MRF's Q3FY18 results (Outperformer) - Strong Operating Performance
Q3FY18 results
- PAT In-line; Operating performance surprises: MRF’s reported PAT at Rs3.4bn (up 18% yoy, up 14% qoq) was in-line with estimates of Rs3.3bn. Stronger than estimated operating performance was marginally offset by lower other income and higher tax rate. Operational performance showed strong growth with EBITDA at Rs 7bn (growth of 24% yoy).
- Strong EBITDA margins : MRFs revenues grew by 20% yoy(+6% qoq) to Rs37.9bn which was in-line with our estimate of Rs37.2 bn. Strong growth in revenues could be attributable to lower base of demonetization. Nevertheless 6% qoq growth was robust. EBITDA at Rs 7bn grew by 24% yoy (+16% qoq). EBITDA margins at 18.5% grew by 160 bps qoq (+70 bps yoy). The expansion in EBITDA margins for MRF was largely on the back of gross margins improvements – possibly due to lower raw material prices. We note however that the expansion is sharper than its peer CEAT (CEAT reported a 40bps qoq expansion qoq) – this may reflect a better product mix (higher replacement sales). However, the strong operational performance was marginally offset by lower other income. This could be because of capital loss on mark to market valuation of fixed income securities.
- Management Commentary: During the quarter the company supplied high specification tires for Sukhoi aircrafts for the Indian air force – this reflects the company’s R&D strength. According to recent media reports the management has stated that it was targeting a turnover of Rs220bn was 2020 (IDFC FY20E: Rs183bn). The company is in the process of setting up a plant in Gujarat at an expense of Rs20bn.
Key positives: Stronger than expected expansion in margins
Key negatives: Lower than expected other income
Change in estimates: No change
Valuations & view
We expect MRF to report 13% EPS CAGR over FY17-20E (with EBITDA margin improving from Q1FY18 lows) and revenue CAGR of 11%. With strong competitive advantages (distribution network, brand equity and economies of scale) and a shift in pricing strategy, we believe that the premium valuations for MRF (~14.5x Sep-19E EPS versus 11-13x for peers) are justified. MRF, unlike peers, has not raised any capital in the past decade, despite strong EPS growth, which is comforting. We value MRF at 16x FY20 earnings .Maintain Outperformer
MRF is a automobile tire manufacturing group based in India. Co. is principally engaged in the manufacturing of automobile tires and tubes. Co. also manufactures pre-cured treads, tread rubber, finished leather from skins, fabric/steel cord and specialty surface coatings. In addition, Co. trades in marine products and through a subsidiary, is active in the toy market. Co. maintains a global presence across 65 different countries, with tires manufactured in 6 interdependent facilities, approximately 3,000 dealer networks and approximately 180 different offices.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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