Buy MRF; target of Rs 45,575: Angel Broking

Angel Broking’s report on MRF

For 4QFY2016, MRF beat our estimates on the EBITDA and bottom-line fronts. The top-line for the quarter remained flat on a yoy basis at `3,330cr (it declined marginally by 0.9% yoy). Raw material cost as a percentage of sales declined by 589bp yoy to 53.6%, thus aiding EBITDA margin expansion by 530bp yoy to 23.4%. Depreciation expense grew by 12.2% yoy to `125cr and other income grew by 209.3% yoy to `77cr. As a result, the net profit jumped by 45.4% yoy to `461cr.

Replacement market demand affected by Chinese imports, OEM recovery to continue: The recovery in demand from OEMs has been slow despite better numbers from the MHCV side. This is because 2W/3W and tractor performance has been sub-par due to deficient monsoons and dampened rural sentiments. Additionally, surge in import of cheaper Chinese tyres is eating into the share of domestic players, including MRF, in the TBR replacement market. However recovery is expected in MHCV replacement cycle on the back of strong OEM sales in the last one year. We expect MRF to benefit from its diversified product portfolio and strong presence in the replacement market across all segments.

Low rubber prices to aid margins: During 4QFY2016, the price of rubber in the domestic market declined by 5.9% yoy to `118/kg; rubber currently trades at ~`114/kg in the domestic market. Considering the high global inventory levels, cheaper synthetic rubber and lower demand from China, we expect rubber prices to remain at lower levels. This will help the company in maintaining its EBITDA margin.

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