MRF - 2QSY2013 Result Update - Angel Broking

For 2QSY2013, MRF reported a 2.9% yoy decline in revenue to Rs. 2,906cr (Rs. 2,993cr in 2QSY2012), on account of slowdown in auto industry. Declining rubber prices led to a 440bp yoy expansion in the EBITDA margin to 15.3% from 10.9% in the same quarter last year. Consequently, the net profit for the quarter surged by 40.3% yoy to Rs. 211cr, from Rs. 150cr in 2QSY2012.

Low rubber prices benefits margin in spite of low demand: Volatility in rubber (a major raw material for MRF) prices since the last two years has favorably impacted the company's financials. Rubber prices have declined to an average of Rs. 160/kg in 2QSY2013 as compared to an average of Rs. 173/kg in 1QSY2013 and Rs. 191/kg in 2QSY2012. This led to an expansion in the EBITDA margin by 196bp qoq and 440bp yoy to 15.3% for the quarter. Going forward, since the company has taken price cuts in its products during 2QSY2013 and demand for its tyres is low due to a slowdown in the auto industry, we expect the EBITDA margin for 2HSY2013 to be lower compared to the current quarter, thus resulting in an overall margin of 14.1% for SY2013. We expect the EBITDA margin to contract by 65bp yoy in SY2014 due to price cuts, which could further escalate if the demand does not pick up.

Outlook and valuation: We expect MRF to post a 3.0% revenue CAGR over SY2012-14 to Rs. 12,587cr, while EBITDA margin is expected to expand by 348bp to 14.1% in SY2013, due to decline in rubber prices. However, we expect margin to contract in SY2014 to 13.5% on account of reduction in tyre prices. Consequently, the net profit is expected to post a 18.7% CAGR over SY2012-14 to Rs. 807cr. At the current market price, MRF is trading at a PE of 7.3x its SY2014E earnings and at a P/BV of 1.3x for SY2014E. We upgrade the stock to Buy rating on the stock with a revised target price of Rs. 15,225, based on a target P/E of 8.0x for SY2014E earnings.

Source : Equity Bulls

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