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MRF's Q4FY19 results (Outperformer) - Inline quarter; pressures persist

Q4FY19 results

• PAT inline; operating profit a tad below: MRF reported PAT at Rs 2.9bn (-14.9% yoy) was broadly inline with estimates. While reported EBITDA margins were missed expectations, it was offset by a lower tax rate.
• EBITDA margins improve a tad on a sequential basis: Revenues at Rs40.7bn (+5% yoy) were inline with estimates . EBITDA margins came in at 14.0% (+30bps qoq, down 370bps yoy, est: 14.7%). While material costs declined a bit on a sequential basis (-40bps qoq) on favourable commodity movements, other expenses continue to remain at elevated levels (+ 40 bps qoq). The yoy decline in margins also reflected 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. The PAT was boosted by a lower tax rate. 
• Revenue growth slower than peers:In the past few quarters, MRF revenue growth has been slower than its peers.  This in our view reflects its lower market share in the faster growing TBR space. We believe that the revenue growth differential may have narrowed during the quarter, it is likely 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 13%/11% in FY20 and FY21 respectively to factor in 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 (~15x FY21 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 FY21 earnings. Maintain Outperformer with target price of Rs60,000.