Company Update Automobile February 22, 212 MRF Performance Highlights Y/E Sept. (` cr) 1QSY12 1QSY11 % chg (yoy) 4QSY11 % chg (qoq) Net sales 2,875 2,167 32.7 2,62 9.8 EBITDA 258 243 5.9 181 42.6 EBITDA margin (%) 9. 11.2 (226)bp 6.9 26bp Reported PAT 113 13 9.7 395 (71.4) MRF reported revenue growth of 32.7% yoy to `2,875cr during 1QSY212. The company s EBITDA margin contracted by 226bp yoy to 9.% from 11.2% in 1QSY211 on account of increased raw-material cost on the back of higher rubber prices. The company reported net profit growth of 9.7% yoy to `113cr in 1QSY212 as compared to `13cr in 1QSY211. Increasing demand and radialization to improve future prospects for MRF: Growing demand in the tyre industry is expected to give a momentum to the company s revenue going forward, since MRF is a market leader in the Indian tyre market. Moreover, we expect the company s EBITDA margin to expand due to an industry shift to radialization across all tyre segments. Also, rubber prices have declined by ~31% from `243/kg in April 211 to `185/kg as on February 2, 212 this would further lead to margin expansion. Thus, we expect EBITDA margin to expand by 186bp over SY211-13E, from 8.3% in SY211 to 1.1% in SY213E. Outlook and valuation: We expect MRF s revenue to post an 18.6% CAGR over SY211-13E, aided by a conservative 8.5% CAGR volume growth and a ~7.5% increase in realization over the same period. However, adjusted net profit is expected to witness a CAGR of 25% over SY211-13E to `534cr. At `9,47, MRF is trading at PE of 7.5x its SY213E earnings. We maintain our Buy recommendation on the stock with a revised target price of `11,343, based on a target P/E of 9.x for SY213E earnings. Key financials Y/E Sept. (` cr) SY21 SY211 SY212E SY213E Net Sales 7,453 9,743 11,883 13,71 % chg 31.6 3.7 22. 15.4 Net Profit 348 343 456 534 % chg 39.7. 33.1 17.2 EBITDA (%) 11. 8.3 9.6 1.1 EPS (`) 82 88 1,76 1,26 P/E (x) 11.5 11.6 8.7 7.5 P/BV (x) 2.4 1.7 1.5 1.2 RoE (%) 22.8 14.9 16.5 17.3 RoIC (%) 28. 16. 2.3 18.2 EV/Sales (x).7.6.6.5 EV/EBITDA (x) 6.4 8.3 5.8 5.2 BUY CMP `9,47 Target Price `11,343 Investment Period 12 Months Stock Info Sector Market Cap (` cr) Automobile 3,988 Beta.7 52 Week High / Low 1,5 / 5,527 Avg. Daily Volume 4,727 Face Value (`) 1 BSE Sensex 18,145 Nifty 5,55 Reuters Code MRF.BO Bloomberg Code MRF IN Shareholding Pattern (%) Promoters 27. MF / Banks / Indian Fls 12. FII / NRIs / OCBs 26.2 Indian Public / Others 34.8 Abs. (%) 3m 1yr 3yr Sensex 13. (.8) 15.7 MRF 45.2 61.6 471.6 Shareen Batatawala +91-22- 3935 78 Ext: 6849 shareen.batatawala@angelbroking.com Please refer to important disclosures at the end of this report 1
Exhibit 1: 1QSY212 performance Y/E Sept. (` cr) 1QSY12 1QSY11 yoy chg (%) 4QSY11 qoq chg (%) SY11 SY1 % chg Net Sales 2,875 2,167 32.7 262 9.8 9,743 7,453 3.7 Net raw material 2,11 1,59 39.8 1,921 9.8 7,17 5,15 41.7 (% of Sales) 73.4 69.6 73.3 72.9 67.3 Staff Costs 118 1 17.9 12 (1.8) 447 371 2.3 (% of Sales) 4.1 4.6 4.6 4.6 5. Other Expenses 39 315 24. 398 (1.8) 1385 1249 1.8 (% of Sales) 13.6 14.5 15.2 14.2 16.8 Total Expenditure 2,618 1,924 36.1 2,439 7.3 8,938 6,636 34.7 Operating Profit 258 243 5.9 181 42.6 85 817 (1.4) OPM 9. 11.2 6.9 8.3 11. Interest 32 21 52.1 27 19.2 93 63 47.4 Depreciation 65 76 (14.5) 68 (5.2) 248 261 (5.) Other Income 3.9 4.8 (17.3) 2.7 47.2 25 42 (39.7) PBT 165 151 9. 