MRF loses market share as peers race ahead in the March quarter
PremiumChannel checks by brokerages show that MRF has raised prices in March, April and May by 1-2% cumulatively
Tyre manufacturer MRF Ltd reported a disappointing set of earnings for the March quarter. Revenue growth of 31% on a year-on-year (y-o-y) basis was lower than analysts’ estimates and lagged peers. Apollo Tyres Ltd and Ceat Ltd reported y-o-y revenue growth of around 50% each in Q4. Thus, pointing to a market share loss for MRF in FY21.
Not just revenues, MRF fared poorly on handling costs as well in Q4. In recent months, costs of key input materials such as natural rubber and carbon black have risen sharply. Unfortunately, tyre companies have not been immune to it despite taking price hikes. But in the case of MRF, the impact on gross margins has been significantly higher than peers.
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On a sequential basis, MRF saw gross margin compression of 600 basis points (bps), which was nearly double of what peers reported in the March quarter. One basis point is one-hundredth of a percentage point.
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Channel checks by brokerages show that MRF had raised prices in March, April and May by 1-2% cumulatively. This compares with a 4.5% increase by Apollo in the past six months for the replacement segment across product categories. It should be noted that Apollo is contemplating another round of price hikes in the current quarter.
Increased raw material prices and less frequent price hikes than peers weighed on MRF’s operating margins, which fell by over 500bps in Q4, sequentially.
According to analysts at Kotak Institutional Equities, MRF’s gross margins may remain under pressure led by raw material cost pressures and an inferior product mix, which has a higher mix of the OEM segment. “Also, MRF has lost market share in the M&HCV segment in FY21, which is a cause for concern," said the Kotak report dated 7 June.
The management cautioned against business impact from covid-led lockdowns in the near term, but it expects normalcy to return in the next few months.
Meanwhile, MRF’s subdued earnings performance has rubbed off on its share price movement. In 2021, the MRF stock has risen by 7%—much lower than the 25% and 37% returns given by Ceat and Apollo, respectively. On the valuation front, the MRF stock is trading at a one-year forward price-to-earnings (PE) multiple of 26 times, shows Bloomberg data. This is much higher than the PE multiples of Ceat and Apollo, which are trading at 15 and 18 times, respectively. In this backdrop, analysts find MRF’s valuations expensive.
“While MRF is likely to be a beneficiary of cyclical demand recovery, margin headwinds over the next few quarters and full valuations cap near-term upside," analysts at Macquarie said in a report. The research house has downgraded the stock’s rating from ‘outperform’ to ‘neutral’.
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