) 73.4 69.6 73.3 72.9 67.3

Staff Costs 118 100 17.9 120 (1.8) 447 371 20.3

(% of Sales) 4.1 4.6 4.6 4.6 5.0

Other Expenses 390 315 24.0 398 (1.8) 1385 1249 10.8

(% of Sales) 13.6 14.5 15.2 14.2 16.8

Total Expenditure 2,618 1,924 36.1 2,439 7.3 8,938 6,636 34.7

Operating Profit 258 243 5.9 181 42.6 805 817 (1.4)

OPM 9.0 11.2 6.9 8.3 11.0

Interest 32 21 52.1 27 19.2 93 63 47.4

Depreciation 65 76 (14.5) 68 (5.2) 248 261 (5.0)

Other Income 3.9 4.8 (17.3) 2.7 47.2 25 42 (39.7)

PBT 165 151 9.0 88 86.8 489 535 (8.5)

(% of Sales) 5.7 7.0 3.4 5.0 7.2

Tax 52 48 7.6 177 (70.7) 274 181 51.9

(% of PBT) 31.5 31.9 201.1 56.0 33.8

Extraordinary income (484.1) 404.2 0.0

Reported PAT 113 103 9.7 (573) (119.7) 619 354 74.9

PATM 3.9 4.7 (21.9) 6.4 4.8

Equity capital (cr) 4 4 4 4 4

EPS (`) 266.2 242.7 9.7 (1,352) (119.7) 1,461 835.2 74.9


Stable rubber price + Better realization = Normalized OPM

During 1QSY2012, MRF reported a 32.7% yoy increase in its revenue, from

`2,167cr in 1QSY2011 to `2,875cr in 1QSY2012, on the back of increased

realization. Furthermore, the company’s EBITDA margin expanded by 206bp on a

sequential basis to 9.0% from 6.9% in 4QSY2011 on account of a ~31% decline

in rubber prices from April 2011 to February 2012. Net profit increased by 9.7%

yoy to `113cr in 1QSY2012 from `103cr in 1QSY2011.


February 22, 2012

3

Investment rationale

Indian tyre industry – Demand, a growth driver

The Indian tyre industry has a size of `30,000cr (as of September 2011), of which exports contribute `3600cr. The industry is classified into commercial vehicle tyres (71%) and passenger vehicle tyres (22%). Commercial vehicle tyres include medium and heavy commercial vehicles (MHCV, 55%), light commercial vehicles (LCV, 8%) and tractors (8%). Passenger vehicle tyres include passenger cars and MUVs (12%), motorcycles (7%) and scooters (3%).

The three major segments of the tyre industry are original equipment (OE, 26%), replacement (63%) and exports (11%). The performance of the industry is influenced by the replacement segment due to a larger share of truck tyres (71%) in the product mix.

The industry is a raw-material intensive industry, with raw material constituting about 66% of sales turnover and 70% of operational cost.

Exhibit 2: Tyre industry statistics

FY2011

Current capacity (MT/day) 6,429

Current capacity (MT/year) 2,262,857

Current sales (` cr) 59,507

Revenue per MT (`) 262,972

Investment per TPD@ (` cr) 6.1

FY2011–14E

CAGR for volume sales 9%

Total capacity by FY2014E (MT) 2,930,466

Capacity added (MT) 667,608

Total investment (` cr) 11,569

Debt (` cr) 5,785

Equity (` cr) 7,231

Net profit in FY2011E (` cr) 950

Net profit in FY2014E (` cr) 2,410

Market capitalisation* (` cr) 9,348

PE for FY2014E (x) 3.9

Source: Angel Research; Note: Industry includes Apollo Tyres, MRF, Goodyear India, JK Tyre and CEAT, @TPD stands for tonne per day, *As on February 22, 2012

The current capacity of the tyre industry in India is ~22.6lakh MTPA with an assumption of 352 working days, thus leading to revenue per MT of `2.6lakh. Assuming a 9% CAGR for the next three years, the capacity is expected to increase by ~6.7lakh tonnes to ~29.3lakh tonnes in FY2014E. Currently, investment for expansion of one TPD is `6.1cr, of which `5cr is capex requirement and `1.1cr is working capital requirement. Hence, the total investment required for the next three years is `11,569cr. With the assumption of 1:1 debt-equity ratio and 20% dividend payout for the next three years, net profit for FY2014E is expected to stand at `2,410cr, resulting in PE of 3.9x its earnings.


February 22, 2012

4

Radialization to drive profitability in the long term

Radialization in the commercial tyre segment is 15–18% compared to 98% in the passenger vehicle tyre segment. Radial tyres are priced 20-25% higher than cross-ply tyres. Capital expenditure required for radialization is expected to reduce profitability in the short term. However, in the long term, we expect EBITDA margins to expand.

