MRF - Diwali 2012 Pick - Angel Broking

MRF is a market leader in the tyre industry with a ~30% market share. The company is present across all categories of tyres, with an installed capacity of 3.2cr tyres. MRF also exports tyres to over 65 countries in America, Europe, Middle East, Japan and the Pacific region.

There is an industry shift towards radial tyres in the truck segment, where capital expenditure for radial tyres is 3.2x that of cross-ply tyres. Thus, in order to generate normalized RoCE and RoE, tyre companies would need to earn EBITDA margins of ~20% on radial tyres in comparison to ~9% on cross-ply tyres, leading to a 20-25% higher pricing for radial tyres. As radialisation in the tyre industry is already past the S-curve inflection point of 8-10%, volumes of radial tyres are likely to witness a CAGR of more than 25% for the next five years.

Rubber prices which constitute a major proportion (~60%) of the raw material cost for tyre manufacturing, have been range bound at Rs.175-185/ kg which is lower than the average price of ~Rs.190/kg witnessed in 2QSY2012. Lower rubber price is expected to improve the EBITDA margin and consequently result in better profit.

At the current market price of Rs.10,169, the stock is trading at a PE of 7.1x its SY2013E earnings, which we believe is attractive. We maintain our Buy rating on the stock with a target price of Rs.12,884 based on a target PE of 9.0x for SY2013E.

Source : Equity Bulls

Keywords