MRF - Q2FY14 Result Update - Challenging quarter, maintain Buy

MRF - Q2FY14 Result Update - Challenging quarter, maintain Buy

Rating: Buy; Target Price: Rs31,700; CMP: Rs26,721; Upside: 18.7%



Traction to continue; Maintain Buy



We retain Buy on MRF with a revised TP of Rs31,700. Our confidence is
driven by its ability to maintain better than industry growth and
sustain strong margin profile as seen in the past few quarters. Our
recent interaction with dealers pointed to QoQ uptick in replacement
demand in a few pockets. Though the uptick is not broad based yet,
most dealers pan India expected revival in demand post monsoon.
Further, based on interaction with dealers and other tyre
manufacturers, we understand that pricing discipline was maintained
during the quarter and there was no increase in dealer margins or
price cuts. The recent correction in rubber prices and stable pricing
scenario in the replacement market bode well for margins across
players.

$ Interaction with dealers indicate stable pricing scenario: Based on
interaction with dealers and other tyre manufacturers, we understand
that pricing discipline was maintained during the quarter and there
was no increase in dealer margins or price cuts. Recent correction in
rubber prices and stable pricing scenario in the replacement market
bode well for margins across players.

$ Fall in rubber prices continues; to support margins in medium term:
Domestic rubber prices are currently trading at Rs127/kg (one of the
lowest in 5 years) and corrected by 27%/5% YoY/QoQ respectively.
Typically, the positive impact of correction in rubber prices is felt
with a quarter’s lag. Given the fact that 3QFY14 had seen a correction
of 14%/4% YoY/QoQ, its positive impact should be felt in this quarter.
Recent correction in rubber prices coupled with stable pricing should
help MRF in sustaining/expanding margins.

$ Replacement demand – mixed signals: Our recent interaction with
dealers pointed to QoQ uptick in replacement demand in a few pockets.
Though the uptick is not broad based yet, most dealers pan India
expected revival in demand post monsoon. Dealers in Maharashtra and
South pointed to strong recovery in replacement demand. Others were
also optimistic. Further, dealers indicated supply side constraints
for two- /three-wheeler tyres (specifically from MRF and CEAT). Given
the seasonally weak quarter due to monsoons, dealers expect sharp
recovery in 3QFY15.

$ Valuation and risks: We retain Buy with revised TP of Rs31,700 (10x
September’16E EPS). The overall sector has seen re-rating on the back
of favourable industry factors including sustained growth in
replacement demand, benign rubber prices and relatively stable pricing
environment. Further, rubber prices are currently at five year lows
and lend visibility to strong margin profile for the industry in the
medium term. Key risks: 1) Longer than expected replacement cycle and
2) Increased price competition from Michelin and Bridgestone.