Can MRF share price fall 31% from here? What analysts say after Q1 results

MRF share price: MRF stock is trading higher relative to its historical average

MRF stock strategy: Weighed by rising commodity costs and rich valuation, analysts see up to 31 per cent downside in the MRF share price in the near-term. The stock's valuation, they said, is trading higher relative to its historical average at a time when its competitive advantage is weakening.

On the bourses, MRF share price today fell 2.2 per cent to Rs 1,37,201 per share on the BSE in the intraday trade. By comparison, the BSE Sensex was ruling 856 points, or 1 per cent, higher at 79,743 level at 10:15 AM.

"MRF stock is currently trading at 29.5x and 25.2x FY25 and FY26 estimated earnings per share (EPS) above its 10-year long-period average (LPA) of around 23x, despite its weakening competitive position and similar capital efficiency as peers," analysts at Motilal Oswal Financial Services said with a 'Sell' rating and a target price of Rs 1,08,000.

MRF's competitive positioning, the brokerage said, has weakened over the past few years, which is reflected in the company's diluted pricing power in the passenger car radial (PCR) and truck, bus, and radial (TBR) tyre segments.

This, coupled with the impact of the planned capex, will likely limit the expansion in return ratios of MRF.

"We expect MRF's return ratios to dilute over the next two years as its return on equity (RoE) is expected to reach 12.1 per cent by FY26E (from around 13.5 per cent in FY24)," Motilal Oswal brokerage said. MRF's RoE, at the end of the recent June quarter (Q1FY25), stood at 12.6 per cent.

Its standalone EPS stood at Rs 1,326.41 while consolidated EPS was 1,346.38.

Financially, MRF reported a 3 per cent dip in Q1FY25 consolidated net profit at Rs 571 crore from Rs 589 crore in the year-ago quarter (Q1FY24). Sequentially, though, it was a solid growth of 54.8 per cent.

That apart, revenue from operations increased 12 per cent Y-o-Y to Rs 7,196 crore, and 13.3 per cent Q-o-Q.  

MRF's gross profit margin, however, contracted 150 basis points (bps) over the previous year and 160 bps Q-o-Q to 37.3 per cent in Q1, pressured by an increase in raw material costs.
 

According to analysts, MRF's revenues were driven by strong growth in TBR/PCR/two-wheeler  replacement segment demand, and a recovery in the export segment. Ebitda margin of 16.1 per cent (down 150 bps Y-o-Y but up 190 bps Q-o-Q) was aided by tighter control over costs.

Going ahead, analysts at Kotak Institutional Equities expect MRF to continue to gain market share in the domestic market given limited price increases taken in the replacement segment, especially in TBR, and two-wheeler segments.

"Given relatively aggressive pricing coupled with improvement in export market outlook and steady growth in replacement market, we expect MRF to clock in 12 per cent Y-o-Y revenue growth in FY25. However, given the recent sharp uptick in natural rubber prices (up 10-15 per cent in the past two months), we expect margins to remain under pressure as the price increase taken, so far, will be inadequate to offset the commodity headwinds," they said.

The brokerage, too, has a 'Sell' rating with a target price of Rs 97,000.

Earnings upgrade

That said, brokerages have raised their earnings forecast for MRF, factoring in the earnings beat in Q1.

Kotak Institutional Equities, for instance, has increased its FY2025-27 consolidated EPS estimates by 8 per cent on higher revenue growth assumptions.

"We raise our FY25E/FY26 EPS by 4 per cent/9 per cent to factor in better-than-expected revenue growth and cost efficiencies. The stock trades at around 29.5x/25.2x FY25/26 EPS (higher than Apollo Tyres' 19x/15.2x and CEAT's 17.2x/13.7x), which does not align with its weakening competitive position," said those at Motilal Oswal.