Why is the Stock of MRF Falling?

MRF Stock Analysis

Introduction

In this article, we will analyse the MRF stock and also the reasons why the MRF stock has dropped almost 30%-35% from its 52-week high Rs. 81,000 (in July 27, 2018) to around Rs.52,400 on May 2, 2019. Let us discuss in detail the impact of rubber prices, crude oil prices and the automobile sector on the tyre industry stocks and thereby on their share price.

Company Profile

Madras Rubber Factory (MRF) Limited is an Indian multinational and the largest manufacturer of tyres in India and the 14^th largest manufacturer in the world. It is headquartered in Chennai, India. The company manufactures rubber products including tyres, treads, tubes and conveyor belts, paints and toys.

Why is the Stock of MRF Falling?

Stock Performance of MRF Ltd

• The share price of MRF Ltd is almost 30%-35% down from its 52-week high or to say its life time high. From a share price of close to Rs. 81,000 (in July 2018) it went down till Rs. 52,400 on May 2, 2019.
• Currently, the stock of MRF Ltd is trading around Rs. 54,000.
• The 3-Yr historical PE ratio of MRF Ltd is around 14-15. 5-Year historical PE ratio is around 17-18. The TTM PE ratio, or the current PE, of MRF Ltd is at close to 20+.
• While trading at a price of Rs. 81,000 the PE ratio of MRF Ltd was around 28-29. Thus, according to historical PE ratio, the PE ratio was almost 100% up.

Market Capitalization

• MRF Ltd used to be a large cap company. But now the market cap of the company has come down from Rs. 30,000 to almost Rs. 23,000.
• Thus as per the latest market capitalisation. MRF Ltd is a mid-cap company. Though this hasn’t been declared yet, but in the next 6 month average market cap list by AAMFI it can be declared as a mid-cap stock.

Financials of MRF Ltd

1. Debt-to-Equity (DE) Ratio

MRF Ltd has a DE ratio of 0.18. It is virtually debt free. This does not mean that the company doesn’t have any debt, but in comparison with the other peer companies it is very low.

2. Interest Coverage Ratio (ICR)

As the company’s DE ratio is low its ICR is also very. Compared to the peers the ICR is very high. MRF Ltd has a ICR of 7.49.

3. ROCE & ROE

Here too, the ROCE and ROE are very good in comparison with the industry average ROCE & ROE. The ROCE & ROE of the company are 16.86% & 12.0.% respectively.

Tyre Industry Dependency

The tyre industry (tyre companies) is highly dependent of 3 main factors, namely:

1. Rubber Prices : If the rubber prices increase, then the margins for tyre companies go down. As the prices for raw material increases it has an automatic impact on the margins of the company.
2. Crude Prices : Tyre industry or tyre companies are also dependent on crude prices. Crude oil is an important component required while manufacturing a tyre. Here too, same like rubber prices, if the crude prices go up, the margins of  the company go down.
3. Performance of Automobile Sector : The more automobiles (cars, 2-wheelers, trucks, etc) are sold, the more ultimately tyres will be required. Thus, the better the auto sector performs, then the better is the performance of tyre industry.

Raw Materials Used in a Tyre

1. Natural Rubber (37% contribution in the tyre)
2. Nylon Tyre Cord Fabric (18% contribution in the tyre)
3. Synthetic Rubber (16% contribution in the tyre)
4. Carbon Black (16% contribution in the tyre)
5. Others (13% contribution in the tyre)

• Nylon Tyre Cord Fabric, Synthetic Rubber and Carbon Black are all manufactured from crude oil and are therefore called as crude derivatives. Thus, 50% (18%+16%+16%) of the raw material for a tyre comes from crude oil.
• Natural Rubber prices have been quite sluggish for the last 2 years.
• Therefore, changes in the prices of any of the raw material mentioned above will have direct impact on the profit margins.

Automobile Sector Performance

• The auto sector has experienced a bull run for the last 4-5 years. But now, from the last 3-4 quarters there has been a downturn in the performance of the automobile companies.
• This downturn in the auto sector has a had a direct impact on the tyre industry.
• The automobile sector will be sluggish for the next 3-4 quarters, after which it may again pick up pace.

Peer Tyre Companies

All the tyre companies like JK Tyres, Ceat Tyres, Apollo Tyres, Goodyear Tyres are all impacted by crude oil and rubber prices. In fact last year itself during the tensions around US and Iran regarding the sanction, the crude oil prices went up. As a result, the share prices of tyre companies saw good corrections.

Summary

• The earning of the tyre companies will start to improve after 2-3 quarters.
• If the rubber and crude prices cool down further, then the EBITDA margins of the tyre companies will definitely improve. If the margins increase, Net profit will go up. And if Net profit increases the PE ratio can come down.
• Currently the PE ratio of the company has come almost close to its 5-Yr historical PE ratio.
• The 35% correction in the share price of MRF Ltd gives it an attractive valuation.

Notes: –

• The numbers that are used are approximate and have been rounded for presentation purposes.
• We are not in any way saying that this is a bad company, or the stock of this company is bad.
• We are also not suggesting anyone to immediately go and buy the stock or invest in the stock markets.
• Only an analysis has been presented here. No judgments or final statements are being made here.