Sell MRF Bank Ltd For Target Rs.1,05,400 by Motilal Oswal Financial Services Ltd
Strong revenue growth offset by margin pressures Raw material prices to remain elevated in the near term
* MRF’s 2QFY27 adj. PAT at INR3.7b missed our estimate despite a strong ~18% YoY revenue growth to INR85.2b. Higher-than-expected raw material inflation led to a 430bp YoY contraction in EBITDA margin to 10.7%, below our estimate for the quarter.
* Management remains cautious about the demand outlook given the risk of a subnormal monsoon. Further, rising raw material costs and supply chain disruptions due to the ongoing Middle East conflict remain the key nearterm headwinds. As a result, we cut our FY27 earnings estimate by 17% and now expect MRF’s earnings to remain flat over FY26-28. While its RoCE has improved to 11.8% from a recent dip to 10% in FY25, it is likely to dip to 7% by FY27E given the sustained margin pressure before recovering in FY28. Given its subpar returns, valuations at 34x/21x FY27E/FY28E appear expensive. We reiterate our Sell rating with a TP of INR1,05,400, valued at 18x FY28E EPS.
A spike in input costs hurts margins, leading to miss on estimates
* MRF’s standalone revenue grew 17.6% YoY to INR85.2b, beating our estimate of INR81.2b. The strong growth was primarily due to sustained demand from both OEM and the replacement segments.
* RM pressure was higher than expected, leading to a 470bp YoY dip in gross margin to 31.7% (below our estimate of 32.7%).
* As a result, EBITDA margin contracted 430bp YoY to 10.7% (vs. our estimate of 11.8%) in 2QFY27.
* EBITDA declined 16.3% YoY to INR9.1b (missing our estimate of INR9.6b).
* Other income came in higher than expected at INR1.3b.
* However, margin pressures led to a ~28% YoY decline in PAT to INR3.7b, missing our estimate of INR3.9b.
* The Board announced an interim dividend of INR3 per share.
* Standalone CFO for 1HFY27 stood at INR12.4b, with free cash flow coming in at a positive INR4.7b.
Valuation and view
Management remains cautious about the demand outlook given the risk of a subnormal monsoon. Further, rising raw material costs and supply chain disruptions due to the ongoing Middle East conflict remain key near-term headwinds. As a result, we cut our FY27 earnings estimate by 17% and now expect MRF’s earnings to remain flat over FY26-28. While its RoCE has improved to 11.8% from a recent dip to 10% in FY25, it is likely to dip to 7% by FY27E given the sustained margin pressure before recovering in FY28. Given its subpar returns, valuations at 34x/21x FY27E/FY28E appear expensive. We reiterate our Sell rating with a TP of INR1,05,400, valued at 18x FY28E EPS.
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