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EBITDA in line despite a miss on revenue

Margin for 2QFY24 likely to have peaked

* MRF’s 2QFY24 performance was a mixed bag as revenue was below estimate at INR60.9b (+6% YoY; est. INR64.1b), while EBITDA was in line at INR11.3b (+2.4x YoY). However, lower RM costs led to an EBITDA margin beat. Margin stood at 18.5% (vs. est. 17.5%). We believe the 2Q margin reflects most of the tailwinds and should see some moderation in the coming quarters.

* We tweak our FY24E/FY25E EPS by +3%/4% to factor in RM cost benefits partially offset by weaker revenue growth across categories. Reiterate Sell with a TP of INR97,000 (based on 18x Sep’25E EPS), as the stock trades at 20.5x FY25E EPS (in line with its 10-year LPA), which does not reflect its weakening competitive position and similar return ratios vs. its peers.

Better EBITDA margin driven by lower RM costs

* MRF’s 2QFY24 revenue/EBITDA/Adj. PAT increased ~6%/2.4x/4.6x YoY to NR60.9b/INR11.3b/INR5.7b. 1HFY24 revenue/EBITDA/adj. PAT grew 10%/2.4x/4x YoY.

* Revenue rose 6% YoY (vs. CEAT’s revenue growth of 5.5% YoY) to INR60.9b (est. INR64.05b).

* Gross margin expanded 11.1pp YoY (+200bp QoQ) to 40.8% (vs. est. 38.5%) as against CEAT’s gross margin of 43.3% in 2QFY24.

* Despite higher-than-estimated other expenses and employee costs, EBITDA margin came in at 18.5% (+10.3pp YoY/90bp QoQ; vs. est. 17.5%) as against CEAT’s margin of 14.6%. EBITDA surged 2.4x YoY to INR11.3b (in line) during the quarter.

* Adj. PAT too came in line at INR5.7b (+4.6x YoY/-2% QoQ).

* The Board declared its first interim dividend of INR3/share for FY24.

* FCFF came in at IN6.8b in 1HFY24 (vs. outflow of INR4.9b in 1HFY23). This was due to strong operating cash flows of INR19.8b (vs. INR8.5b in 1HFY23) despite capex being steady at INR13b similar to the last year’s levels.

Valuation and view

* MRF’s competitive positioning in the sector has weakened over the past few years, which reflects 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 see a relatively lower uptick vs. peers over the next two years as its RoE is expected to reach 12.4% by FY25 (vs. APTY/CEAT estimated at 13.5%/17.2%).

* The stock is currently trading at 20.5x FY25E EPS, in line with its 10-year LPA, despite its weakening competitive position and similar capital efficiency as peers. Hence, we maintain our Sell rating on the stock with a TP of INR97,000 (premised on 18x Sep’25E EPS).

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