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Weak operating performance

Competitive pricing action hit margins

While MRF’s (MRF IN) Q4 revenue was slightly above estimated, margin stood below expectations. Q4 revenue grew 9%/3% YoY/QoQ (CEAT’s topline growth: 4% YoY/1% QoQ). Outperformance in YoY revenue growth was likely due to market share gains in TBR. Gross margin dipped 120bps QoQ to 38.9% in Q4. Q3 EBITDA margin fell 300bps QoQ to 14.2%, lower than our estimates of 16.2%, while absolute EBITDA grew 5% YoY but declined 15% QoQ to INR 8.9bn. MRF made an INR 463.7mn provision in Q4 with regards to EPR regulations, which hit margins 70bps. Adjusted PAT rose 14 YoY but dipped 25% QoQ to INR 3.8bn. QoQ, MRF’s EBITDA margin fall was greater than CEAT’s.

Expect RM cost basket to remain inflated in Q1

RM cost basket grew in Q4, leading to gross margin declining by120bps QoQ. The industry expects RM cost to surge 3-4% sequentially, led by a rise in crude prices. MRF incurred a capex of INR 21bn in FY24, generating an FCF of INR 11bn (versus -INR 8.6bn in FY23-end) led by improved working capital management.

Valuations: Reiterate Sell; TP cut to INR 110,000 

Despite the recent aggressive competition, MRF’s regained its leadership in the domestic truck replacement segment. FY24 seems to be the peak margin for MRF and the tyre sector. We believe, there are limited positive triggers for the tyre industry in the current environment, while price increases in an environment of softening demand may be monitored. Expect margin to dip from 16.9% in FY24 to 15.4%/15.6% in FY25E/26E, given bottoming of RM cost, intensifying competition and factoring in the impact of the EPR regulation.     

With capex intensity behind, FY24-26E cumulative FCF generation may be INR 42bn. Expect a revenue CAGR of 6%, an EBITDA CAGR of 2% and a PAT CAGR of 2% in FY24-26E. Reiterate Sell, with TP pared to INR 110,000 from INR 123,484 on 22x (unchanged) FY26E EPS of INR 5,000.

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