The December quarter performance of MRF Ltd failed to match expectations on the Street. But the tyre manufacturer put up a decent show, given the odds of stiff competition from Chinese counterparts and a drop in tyre prices sustained by the firm during the quarter.
Net revenue at Rs.3,260.9 crore was about 3% lower than a year ago and even a tad lower than the forecast byBloomberg, although very few brokerage firms track the company. The management outlined two reasons for this in a statement. One, the firm took a 10% price cut in truck and bus tyres, where it has a huge presence, which reflects in lower realization on sales. Two, there was only a nominal growth in the quantum of tyres produced.
Obviously, this signals growing competition from Chinese tyre makers, which has been a curse on the industry for many years. Tyre companies are more worried now because the slowdown in China could mean higher dumping of products in other markets. At present, imported truck and bus tyres are reportedly 25-30% cheaper than the domestic ones, posing a serious threat to sales in the replacement market.
Yet, on the back of lower raw material costs, the quarter’s operating profit rose by 17.8% year-on-year. Note that the price of RSS-grade 4 rubber, which accounts for about two-thirds of the total cost of producing a tyre, has shed a quarter of its value from a year ago.
Operating margin at 22.6% was higher too by about 400 basis points year-on-year (y-o-y), in spite of higher staff costs. That said, profitability was lower than in the preceding quarter. Perhaps the difference between high-cost inventory and the sale price after the price cut may have impacted margins to some extent. One basis point is 0.01%.
Given these adversities, the 18.5% y-o-y growth in net profit to Rs.388.2 crore cannot be dismissed, although it was a tad below Bloomberg’s forecast. The stock lost momentum in Monday’s trading, closing at Rs.36,010.65, trading at about 10 times one-year estimated earnings per share. The high price per share combined with low liquidity has kept the stock out of bounds for the retail investor.