88 86.8 489 535 (8.5) (% of Sales) 5.7 7. 3.4 5. 7.2 Tax 52 48 7.6 177 (7.7) 274 181 51.9 (% of PBT) 31.5 31.9 21.1 56. 33.8 Extraordinary income (484.1) 44.2. Reported PAT 113 13 9.7 (573) (119.7) 619 354 74.9 PATM 3.9 4.7 (21.9) 6.4 4.8 Equity capital (cr) 4 4 4 4 4 EPS (`) 266.2 242.7 9.7 (1,352) (119.7) 1,461 835.2 74.9 Stable rubber price + Better realization = Normalized OPM During 1QSY212, MRF reported a 32.7% yoy increase in its revenue, from `2,167cr in 1QSY211 to `2,875cr in 1QSY212, on the back of increased realization. Furthermore, the company s EBITDA margin expanded by 26bp on a sequential basis to 9.% from 6.9% in 4QSY211 on account of a ~31% decline in rubber prices from April 211 to February 212. Net profit increased by 9.7% yoy to `113cr in 1QSY212 from `13cr in 1QSY211. February 22, 212 2
Investment rationale Indian tyre industry Demand, a growth driver The Indian tyre industry has a size of `3,cr (as of September 211), of which exports contribute `36cr. The industry is classified into commercial vehicle tyres (71%) and passenger vehicle tyres (22%). Commercial vehicle tyres include medium and heavy commercial vehicles (MHCV, 55%), light commercial vehicles (LCV, 8%) and tractors (8%). Passenger vehicle tyres include passenger cars and MUVs (12%), motorcycles (7%) and scooters (3%). The three major segments of the tyre industry are original equipment (OE, 26%), replacement (63%) and exports (11%). The performance of the industry is influenced by the replacement segment due to a larger share of truck tyres (71%) in the product mix. The industry is a raw-material intensive industry, with raw material constituting about 66% of sales turnover and 7% of operational cost. Exhibit 2: Tyre industry statistics FY211 Current capacity (MT/day) 6,429 Current capacity (MT/year) 2,262,857 Current sales (` cr) 59,57 Revenue per MT (`) 262,972 Investment per TPD @ (` cr) 6.1 FY211 14E CAGR for volume sales 9% Total capacity by FY214E (MT) 2,93,466 Capacity added (MT) 667,68 Total investment (` cr) 11,569 Debt (` cr) 5,785 Equity (` cr) 7,231 Net profit in FY211E (` cr) 95 Net profit in FY214E (` cr) 2,41 Market capitalisation* (` cr) 9,348 PE for FY214E (x) 3.9 Source: Angel Research; Note: Industry includes Apollo Tyres, MRF, Goodyear India, JK Tyre and CEAT, @ TPD stands for tonne per day, *As on February 22, 212 The current capacity of the tyre industry in India is ~22.6lakh MTPA with an assumption of 352 working days, thus leading to revenue per MT of `2.6lakh. Assuming a 9% CAGR for the next three years, the capacity is expected to increase by ~6.7lakh tonnes to ~29.3lakh tonnes in FY214E. Currently, investment for expansion of one TPD is `6.1cr, of which `5cr is capex requirement and `1.1cr is working capital requirement. Hence, the total investment required for the next three years is `11,569cr. With the assumption of 1:1 debt-equity ratio and 2% dividend payout for the next three years, net profit for FY214E is expected to stand at `2,41cr, resulting in PE of 3.9x its earnings. February 22, 212 3