Exhibit 3: DuPont analysis of cross-ply tyres vs. radial tyres ` cr per TPD Cross-ply Radial

Investment per tonne 2.0 5.0

(less) Accumulated depreciation 1.0 -

Net investment per tonne 1.0 5.0

Working capital per tonne 0.9 1.1

Total investment 1.9 6.1

Sales 4.6 5.5

Expenses 4.2 4.4

Operating profit 0.4 1.1

Depreciation 0.1 0.2

Interest cost 0.1 0.3

PBT 0.2 0.6

Tax 0.1 0.2

PAT 0.1 0.4

OPM (%) 9.0 20.6

RoE (%) 13.6 13.6

RoCE (%) 15.8 15.8

Source: Angel Research

Manufacturing of radial tyres is far more capital intensive than cross-ply tyres as investment per TPD for radial is almost 3.2x of cross-ply at `6.1cr. Radial tyres are priced ~20% higher than cross-ply tyres.

Taking into account the differences in capital requirements and the consequent impact on asset turnover, interest costs and depreciation, to generate similar RoCE and RoE, tyre companies would need to earn EBITDA margin of ~21% as compared to about 9% being earned on cross-ply tyres. This assumption also implies a 5% higher operating expense per TPD in absolute terms for radials. Hence, we expect margins to increase in the long term, thus leading to a 25% CAGR in net profit over SY2011-13E.


February 22, 2012

5

Financial performance

Exhibit 4: Key assumptions

SY2012E SY2013E

Change in tyre realization 6.0 5.0

Change in rubber price - 5.0


Exhibit 5: Change in estimates Y/E Sept. Earlier estimates Revised estimates % chg

SY2012E SY2013E SY2012E SY2013E SY2012E SY2013E

Net sales (` cr) 11,368 12,685 11,883 13,710 4.5 8.1

OPM (%) 8.5 9.3 9.6 10.1 116bp 86bp

EPS (`) 972 1,206 1,076 1,260 10.7 4.5


Improved tyre realization to help post better revenue

We expect MRF to post a revenue CAGR of 18.6% over SY2011-13E, from `9,743cr in SY2011 to `13,710cr in SY2013E, on the back of improved tyre realization.

Exhibit 6: Revenue and revenue growth


0

5

10

15

20

25

30

35

0

2000

4000

6000

8000

10000

12000

14000

16000

SY2008 SY2009 SY2010 SY2011E SY2012E SY2013E

(%)

(`cr

)

Revenue (LHS) Revenue growth (RHS)


February 22, 2012

6

Expansion in EBITDA margin to improve profits

We expect the company’s EBITDA margin to improve by 186bp over SY2011-13E, on account of stable rubber prices. Even though prices of other raw materials are witnessing an uptrend, their impact on the company’s EBITDA margin is minimal, as rubber constitutes 66% of total raw-material cost. Change in the method of depreciation to straight line has led to lower depreciation cost (percent of gross block), which would add to profitability. Hence, we expect net profit to post a 25% CAGR over SY2011-13E.

Exhibit 7: EBITDA margin to bounce back


Exhibit 8: PAT and PAT growth


Outlook and valuation

We have revised our revenue and earnings estimates upwards due to increased prices of tyres and stabilizing rubber prices. At current levels, the stock is trading at PE of 7.5x SY2013E and P/B of 1.2x for SY2013E. We maintain our Buy recommendation on the stock with a revised target price of `11,343, based on a target P/E of 9.0x for SY2013E.

Exhibit 9: One-year forward P/E


0

2

4

6

8

10

12

14

0

200

400

600

800

1000

1200

1400

1600


(%)

(`cr

)

EBITDA (LHS) EBITDA margin (RHS)

(40)

(20)

0

20

40

60

80

100

0

100

200

300

400

500

600


(%)

(`cr

)

PAT (LHS) PAT growth (RHS)

0

3,000

6,000

9,000

12,000

15,000

Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12

(`)

Price 2x 5x 8x 11x


February 22, 2012

7

Exhibit 10: Relative valuation

Year end Sales (` cr)

OPM (%)

PAT (` cr)

EPS (`)

ROE (%)

P/E (x)

P/BV (x)

EV/EBITDA (x)

EV/Sales (x)

Apollo Tyres FY2013E 13,580 10.2 556 11.0 12.9 7.1 1.2 4.6 0.5

MRF SY2013E 13,710 10.1 534 1260.3 17.3 7.5 1.2 5.2 0.5

Source: Company

Risks

Volatile rubber prices: Rubber is the major raw material used in the manufacture of tyres. Rubber price was at a high of `243/kg in April 2011; however, prices have come down to `185/kg as on February 20, 2012. Increased volatility in rubber prices would have a direct impact on the company’s EBITDA margin and consequently the profit.

