MRF – A market leader in the Indian Tyre industry

Positive:
– MRF is the market leader in India and among the Top 20 Global Tyre manufacturers.
– The operating margin expanded sharply due to fall in raw material prices.
– The government’s announcement of putting restrictions on the import of tyres is likely to be of immense help to the industry at a difficult time like this.

Negative:
– The future is not clear as the pandemic has brought in uncertainties both for the automobile sector and for the tyre industry.
– The increase in competitive intensity in the two-wheeler segment.
– MRF’s valuations are relatively expensive.

Business:
MRF is a leading manufacturer of Automobile Tyres, Tubes, Flaps, Tread Rubber and Conveyor Belt. MRF has its manufacturing plants spread across nine locations in Tamil Nadu, Kerala, Andhra Pradesh and Goa. MRF is also setting up its tenth plant at Dahej, Gujarat. MRF has a strong R&D support and marketing team with a wide distribution network.

MRF has a superior liquidity position with cash and liquid investments of ₹3,956 crores as of Mar 2019. MRF has undertaken significant capex investments of ~₹5,000 crores in the past three years.

MRF is better placed because it derives two-thirds of the revenues from replacements. MRF derives over 50% of the revenues from the commercial segment.

Competitive Advantage:
– MRF has a long track record, strong brand name, stable relationships with OEMs, and wide distribution network.
– MRF continues to dominate the Indian tyre industry with an estimated market share of ~28%.
– MRF has a well-balanced product mix and diversified segmental mix with over two-thirds of revenue from replacements. The relatively stable replacement segment continues to support its revenues.
– MRF is India’s most preferred brand due to its relentless focus on quality.
– MRF is the only Indian tyre manufacturer to have won the JD Power award for a record 13 times.

Management:
Good management. MRF is currently managed by Mr. K.M. Mammen.

Valuation:
– Ten years ago, Tyre companies have traded in single digit P/Es. Last three years, MRF has traded in the P/E range of 18 to 25.
– At the CMP of ₹61,000, the rate of return is 7.3% based on pre-tax earnings to market cap. MRF is available at .6x times of sales to market cap.

Investors:
– The promoters hold 27.9% stake
– MFs hold 11.5% of the company
– Nalanda Capital holds 1.7% of the company
– Nemish Shah holds 2.8% of the company

Innovation:
A new size tyre was required for trucks to meet the increased axle loads due to new axle load regulation. Most of the companies thought that tubeless tyre was the only way to go. MRF invented a new tyre size 295/90 R 20 which was not a standard size anywhere in the world. The customer would be comfortable with the tube type tyres.

Risk:
– A slow recovery in demand could impact both the automobile sector and the tyre industry.
– Any volatility in raw material prices and currency fluctuation could lead to increase in cost of imports and impact the company’s margins, as witnessed in the past.
– The anticipated increase in vehicle prices on account of compliance with BS VI norms, the volatile fuel prices and rising insurance costs are expected to add to the overall cost of ownership.
– Ride-sharing apps have turned potential car buyers into just riders.
– Autonomous and connected vehicles are potential game changers.
– Tyre Companies will be under pressure to build products which have minimal friction and offer high fuel efficiency.

Industry:
Traditionally, tyres are classified as Cross-ply (Bias) and Radial based on the technology deployed in their manufacture. In India, the commercial tyre category continues to be dominated by cross-ply tyres due to road conditions, loading patterns and the high initial cost of radials. India’s passenger car category is fully radialized.

Natural rubber and crude derivative products are the two most important raw materials (RM) for tyres. Natural rubber prices stayed below Rs 125 per kilogram. Oil prices are trading at around $45 per barrel.

RM cost is around 55-60% of the sales. Any decline in RM cost will improve the operating margins.

The passenger car (PV) and the two-wheeler (2W) segments have seen a slow recovery. The farm equipment has been least affected by the pandemic. The commercial vehicle (CV) segment is operating in a very challenging environment due to economic slowdown. Generally, CV segment is tied to the economic recovery.

The replacement market for tyres is growing at a healthy pace.

Opportunity:
– The Indian Tyre industry is estimated to be around Rs 65,000 crores in 2018- 2019.
– India is the world’s largest two-wheeler market in 2018.
– The Indian two-wheeler market recorded annual domestic sales of 18 plus million units.
– Replacement market accounts for 56% of the Industry.
– OEM and Exports make up the balance 44% of the industry.

Source: Annual Reports, ICRA Reports

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MRF – Brand Power
MRF – Brand Power

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