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MRF hits a dirt patch

MRF hits a dirt patch

a slow recovery has India’s largest tyre manufacturer in the backseat
December 5, 2021
5 min read
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MRF hits a dirt patch

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when one thinks about tyres, it’s usually with respect to the last time they had a flat. probably first thing in the morning, on the way to work, with texts from the boss piling up. but when it comes to the business of them, the treads vary in size and into classifications such as Truck and Bus Radial Tyre (TBR), Passenger Car Radial tyre (PCR), and Off the Road tyre (OTR). an interesting dynamic in purchasing trends in these segments is giving MRF the business equivalent of a flat tyre.

as a result, it’s stock has skidded to a 52-week low on the back of a 9% drop in three weeks. Will it get rolling again?

thin margins

the trouble began with MRF’s quarterly report for Q2 FY22 three weeks ago. its operations revenue rose 15.6% y-o-y, from Rs 4,244.4 crore to Rs 4,907.8 crore. but the company reported a 54% decline in its net profit over the corresponding period last year, from Rs 410.9 crore to Rs 189.1 crore. this was largely due to a spike in input costs as a result of the global supply chain crunch, which is being witnessed across the board. natural rubber prices, currently at about Rs 192/kg, are around 45% higher than their lows in last year’s December quarter.

competition catching up

MRF’s results also showed that its revenue growth was slower than that of peers such as Ceat and Apollo Tyres, a trend that has been consistent over the past few quarters. 

the natural response to counter increasing input costs is to hike the price of the finished products. but the dilution of its pricing power in the PCR and TBR segments over recent years makes that nearly impossible. aggressive competition in the recent past has dethroned MRF from the top spot in both segments, also resulting in a sizeable overall reduction in market share. the company has also incurred significant capex (capital expenditure) over the last three years to increase its capacity. this has resulted in a substantial dilution in its return ratios which used to be superlative to competition.

MRF is the answer to one of those beloved trivia questions on the most expensive stock on Indian exchanges, and will likely continue to be for a while. however, the answer to whether it’s the best stock to count on right now is unclear.