Radialization to drive profitability in the long term Radialization in the commercial tyre segment is 15 18% compared to 98% in the passenger vehicle tyre segment. Radial tyres are priced 2-25% higher than crossply tyres. Capital expenditure required for radialization is expected to reduce profitability in the short term. However, in the long term, we expect EBITDA margins to expand. Exhibit 3: DuPont analysis of cross-ply tyres vs. radial tyres ` cr per TPD Cross-ply Radial Investment per tonne 2. 5. (less) Accumulated depreciation 1. - Net investment per tonne 1. 5. Working capital per tonne.9 1.1 Total investment 1.9 6.1 Sales 4.6 5.5 Expenses 4.2 4.4 Operating profit.4 1.1 Depreciation.1.2 Interest cost.1.3 PBT.2.6 Tax.1.2 PAT.1.4 OPM (%) 9. 2.6 RoE (%) 13.6 13.6 RoCE (%) 15.8 15.8 Source: Angel Research Manufacturing of radial tyres is far more capital intensive than cross-ply tyres as investment per TPD for radial is almost 3.2x of cross-ply at `6.1cr. Radial tyres are priced ~2% higher than cross-ply tyres. Taking into account the differences in capital requirements and the consequent impact on asset turnover, interest costs and depreciation, to generate similar RoCE and RoE, tyre companies would need to earn EBITDA margin of ~21% as compared to about 9% being earned on cross-ply tyres. This assumption also implies a 5% higher operating expense per TPD in absolute terms for radials. Hence, we expect margins to increase in the long term, thus leading to a 25% CAGR in net profit over SY211-13E. February 22, 212 4
Financial performance Exhibit 4: Key assumptions SY212E SY213E Change in tyre realization 6. 5. Change in rubber price - 5. Source: Angel Research Exhibit 5: Change in estimates Y/E Sept. Earlier estimates Revised estimates % chg SY212E SY213E SY212E SY213E SY212E SY213E Net sales (` cr) 11,368 12,685 11,883 13,71 4.5 8.1 OPM (%) 8.5 9.3 9.6 1.1 116bp 86bp EPS (`) 972 1,26 1,76 1,26 1.7 4.5 Source: Angel Research Improved tyre realization to help post better revenue We expect MRF to post a revenue CAGR of 18.6% over SY211-13E, from `9,743cr in SY211 to `13,71cr in SY213E, on the back of improved tyre realization. Exhibit 6: Revenue and revenue growth 16 14 12 1 (` cr) 8 6 4 2 35 3 25 2 15 1 5 (%) SY28 SY29 SY21 SY211E SY212E SY213E Revenue (LHS) Revenue growth (RHS) February 22, 212 5
Expansion in EBITDA margin to improve profits We expect the company s EBITDA margin to improve by 186bp over SY211-13E, on account of stable rubber prices. Even though prices of other raw materials are witnessing an uptrend, their impact on the company s EBITDA margin is minimal, as rubber constitutes 66% of total raw-material cost. Change in the method of depreciation to straight line has led to lower depreciation cost (percent of gross block), which would add to profitability. Hence, we expect net profit to post a 25% CAGR over SY211-13E. Exhibit 7: EBITDA margin to bounce back Exhibit 8: PAT and PAT growth 16 14 6 1 (` cr) 14 12 1 8 6 4 2 12 1 8 6 4 2 (%) (` cr) 5 4 3 2 1 8 6 4 2 (%) (2) SY28 SY29 SY21 SY211E SY212E SY213E SY28 SY29 SY21 SY211E SY212E SY213E (4) EBITDA (LHS) EBITDA margin (RHS) PAT (LHS) PAT growth (RHS) Outlook and valuation We have revised our revenue and earnings estimates upwards due to increased prices of tyres and stabilizing rubber prices. At current levels, the stock is trading at PE of 7.5x SY213E and P/B of 1.2x for SY213E. We maintain our Buy recommendation on the stock with a revised target price of `11,343, based on a target P/E of 9.x for SY213E. Exhibit 9: One-year forward P/E 15, 12, 9, (`) 6, 3, Feb-7 Feb-8 Feb-9 Feb-1 Feb-11 Feb-12 Price 2x 5x 8x 11x February 22, 212 6
