MRF on a roll on low rubber prices

That tyre companies would show a strong operating performance in the September quarter was well known, because of the plummeting rubber prices. RSS-Grade 4 rubber price has fallen by nearly 23% from the year-ago period. MRF Ltd, which declared its September quarter and annual results on Wednesday, trumped profit expectations with the stock jumping to Rs.33,152.15—a rise of 4.6% in last two trading sessions.

The core outperformance was on operating margin— 423 basis points higher than the year-ago period at 18.1%.

One basis point is one-hundredth of a percentage point.

MRF had some of the best margins among peers for the quarter. Even theBloomberg consensus was at 14.5%. In fact, some tyre-makers like Ceat Ltdposted a drop in profitability on higher marketing and advertising expenses, which negated the gains from falling rubber prices.

MRF, like other tyre firms, posted a moderate 6.8% year-on-year growth in net revenue. According to the management, demand from original equipment manufacturers is yet to pick up. However, strong brand equity in the replacement market helped, besides the fact that it has a solid presence in the truck tyre segment, which has shown growth on the low base of the past several quarters. That said, realizations did not improve much as there was no opportunity for tyre price hikes on account of weak demand and low rubber prices.

Analysts say the coming quarters may continue to see strong results. One reason is the recovery in the domestic auto segment and another reason is falling rubber prices, which are unlikely to look up in the medium term.

Commodity traders say that the slowdown in China demand and high production by growers in Thailand and Malaysia will keep international rubber prices in check. Indian prices, too, will mirror international prices, apart from the fact that rising imports are a threat to domestic rubber planters. Rubber futures, too, are down.

For the quarter, MRF’s net profit at Rs.317 crore was about 72% higher than a year ago and around 27% higher than the Bloomberg consensus.

Outperformance of most tyre companies may prod analysts to reset earlier forecasts where they had expected free cash flows to be adversely impacted in the forthcoming quarters on account of huge capacity expansions. Plunging rubber prices and rising demand may turn the situation in favour of tyre companies and MRF would be a key beneficiary from this trend.

At present, even after a 54% rise in price since the beginning of this fiscal year, MRF shares trade at around 10 times fiscal 2016 estimated earnings per share.

– livemint.com