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MRF's Q3FY19 results (Outperformer) - Inline quarter; revenue growth muted

Q3FY19 results

• PAT decline on weaker revenue growth: MRF reported PAT at Rs 2.85bn (-16.4% yoy) was broadly inline with estimates. While reported EBITDA and EBITDA margins were below expectations, they were impacted by a change in accounting policy that boosted other income.
• Accounting policy lowers EBITDA, boosts other income: Revenues at Rs40.3bn (+6% yoy) was inline with estimates while reported EBITDA margins at 13.7% (90bps qoq, est: 15.5%). Apart from an increase in commodity costs (+90bps qoq), margins were also impacted by a reclassification of export incentives as other income (previously a part of revenues). Based on previous quarter’s reclassification, we estimate that EBITDA margins would have been a 75-150bps higher. EBITDA including other income was broadly inline with estimates. This led to a sharp increase in other income. A lower tax rate also boosted the PAT.
• Revenue growth slower than peers: MRF revenue growth (+6% yoy) continues is be slower than its peers (CEAT +9%, APTY +16% yoy) This in our view reflects its lower market share in the faster growing TBR space. We believe that MRF may regain market share in FY20 when its new plant at Gujarat comes on stream.

Key positives: Steady gross margins

Key negatives: Lower revenue growth 

Change in estimates: We cut our earnings by 12%/18% in FY19 and FY20 to factor in higher raw material cost pressures and weaker volume growth.

Valuations & view

We are cautious on the tyre sector given the high capex requirements and rising competition when volume growth could slow down. However, 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 (~16x FY20 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 17x Sept2020 earnings. Maintain Outperformer with target price of Rs63,800.