Sell MRF Ltd for the Target Rs 113,936 by Motilal Oswal Financial Services Ltd
A surge in input costs drives an earnings miss Margins likely to remain under pressure in the near term
* MRF’s 1QFY27 adj. PAT at INR4.7b was largely in line. PAT was supported by higher-than-expected other income despite weak EBITDA margin at 11.4% vs. our est. of 12.6%.
* 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 expect MRF to post just 1% earnings CAGR 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 10% by FY27E given the sustained margin pressure. Given its subpar returns, valuations at 25.5x/21.9x FY27E/FY28E appear expensive. Reiterate Sell with a TP of INR113,936, valued at 19x FY28E EPS
A spike in input costs hurts margins
* Standalone revenue grew 10% YoY to INR82.9b (in line).
* Demand from OEMs was buoyant as vehicle sales across segments witnessed strong growth. Replacement demand also continued to be robust.
* EBITDA margin contracted 220bp YoY to 11.4% vs. est. of 12.6% on account of higher input costs.
* As a result, EBITDA declined 8% YoY to INR9.5b (9% below our est).
* The company has taken price increases and cost management measures in this quarter, which helped to partially offset cost increases. RM prices continue to remain firm due to the ongoing conflict in the Middle East. The impact of higher costs on margins is expected to continue.
* Other income was significantly higher at INR1.9b vs. our est of INR1.4b, supporting earnings.
* PAT declined 2% YoY to INR4.7b (in line).
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 crisis remain key near-term headwinds. As a result, we expect MRF to post just 1% earnings CAGR over FY26-28E. While its RoCE has improved to 11.8% from a recent dip to 10% in FY25, it is likely to decline back to 10% by FY27E given the sustained margin pressure. Given its subpar returns, valuations at 25.5x/21.9x FY27E/FY28E appear expensive. Reiterate Sell with a TP of INR113,936, valued at 19x FY28E EPS.
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