Margin worries, market share loss to weigh on MRF after tepid Q4 show

The company trailed peers on the revenue front in Q4

A lower-than-expected operating performance in Q4 led to a 1.2 per cent fall in the stock price of India’s largest tyre maker, MRF. A few brokerages have also downgraded the stock given margin worries going ahead, market share loss and premium valuations.

The key disappointment in the March quarter was the dip in profitability with gross margins down 434 basis points y-o-y  and 626 basis points on a sequential basis to 38.5 per cent. Its raw material to sales at 61.5 per cent was the highest among peers.

A higher share of volumes to auto makers or OEMs which fetch lower margins and sharp rise in raw material costs meant that the tyre maker missed the street’s expectations of 40 per cent plus gross margins.

After hitting a 17-quarter high in the December quarter, operating profit margins were flat y-o-y while they fell 540 basis points on a sequential basis to 15.7 per cent. Lower staff costs and moderate increase in other expenses (advertisement and promotions) helped it to post flat margin performance as compared to the year ago quarter.

With natural and synthetic rubber prices expected to move up in the near term, profitability could remain under pressure in the near term. The revenue mix and the share of the more profitable replacement market will have a bearing on  margins.

Though its revenue growth in the quarter at 31 per cent was better than expectations led by robust growth in the replacement segment and recovery in OEM supplies, it trailed peers Ceat and Apollo Tyres’ standalone growth of 49 per cent each. A slowdown in the OEM segment given the second wave could dent sales in the near term.

Analysts at Kotak Institutional Research believe that the company has lost market share in the medium and heavy commercial vehicle market in FY21 and is a cause for concern. The segment is its single largest for MRF accounting for 40 per cent of its revenues.

Given the near term headwinds both on the margin and demand fronts, investors should await a recovery before considering tyre stocks such as MRF. Further, valuations at 21 times FY23 earnings in MRF’s case are also expensive.