Exhibit 11: Rubber price trend

Source: Rubber Board (*MTD)

(9)

(6)

(3)

0

3

6

9

12

0

50

100

150

200

250

300

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-

11

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

*Feb

-12

(%)

(`/k

g)

Rubber price Change in price (%)


February 22, 2012

8

The company

MRF manufactures rubber products such as tyres, tubes, flaps, tread rubber and conveyor belts. The company is a market leader in the tyre industry with a ~30% market share currently.

Exhibit 12: Market share (India)

Source: Industry, CRISIL Research

MRF is also a leader in the passenger car tyre segment with a 20.3% market share and holds a second position in the MHCV segment with a ~19.5% market share.

Exhibit 13: Product mix (tonnes)

Source: Industry, CRISIL Research

.

0.0

5.0

10.0

15.0

20.0

25.0

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Apollo tyres MRF Ltd JK tyres Ceat tyres Goodyear Tyres

MHCV49%Passenger cars

12%

MUV2%

LCV9%

Tractor10%

OTR3%

Motorcycle10% Scooter

5%


February 22, 2012

9

Profit & Loss Statement (Standalone)

Y/E Sept. (` cr) SY2008 SY2009 SY2010 SY2011 SY2012E SY2013E

Gross sales 5,716 6,142 8,080 10,645 12,916 14,902

Less: Excise duty 671 478 628 902 1,033 1,192

Net Sales 5,045 5,664 7,453 9,743 11,883 13,710

Other operating income - - - - - -

Total operating income 5,045 5,664 7,453 9,743 11,883 13,710

% chg 14.8 12.3 31.6 30.7 22.0 15.4

Net Raw Materials 3,458 3,710 5,015 7,107 8,337 9,540

Other Mfg costs 496 505 693 779 1,046 1,206

Personnel 270 311 371 447 570 658

Other 414 457 557 605 784 919

Total Expenditure 4,638 4,981 6,636 8,938 10,738 12,323

EBITDA 406 682 817 805 1,145 1,387

% chg (6.4) 67.9 19.7 (1.4) 42.3 21.2

(% of Net Sales) 8.1 12.0 11.0 8.3 9.6 10.1 Depreciation& Amortisation 170 249 261 248 322 418

EBIT 237 433 556 557 823 969

% chg (15.6) 82.8 28.4 0.2 47.8 17.7

(% of Net Sales) 4.7 7.6 7.5 5.7 6.9 7.1

Interest & other charges 66 69 63 93 178 214

Other Income 41 34 42 25 36 43

(% of sales) 0.8 0.6 0.6 0.3 0.3 0.3

PBT 211 398 535 489 681 798

% chg 88.5 34.2 (8.5) 39.1 17.2

Tax 67 145 181 274 225 263

(% of PBT) 31.6 36.5 33.8 56.0 33.0 33.0

PAT (reported) 145 253 354 215 456 534 Extraordinary (Expense)/Inc. 6 4 7 (404) - -

ADJ. PAT 139 249 348 619 456 534

% chg 79.5 39.7 78.2 (26.4) 17.2

(% of Net Sales) 2.7 4.4 4.7 6.4 3.8 3.9

Basic EPS (`) 326.9 586.7 819.6 808.4 1,075.7 1,260.3

Fully Diluted EPS (`) 326.9 586.7 819.6 808.4 1,075.7 1,260.3

% chg 79.5 39.7 (1.4) 33.1 17.2


February 22, 2012

10

Balance Sheet (Standalone)

Y/E Sept. (` cr) SY2008 SY2009 SY2010 SY2011 SY2012E SY2013E

SOURCES OF FUNDS

Equity Share Capital 4 4 4 4 4 4

Preference Capital - - - - - -

Reserves& Surplus 1,117 1,357 1,686 2,294 2,737 3,259

Equity share warrants Shareholders’ Funds 1,121 1,361 1,691 2,298 2,741 3,263

Minority Interest - - - - - -

Total Loans 1,249 672 1,354 2,285 2,971 3,565

Deferred Tax Liability 10 (12) (15) 142 142 142

Total Liabilities 2,380 2,021 3,030 4,725 5,854 6,970

APPLICATION OF FUNDS Gross Block 2,423 2,734 3,368 3,832 4,981 6,476

Less: Acc. Depreciation 1,556 1,801 2,039 1,860 2,182 2,601

Net Block 867 934 1,329 1,971 2,799 3,875

Capital Work-in-Progress 444 285 498 1,135 908 636

Goodwill - - - - - -

Investments 69 149 73 73 73 73

Current Assets 1,997 1,388 2,095 3,148 3,927 4,513

Cash 102 60 45 57 244 264

Loans & Advances 300 98 127 256 258 297

Inventory 984 650 1,111 1,526 1,830 2,111

Debtors 610 580 811 1,308 1,595 1,841

Current liabilities 996 734 964 1,602 1,853 2,127

Net Current Assets 1,001 654 1,131 1,545 2,074 2,386

Mis. Exp. not written off - - - - - -

Total Assets 2,380 2,021 3,030 4,725 5,854 6,970


February 22, 2012

11

Cash Flow Statement (Standalone) Y/E Sept. (` cr) SY2008 SY2009 SY2010 SY2011 SY2012E SY2013E

