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Rising input costs likely to be the key monitorable

* MRF reported a strong beat on all fronts in 1QFY25, driven by healthy revenue growth of ~12% YoY (vs. ~8%/4% for CEAT/APTY). Despite strong revenue growth, PAT declined ~3% YoY due to commodity inflation and higher depreciation.

* We raise our FY25E/FY26E EPS by 4%/9% to factor in better-than-expected revenue growth and cost efficiencies. The stock trades at ~29.5x/25.2x FY25E/26E EPS (higher than APTY’s 19x/15.2x and CEAT’s 17.2x/13.7x), which does not align with its weakening competitive position. Maintain Sell with a TP of INR108,000, based on 19x Jun’26E EPS.

Lower employee cost offsets RM inflation resulting in margin beat

* Standalone revenue/EBITDA grew ~12%/2% YoY to INR70.8b/INR11.4b (est. INR63.9b/INR9.7b). Adj. PAT declined 3% YoY to INR5.6b (est. INR4.5b).

* Gross margin came in line at 37.2%, down 150bp YoY/160bp QoQ at 37.3%, led by an increase in RM costs.

* However, lower-than-expected employee and other operational expenses led to an EBITDA margin beat at 16.1% (est. 15.2%), down 150bp YoY/10bp QoQ.

* The company recognized a provision of INR300.7m in 1QFY25 toward the levy on Extended Producer Responsibility (EPR), which was accounted in other expenses.

* The healthy operating performance was partially offset by higher interest costs and depreciation, resulting in adj. PAT beat.

Valuation and view

* MRF’s competitive positioning in the sector has weakened over the past few years, which reflects in the dilution of pricing power in the PCR and TBR segments. This, coupled with the impact of the planned capex, should limit the expansion in return ratios. We expect MRF’s return ratios to dilute over the next two years as its RoE is expected to reach 12.1% by FY26E (vs. ~13.5% in FY24).

* The stock is currently trading at 29.5x/25.2x FY25E/FY26E EPS above its 10- year LPA of ~23x, despite its weakening competitive position and similar capital efficiency as peers. Hence, we maintain our Sell rating on the stock with a TP of INR1,08,000 (valuing at 19x June-26E EPS).

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