Exhibit 1: Relative valuation Year end Sales (` cr) OPM (%) PAT (` cr) EPS (`) ROE (%) P/E (x) P/BV (x) EV/EBITDA (x) Apollo Tyres FY213E 13,58 1.2 556 11. 12.9 7.1 1.2 4.6.5 MRF SY213E 13,71 1.1 534 126.3 17.3 7.5 1.2 5.2.5 Source: Company EV/Sales (x) Risks Volatile rubber prices: Rubber is the major raw material used in the manufacture of tyres. Rubber price was at a high of `243/kg in April 211; however, prices have come down to `185/kg as on February 2, 212. Increased volatility in rubber prices would have a direct impact on the company s EBITDA margin and consequently the profit. Exhibit 11: Rubber price trend 3 12 25 9 (`/kg) 2 15 1 6 3 (3) (%) 5 (6) (9) Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 *Feb-12 Rubber price Change in price (%) Source: Rubber Board (*MTD) February 22, 212 7
The company MRF manufactures rubber products such as tyres, tubes, flaps, tread rubber and conveyor belts. The company is a market leader in the tyre industry with a ~3% market share currently. Exhibit 12: Market share (India) 25. 2. 15. 1. 5.. 23-4 24-5 25-6 26-7 27-8 28-9 29-1 Apollo tyres MRF Ltd JK tyres Ceat tyres Goodyear Tyres Source: Industry, CRISIL Research MRF is also a leader in the passenger car tyre segment with a 2.3% market share and holds a second position in the MHCV segment with a ~19.5% market share. Exhibit 13: Product mix (tonnes) Tractor 1% OTR 3% Motorcycle 1% Scooter 5% LCV 9% MUV 2% Passenger cars 12% MHCV 49%. Source: Industry, CRISIL Research February 22, 212 8
Profit & Loss Statement (Standalone) Y/E Sept. (` cr) SY28 SY29 SY21 SY211 SY212E SY213E Gross sales 5,716 6,142 8,8 1,645 12,916 14,92 Less: Excise duty 671 478 628 92 1,33 1,192 Net Sales 5,45 5,664 7,453 9,743 11,883 13,71 Other operating income - - - - - - Total operating income 5,45 5,664 7,453 9,743 11,883 13,71 % chg 14.8 12.3 31.6 3.7 22. 15.4 Net Raw Materials 3,458 3,71 5,15 7,17 8,337 9,54 Other Mfg costs 496 55 693 779 1,46 1,26 Personnel 27 311 371 447 57 658 Other 414 457 557 65 784 919 Total Expenditure 4,638 4,981 6,636 8,938 1,738 12,323 EBITDA 46 682 817 85 1,145 1,387 % chg (6.4) 67.9 19.7 (1.4) 42.3 21.2 (% of Net Sales) 8.1 12. 11. 8.3 9.6 1.1 Depreciation& Amortisation 17 249 261 248 322 418 EBIT 237 433 556 557 823 969 % chg (15.6) 82.8 28.4.2 47.8 17.7 (% of Net Sales) 4.7 7.6 7.5 5.7 6.9 7.1 Interest & other charges 66 69 63 93 178 214 Other Income 41 34 42 25 36 43 (% of sales).8.6.6.3.3.3 PBT 211 398 535 489 681 798 % chg 88.5 34.2 (8.5) 39.1 17.2 Tax 67 145 181 274 225 263 (% of PBT) 31.6 36.5 33.8 56. 33. 33. PAT (reported) 145 253 354 215 456 534 Extraordinary (Expense)/Inc. 6 4 7 (44) - - ADJ. PAT 139 249 348 619 456 534 % chg 79.5 39.7 78.2 (26.4) 17.2 (% of Net Sales) 2.7 4.4 4.7 6.4 3.8 3.9 Basic EPS (`) 326.9 586.7 819.6 88.4 1,75.7 1,26.3 Fully Diluted EPS (`) 326.9 586.7 819.6 88.4 1,75.7 1,26.3 % chg 79.5 39.7 (1.4) 33.1 17.2 February 22, 212 9
