MRF's Midas touch: One share equals 16 gm gold

While other tyre stocks surged, MRF touched a high of Rs 50,000 in intra-day trade and is the costliest stock

MRF created history on Wednesday by being the first publicly held private company to touch Rs 50,000 a share on the bourses. At Wednesday’s closing price of Rs 49,734.45 on the BSE, one share of MRF was worth 16 g of gold (priced around Rs 31,135 per 10 g).

MMTC and Orissa Mineral, both held by the government, had crossed Rs 50,000 in 2007 and 2010, respectively, but are far from those levels now, even after adjusting for share split and bonus issues.

MRF’s stupendous performance coincides with the recent re-rating across auto component stocks, particularly of tyre manufactures. Stocks of tyre companies, such as Apollo Tyres, Ceat and Goodyear India, have also risen two to 18 per cent in 10 days. MRF registered the maximum gains (22 per cent), outperforming the BSE Sensex, which has been largely flat in this period. On Wednesday, each of these was up two to seven per cent.

The Street seems to be rewarding the tyre manufactures, as earnings are likely to brighten for these companies in FY17, thanks to weak rubber prices (now at Rs 120 a kg versus Rs 149 in July).

Demand for tyres has gone up and rubber prices have been low.

Raghupati Singhania, chairman and MD, JK Tyre & Industries, is of the view that good monsoon and better performance of the farm sector will keep demand buoyant for tyres. “Passenger vehicle tyre demand is also showing an increase. This should compensate for the slowing demand from commercial vehicle manufactures,” he said.

Not surprisingly, analysts remain bullish on tyre companies, and more particularly on MRF.

Mayur Malik of Anand Rathi said MRF may race ahead of the industry due to its higher exposure to original equipment manufacturers and its leading position in the replacement market.

MRF has maintained its market leadership for almost 29 years (particularly in the replacement market) and has the wherewithal to sustain its position without undertaking major price cuts.

Financially, MRF’s revenue, operating profit and net profit have grown at a compound annual rate of 21.3 per cent, 36.3 per cent and 50.2 per cent, respectively, in the last 10 years, ending FY16. Cash flows have been good, and debt at manageable levels, leading to high return ratios.

Analysts said these are the reasons MRF has been able to reward its investors with higher gains. They are confident that MRF is better positioned to pass on higher raw material costs, even if there is a trend reversal in rubber prices.

MRF’s market capitalisation of Rs 21,100 crore is almost equal to the combined market value of its peers — such as Apollo Tyres, Ceat, Goodyear India and JK Tyres.

While earnings prospects are improving for tyre companies, some experts are questioning the sustainability of the rally.

“The flavour of this season is auto component stocks, and MRF has been the biggest gainer so far,” said Sanjiv Bhasin, EVP, markets & corporate affairs, IIFL. “But a large part of the recent rally is to do with short positions being covered as we are nearing expiry in the F&O market. While MRF has been a great value generator, there’s a lot of froth around the stock and I would suggest investors to book some profit.”

Other experts, though, beg to differ. G Chokkalingam, founder & managing director, Equinomics Research & Advisory, said, “We are afraid to give a sell call as this tyre leader is still trading around only 12 times price-to-earnings (PE) on current year earning, and its floating stock is too low.”

Chokkalingam has a two-three-year price target horizon of Rs 65,000 for MRF. There is also a strong market buzz that MRF is likely to witness corporate action such as stock split or bonus issue or a combination of both in six months.

“Any of this is important to rekindle interest in MRF’s stock, given its expensive per-share value,” said Bhasin.

Apart from the caution raised by Bhasin, there are some potential downside risks that investors should be aware of. The threat of China dumping tyres at a significantly low price, especially in the truck radial segment, has heightened for the industry, with rubber price cooling from July levels.

Also, rubber prices itself have been volatile in 2016. For instance, Rubber Board data show prices zoomed from Rs 114 a kg in February to Rs 149 in July this year, up 31 per cent. Though prices have softened again to Rs 120 in the previous two months, any reversal of this trend could hurt the profitability of tyre companies. A lower-than-expected demand pick-up could also play spoilsport.