Sell MRF Ltd for the Target Rs. 105,295 by Motilal Oswal Financial Services Ltd
Healthy margin recovery comes as a surprise…
…but focus on market share revival likely to limit margin upside
* MRF’s 4QFY25 results have been ahead of our estimates, led by a sharp pick-up in margins (+340bp QoQ) to 15%, which came as a surprise. For FY25, MRF posted an FCF of INR5.7b in FY25, post-capex of INR12.9b.
* We raise our FY26/FY27 EPS estimates by 7%/4% to factor in the reduction in input costs. After the recent rally, the stock is currently trading at 30.1x/26.7x FY26E/FY27E EPS above its 10-year LPA of ~25x, despite its weakening competitive position and similar capital efficiency as peers. Hence, we reiterate our Sell rating on the stock with a TP of INR105,295 (valuing the stock at 20x FY27E EPS).
Margin revival drives earnings beat
* MRF’s standalone revenue grew ~12% YoY to INR69.4b and was in line with our estimates.
* However, the key surprise came in EBITDA margin, which improved 340bp QoQ to 15% (vs. our est. of 12%). The margin, however, was still down 120bp YoY due to higher input costs. Management indicated that input costs have marginally softened QoQ, which was partially offset by the depreciating INR.
* Overall, MRF’s 4QFY25 PAT grew 6% YoY to INR4.9b.
* For FY25, revenue grew 12% YoY, aided by healthy growth across all its segments, viz., replacement, OEM, and exports. Apart from ICE, MRF is also a significant supplier to all major EV OEMs in CVs, PVs, and 2/3Ws.
* For FY25, MRF’s EBITDA margin contracted 260bp YoY to 14.5%.
* Overall, PAT declined 10% YoY to INR18.7b.
* The BOD has approved a total dividend of INR235 per share for FY25.
* MRF clocked an FCF of INR5.7b in FY25, post-capex of INR12.9b.
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. MRF is likely to continue its focus on recovering the lost share across segments. This is likely to limit margin upside, even in a declining input cost scenario. Overall, we expect MRF to post 9% earnings CAGR over FY25-27E.
* We raise our FY26/FY27 EPS estimates by 7%/4% to factor in the reduction in input costs. After the recent rally, the stock is currently trading at 30.1x/26.7x FY26E/FY27E EPS above its 10-year LPA of ~25x, despite its weakening competitive position and similar capital efficiency as peers. Hence, we reiterate our Sell rating on the stock with a TP of INR105,295 (valuing the stock at 20x FY27E EPS).
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