Profit before tax 211 398 535 489 681 798

Depreciation 170 249 261 248 322 418

Change in Working Capital (113) 305 (492) (403) (342) (293)

Other income 67 40 34 217 (36) (43)

Direct taxes paid (67) (145) (181) (274) (225) (263)

Cash Flow from Operations 269 847 157 277 401 618

(Inc.)/Dec. in Fixed Assets (576) (153) (844) (1,101) (922) (1,222)

(Inc.)/Dec. in Investments 12 (73) 84 - - -

Other income 41 34 42 25 36 43

Others (43) (41) (68) (35) - -

Cash Flow from Investing (566) (232) (786) (1,111) (887) (1,179)

Issue of Equity - - - - - -

Inc./(Dec.) in loans 414 (577) 682 931 686 594

Dividend Paid (Incl. Tax) (10) (12) (25) (12) (13) (13)

Others (78) (67) (43) (73) - -

Cash Flow from Financing 326 (657) 614 846 673 581

Inc./(Dec.) in Cash 29 (42) (15) 12 187 20

Opening Cash balances 73 102 60 45 57 244

Closing Cash balances 102 60 45 57 244 264


February 22, 2012

12

Key Ratios

Y/E Sept. SY2008 SY2009 SY2010 SY2011 SY2012E SY2013E

Valuation Ratio (x) P/E (on FDEPS) 28.8 16.0 11.5 11.6 8.7 7.5

P/CEPS 12.9 8.0 6.6 6.8 5.1 4.2

P/BV 3.6 2.9 2.4 1.7 1.5 1.2

Dividend yield (%) 0.2 0.3 0.6 0.3 0.3 0.3

EV/Sales 1.0 0.8 0.7 0.6 0.6 0.5

EV/EBITDA 12.5 6.5 6.4 8.3 5.8 5.2

EV / Total Assets 2.1 2.2 1.7 1.3 1.1 1.0

Per Share Data (`) EPS (Basic) 326.9 586.7 819.6 808.4 1,075.7 1,260.3

EPS (fully diluted) 326.9 586.7 819.6 808.4 1,075.7 1,260.3

Cash EPS 726.7 1,174.7 1,434.6 1,392.4 1,834.9 2,247.4

DPS 23.4 29.2 58.3 25.0 30.0 30.0

Book Value 2,643.4 3,210.9 3,987.5 5,419.3 6,464.9 7,695.3

Dupont Analysis EBIT margin 4.7 7.6 7.5 5.7 6.9 7.1

Tax retention ratio 0.7 0.6 0.7 0.7 0.7 0.7

Asset turnover (x) 2.8 3.7 3.1 2.8 2.6 2.3

ROIC (Post-tax) 9.1 17.9 15.0 11.0 11.9 10.8

Cost of Debt (Post Tax) 4.3 4.6 4.1 2.8 4.5 4.4

Leverage (x) 1.0 0.3 0.7 0.9 1.0 1.0

Operating ROE 13.8 22.4 23.0 18.7 19.0 17.2

Returns (%) ROCE (Pre-tax) 11.2 19.6 21.9 11.8 15.5 15.1

Angel ROIC (Pre-tax) 14.7 26.1 28.0 16.0 20.3 18.2

ROE 13.2 20.0 22.8 14.9 16.5 17.3

Turnover ratios (x) Asset Turnover 2.3 2.2 2.4 2.7 2.7 2.4

Inventory / Sales (days) 71 42 54 57 57 57

Receivables (days) 44 37 40 49 49 49

Payables (days) 78 54 53 65 63 63

WC (ex-cash) (days) 61 48 41 48 51 53

Solvency ratios (x) Net debt to equity 1.0 0.3 0.7 0.9 1.0 1.0

Net debt to EBITDA 2.7 0.7 1.5 2.7 2.3 2.3

Interest Coverage 3.6 6.3 8.8 6.0 4.6 4.5


February 22, 2012

13

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.

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Disclosure of Interest Statement MRF Ltd.

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%)

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Investment Period 12 Monthssmartinvestor.business-standard.com/BSCMS/PDF/mrf_240212.pdf · Growing demand in the tyre industry is expected to give a momentum to the company’s revenue