MRF rating – Sell: RM headwinds took a toll on performance

MRF reported Q4FY21 Ebitda of Rs 7.5 bn (+31% y-o-y), 9% below our estimates due to RM headwinds. Revenues increased by 31% y-o-y, lower than that reported by the competitors. RM headwinds and an inferior mix will continue to put pressure on margins going forward. As per our estimates, the company has lost market share in the M&HCV segment in FY2021, a cause for concern. Maintain Sell with revised FV of Rs 69,150 (from Rs 78,000). The stock is currently trading at 21.6X FY2023E consolidated EPS, which is expensive.

Q4FY21 Ebitda 9% below estimates due to RM headwinds
MRF reported Q4FY21 Ebitda of Rs 7.5 bn (+31% y-o-y), 9% below our estimates due to RM headwinds, partly offset by better-than-expected revenue growth. Revenues increased by 31% y-o-y (5% above estimates), which was possibly driven by (i) double-digit increase in the replacement segment and (ii) sharp recovery in the OEM segment. We would like to note that CEAT had reported volume increase of 50% y-o-y and Apollo Tyres (standalone operations) had reported volume increase of 49% y-o-y during Q4FY21. Ebitda margin came in at 15.7% (flat y-o-y, -540 bps q-o-q), 230 bps below our estimate of 18.0% due to RM headwinds.

Gross margin declined by 630 bps q-o-q in Q4FY21 due to (i) increase in the RM basket and (ii) weaker product mix (higher mix of the OEM segment), partly offset by price increases taken during December. Other expenses increased by 14% y-o-y only (revenue increase of 31% y-o-y), mainly led by sharp cut in advertisement, promotional and travelling spends. Depreciation expense increased by 12% y-o-y as the company commissioned its new plant in Gujarat. Reported PAT came in at Rs 3.2 bn (-52% y-o-y) in Q4FY21, 18% below our estimates due to miss at Ebitda level.

Cut FY2022-23E EPS by 11-16%; SELL stays with revised FV of Rs 69,150
We have cut our FY2022-23E EPS estimates by 11-16% led by lower Ebitda margin assumptions due to RM headwinds. Tyre companies have reported strong operating performance over the past three quarters led by strong growth in the replacement segment and benign RM cost (until Q3FY21). However, going forward, we expect gross margins to remain under pressure led by (i) RM cost pressures and (ii) an inferior product mix (higher mix of the OEM segment). Also, MRF has lost market share in the M&HCV segment in FY2021, which is a cause for concern. Maintain Sell; Fair Value revised to Rs 69,150 (from Rs 78,000 earlier), valuing the stock based on 18X March 2023e EPS estimates. At CMP, the stock is trading at 21.6X FY2023e consolidated EPS, which is expensive.