As MRF stock outperforms, margin worries may go up; valuation as well

The MRF stock gained 35 per cent over the last three months as falling raw material prices, steady replacement segment growth, and restrictions on imports from China helped boost revenues and margins.
 
The recent trigger for the stock was a better-than-expected operating performance in the September quarter. Aided by a 370 basis points dip in raw material costs as a proportion of sales, margins hit a 16-quarter high. They came in at 20.4 per cent, up 670 basis points YoY.
 
Though the company underperformed some of its peers on the revenue front (6 per cent growth) given the production-related issues, analysts expect demand/revenue trends to remain strong. Vijay Sarthy TS of Anand Rathi Research expects the replacement business to continue its growth in the second half of FY21, driven by growth across its segments of truck and bus, passenger car, and two-wheelers.

 
With production issues sorted out and capacity expansion in truck and bus radial tyres expected to ramp up by the end of FY21, growth is expected to be stronger in FY22. Most brokerages expect the company to post sales growth of 20 per cent next year. 
 
While there are multiple positives, such as domestic volume visibility, lower imports, and a steady margin outlook, analysts at BOBCAPS Research believe these are already factored in the price. The key worry for the Street is the 30 per cent rise in natural rubber prices and rising crude oil prices, which could weigh on prices of synthetic rubber and other derivatives. The jump in key raw material inputs, with rubber accounting for most of it, is expected to have a 300-400 basis points sequential impact on gross margins. In addition to this, analysts at Elara Capital believe greater competition in the passenger car radial (PCR) segment and MRF’s ramp-up in its traditionally weaker 16-17 inch PCR.