Balance Sheet (Standalone) Y/E Sept. (` cr) SY28 SY29 SY21 SY211 SY212E SY213E SOURCES OF FUNDS Equity Share Capital 4 4 4 4 4 4 Preference Capital - - - - - - Reserves& Surplus 1,117 1,357 1,686 2,294 2,737 3,259 Equity share warrants Shareholders Funds 1,121 1,361 1,691 2,298 2,741 3,263 Minority Interest - - - - - - Total Loans 1,249 672 1,354 2,285 2,971 3,565 Deferred Tax Liability 1 (12) (15) 142 142 142 Total Liabilities 2,38 2,21 3,3 4,725 5,854 6,97 APPLICATION OF FUNDS Gross Block 2,423 2,734 3,368 3,832 4,981 6,476 Less: Acc. Depreciation 1,556 1,81 2,39 1,86 2,182 2,61 Net Block 867 934 1,329 1,971 2,799 3,875 Capital Work-in-Progress 444 285 498 1,135 98 636 Goodwill - - - - - - Investments 69 149 73 73 73 73 Current Assets 1,997 1,388 2,95 3,148 3,927 4,513 Cash 12 6 45 57 244 264 Loans & Advances 3 98 127 256 258 297 Inventory 984 65 1,111 1,526 1,83 2,111 Debtors 61 58 811 1,38 1,595 1,841 Current liabilities 996 734 964 1,62 1,853 2,127 Net Current Assets 1,1 654 1,131 1,545 2,74 2,386 Mis. Exp. not written off - - - - - - Total Assets 2,38 2,21 3,3 4,725 5,854 6,97 February 22, 212 1
Cash Flow Statement (Standalone) Y/E Sept. (` cr) SY28 SY29 SY21 SY211 SY212E SY213E Profit before tax 211 398 535 489 681 798 Depreciation 17 249 261 248 322 418 Change in Working Capital (113) 35 (492) (43) (342) (293) Other income 67 4 34 217 (36) (43) Direct taxes paid (67) (145) (181) (274) (225) (263) Cash Flow from Operations 269 847 157 277 41 618 (Inc.)/Dec. in Fixed Assets (576) (153) (844) (1,11) (922) (1,222) (Inc.)/Dec. in Investments 12 (73) 84 - - - Other income 41 34 42 25 36 43 Others (43) (41) (68) (35) - - Cash Flow from Investing (566) (232) (786) (1,111) (887) (1,179) Issue of Equity - - - - - - Inc./(Dec.) in loans 414 (577) 682 931 686 594 Dividend Paid (Incl. Tax) (1) (12) (25) (12) (13) (13) Others (78) (67) (43) (73) - - Cash Flow from Financing 326 (657) 614 846 673 581 Inc./(Dec.) in Cash 29 (42) (15) 12 187 2 Opening Cash balances 73 12 6 45 57 244 Closing Cash balances 12 6 45 57 244 264 February 22, 212 11
Key Ratios Y/E Sept. SY28 SY29 SY21 SY211 SY212E SY213E Valuation Ratio (x) P/E (on FDEPS) 28.8 16. 11.5 11.6 8.7 7.5 P/CEPS 12.9 8. 6.6 6.8 5.1 4.2 P/BV 3.6 2.9 2.4 1.7 1.5 1.2 Dividend yield (%).2.3.6.3.3.3 EV/Sales 1..8.7.6.6.5 EV/EBITDA 12.5 6.5 6.4 8.3 5.8 5.2 EV / Total Assets 2.1 2.2 1.7 1.3 1.1 1. Per Share Data (`) EPS (Basic) 326.9 586.7 819.6 88.4 1,75.7 1,26.3 EPS (fully diluted) 326.9 586.7 819.6 88.4 1,75.7 1,26.3 Cash EPS 726.7 1,174.7 1,434.6 1,392.4 1,834.9 2,247.4 DPS 23.4 29.2 58.3 25. 3. 3. Book Value 2,643.4 3,21.9 3,987.5 5,419.3 6,464.9 7,695.3 Dupont Analysis EBIT margin 4.7 7.6 7.5 5.7 6.9 7.1 Tax retention ratio.7.6.7.7.7.7 Asset turnover (x) 2.8 3.7 3.1 2.8 2.6 2.3 ROIC (Post-tax) 9.1 17.9 15. 11. 11.9 1.8 Cost of Debt (Post Tax) 4.3 4.6 4.1 2.8 4.5 4.4 Leverage (x) 1..3.7.9 1. 1. Operating ROE 13.8 22.4 23. 18.7 19. 17.2 Returns (%) ROCE (Pre-tax) 11.2 19.6 21.9 11.8 15.5 15.1 Angel ROIC (Pre-tax) 14.7 26.1 28. 16. 2.3 18.2 ROE 13.2 2. 22.8 14.9 16.5 17.3 Turnover ratios (x) Asset Turnover 2.3 2.2 2.4 2.7 2.7 2.4 Inventory / Sales (days) 71 42 54 57 57 57 Receivables (days) 44 37 4 49 49 49 Payables (days) 78 54 53 65 63 63 WC (ex-cash) (days) 61 48 41 48 51 53 Solvency ratios (x) Net debt to equity 1..3.7.9 1. 1. Net debt to EBITDA 2.7.7 1.5 2.7 2.3 2.3 Interest Coverage 3.6 6.3 8.8 6. 4.6 4.5 February 22, 212 12
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