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Below our estimate; impacted by cost pressure and

MTM losses

Commodity cost inflation expected to taper in 2HFY23

* MRF’s 1QFY23 revenue was a beat, but margin was impacted due to cost pressures (RM cost pressure and higher other expenses). Lower other income impacted PAT. The industry is taking gradual price increases to dilute the impact of severe cost inflation.

* We reduce our FY23 EPS estimate by 5.5% to account for margin pressure and upgrade out FY24 EPS estimate by ~12% to factor in lower commodity costs, in turn improving margin. We maintain our Neutral rating with a TP of INR80,000.

Margin impacted due to RM and higher other expenses

* Revenue grew 36% YoY to INR56b (est. INR52.4b) in 1QFY23, while EBITDA/adjusted PAT fell 2%/30% YoY to INR4.8b/INR1.1b.

* MRF’s revenue growth in 1QFY23 was weaker than that of CEAT (up 48% YoY).

* Gross margin declined by 70bp QoQ and 6.5pp YoY to 31.5% (est. 32%). The gross margin decline for CEAT was steeper on a QoQ basis (down 1.8pp QoQ and 7.2pp YoY) due to commodity cost inflation.

* EBIDTA declined by 2% YoY to INR4.8b (est. INR5.2b). EBIDTA margin fell 3.3pp YoY to 8.5% (est. 9.9%) due to higher RM cost and higher than estimated other expenses. CEAT performance was on similar lines, down 2.9pp YoY.

* Lower other income (expected due to MTM loss) led to a 30% YoY decline in PAT to INR1.1b (est. INR1.4b).

Valuation and view

* The pricing environment for the industry seems stable, with all players raising prices to pass-on the substantial cost inflation. While cost inflation is expected to sustain in 1HFY23, we expect margin to start recovering in the later part of FY23, assuming stable commodity prices.

*  Valuations, at 47.4x/24.5x FY23E/FY24E EPS, fairly capture the changing competitive dynamics for MRF. We maintain our Neutral rating, valuing it at 20x Sep’24E EPS (v/s 20.1x/14.5x its five/10-year average P/E) to arrive at our TP of INR80,000/share.

Valuation and view

* Well diversified presence, with leadership across major segments: MRF’s

leadership across major segments of T&B, 2Ws, and PCR has led to the creation of a strong brand and pricing power. It enjoys market leadership in 2W, TBB, and Agri tyres, and is among the top three players in PCR and TBR. This has resulted in MRF having the highest profitability and superior ratios.

* Dilution in competitive positioning: Aggressive competition in the recent past has dethroned MRF from the top spot in the PCR and T&B space, and resulted in an overall market share loss. With new capacity coming in, MRF should be able to defend its market position. Higher exposure to the TBB segment, which is expected to see muted growth, makes it vulnerable to the trend of radialization in the T&B segment. We expect ~10% revenue CAGR over FY22-25E due to expected recovery in the Replacement demand.

* Margin expansion by FY25E : The recent capex, leading to lower capacity utilization, will keep margin and RoE under check over FY22-24E. We expect EBITDA to grow by ~24% CAGR over FY22-25E, with margin expanding ~470bp to 15.3%. PAT growth would be ~41% CAGR over FY22-25E

* Steep valuations do not factor in downside risk: MRF’s competitive positioning within the sector has weakened over the past few years, which is also reflected in the dilution of pricing power in the PCR and TBR segment. This, coupled with the impact of capex carried out over the last three years, has resulted in a substantial dilution in its superior return ratios. Current valuations at 47.4x/24.5x FY23E/FY24E EPS fairly capture the changing competitive dynamics for MRF. We maintain our Neutral rating, valuing it at 20x Sep’24E EPS (v/s 20.1x/14.5x its five/10-year average P/E) to arrive at our TP of INR80,000/share.

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