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Prioritizing growth over profitability

Revenue traction better but margin impact higher than peers

* MRF’s 3QFY25 result was weak as the margin contracted 280bp QoQ to 11.6% (est. of 13.9%). The company appears to be focusing on recovering its share, which is hurting margins, in the interim. This is also evident in the fact that while its revenue traction is better than peers, its margin impact is higher on a sequential basis.

* We reduce our FY25/FY26 EPS estimates by 8%/10% to factor in the weak performance in 3Q. The stock trades at 25.2x/22x FY26E/FY27E EPS (higher than APTY’s 13.7x/11.2x and CEAT’s 17.2x/13.4x), which does not align with its weakening competitive position. Reiterate Sell with a TP of INR95,500, based on 19x Dec’26E EPS.

EBITDA margin at an eight-quarter low of 11.6%

* Standalone revenue grew ~14% YoY to INR68.8b (in line), but EBITDA/ adj. PAT declined 23%/40% YoY to INR8b/INR3.1b (est. INR9.5b/INR4.1b). Revenue grew ~12% YoY while EBITDA/PAT declined 11%/20% YoY during 9MFY25.

* Higher commodity costs led to a lower gross margin at 33.1% (-700bp YoY/- 340bp QoQ; est. 36%).

* This resulted in an EBITDA margin contraction of ~550bp YoY/280bp QoQ to 11.6% (est. 13.9%). Overall, EBITDA dipped 23% YoY to INR8b (est. INR9.5b) during the quarter.

* The company appears to be focusing on recovering its share, which is hurting margins, in the interim. This is also evident in the fact that while its revenue traction is better than peers, its margin impact is higher on a sequential basis.

* Weak operational performance led to a 40% YoY decline in Adj. PAT at INR3.1b (est. INR4.1b).

* The BOD approved an interim dividend of INR3 per share.

Valuation and view

* MRF’s competitive positioning in the sector has weakened over the past few years, which is reflected 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 its return ratios. We expect MRF’s return ratios to dilute over the next two years as its RoE is expected to reach 10.5% by FY27E (vs. ~13.5% in FY24).

* Valuations at 25.2x/22x FY26E/FY27E EPS appear expensive given its weakening competitive position and similar capital efficiency as peers. Hence, we reiterate our Sell rating on the stock with a TP of INR95,500 (valuing it at 19x Dec’26E EPS).

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