Analyst Corner: MRF rating ‘sell’ – Results were better than estimated

MRF reported Q4FY20 Ebitda of Rs 5.7 bn (flat y-o-y), which was 12% above our estimates due to expansion in gross margins and better-than-expected revenue print.

MRF reported Q4FY20 Ebitda of Rs 5.7 bn (flat y-o-y), which was 12% above our estimates due to expansion in gross margins and better-than-expected revenue print. Revenues declined by 11% due to lockdown-led single-digit decline in the replacement segment and steep decline in OEM revenues. We remain concerned about the increase in competitive intensity in the two-wheeler segment. Valuations are expensive and don’t factor in risks related to decline in profitability over the medium term. Sell stays with a revised FV of Rs 55,000 (from Rs 62,000 earlier)
Q4FY20 Ebitda 12% above estimates

MRF reported Q4FY20 Ebitda of Rs 5.7 bn (flat y-o-y), which was 12% above our estimates due to expansion in gross margins and better-than-expected revenue print. 11% y-o-y revenue decline (2% above estimates) in Q4FY20 was possibly driven by single-digit y/y decline in the replacement segment (70% of the revenues), down from double-digit y/y growth in 1HFY20, and double-digit decline in the OEM segment (20% of the revenues). Growth in the replacement segment had even declined for Apollo standalone and CEAT Tyres in Q4FY20. Ebitda margin came in at 15.7% (up 170 bps y/y and up 20 bps q-o-q), which was 130 bps above our estimate of 14.4% due to sharp expansion in gross margin.

Gross margin expanded by 380 bps q-o-q in Q4FY20 due to sharp decline in rubber prices. Employee cost increased by 20% y-o-y as the company hired new employees for its new plant in Gujarat. Reported PBT came in at Rs 2.9 bn (down 29% y-o-y), 14% above our estimates. Depreciation expense increased by 24% y-o-y as the company commissioned its new plant in Gujarat. Reported PAT came in at Rs 6.7 bn (+128% y-o-y), which was way ahead of our estimates due to negative tax rate. The company opted for a lower tax rate and due to restatement of deferred tax liabilities, the company received tax inflow of Rs 3.8 bn in Q4FY20.

SELL stays with revised FV of Rs 55,000

We have cut our FY2021-22E EPS estimates by 22-25% led by (i) 14-17% cut in revenue growth assumptions and (ii) 40-90 bps increase in Ebitda margin expansion. We expect the company to do well due to higher dependence on the replacement segment (70% of the revenues), which we believe will remain resilient during the pandemic. However, entry of new players in the two-wheeler industry coupled with slowdown in the automotive industry does not augur well for the company’s OEM revenues.

Valuations are expensive and don’t factor in risks related to profitability over the medium term. Sell stays; fair value revised to Rs 55,000 (from Rs 62,000 earlier), valuing the stock based on 18X June 2022e EPS estimates (from 18X December 2021e estimates earlier).