MRF is an excellent company, but avoid investment now

 

 

 

 

MRF’s Q1 results of 2011-12 are not good compared to Q4 results of 2010-11. While revenue has increased from Rs.2383 crore to Rs.2573 crore, its net profit has plummeted from Rs.89.85 crore to Rs.31.95 crore. EPS has declined from Rs.211.85 to Rs.75.33. Operating profit margin has declined from 9.85% to 6.40% while net profit margin has declined from 3.77% to 1.24%. The shares of MRF are traded in the stock market at Rs.6732.75 now. The face value of its shares is Rs.10.

 

 

 

 

MRF will start production of tyres at its Tiruchi plant in Tamil Nadu in the first quarter of 2012. The company has invested Rs.900 crore in the 200 acre production facility. It will cater to both domestic and export requirements. Construction work is at progress in Tiruchi plant. The company’s existing six manufacturing plants are operating at full capacity. The company’s other manufacturing facilities are located at Arakonam (TN), Tiruvottiyur (TN), Medak (AP), Goa, Kottayam (Kerala) and Pondicherry.

 

 

Auto industry has slowed down due to high fuel cost and hike in the interest rates. Rubber prices have also soared, affecting production of tyres. The increase in the raw material prices has affected the company’s margins. MRF has hiked tyre prices four times in the current year to counter the increase in the price of rubber. Each time the price increase was made at 1.5% – 2.5%. But this seems to be not enough. But at the same time, the company cannot pass on the entire cost to the users as there is an intense competition in the industry. Apart from auto industry, MRF has an exposure to aviation industry as it supplies airplane tyres. It supplies 450 helicopter tyres a month to HAL and Defence from its Medak plant. It is also negotiating with the government to supply tyres to military aircraft. Making tyres for aircraft is extremely a complicated business as the speed and pressure with which the tyres hit the tarmac is extremely high.

 

 

Removal of anti-dumping duty on Chinese tyres has damaged competitive environment in Indian tyre industry. Chinese tyres come 20% cheaper compared to Indian tyres. In the coming months, tyre companies will struggle to hold on their own and many of them may see red in their balance sheets. Rubber price has increased in the last one year from Rs.140 a kg to Rs.235 a kg. Availability of rubber is also under pressure. Apollo Tyres has acquired land in Laos for rubber plantation.

 

 

Most of the expansion of MRF this year will be in the truck radial and passenger car segments, which account for 60% of the total revenues of the company. In the case of truck tyres, the trend is for substitution of nylon and bias tyres by radial tyres. World over, the tendency is to go for radial tyres. In India also the trend is catching up albeit slowly. Exports account for 10% of the company’s turnover.

 

 

MRF has a division manufacturing and selling children’s toys called Funskool. It has launched new products across diverse categories like Play-Dob, creatives, board games and puzzles. The new range of board games includes Racko and Disney Flippity Find Game costing Rs.249 and Rs.349 respectively. Play-Doh Best Wishes comes with five animal-shaped cutters and costs Rs.299. The puzzles range costs Rs.165 onwards. Crochet Factory, a creative play kit for children aged six and above costs Rs.249. The company’s toys have become very popular among the parents and children as they come at an affordable cost.

 

 

The company faced labour problems in its Kottayam unit and declared a lockout. Subsequently the lockout was lifted following an agreement between the company management and the Labour Commissioner. Trouble followed the suspension of three workers belonging to INTUC Union, who were blocking production following some issues related to the working arrangement in the unit. There are 2300 workers in the unit working in three shifts with a production capacity of 175 tonnes per day. It manufactures 2600 tyres per day. The company estimated the loss because of the lockout at Rs.3 crore. Kerala is known for its militant trade unionism and disturbances in factory production for small reasons. Left front headed by the communists have a stranglehold among the workers in Kerala. Knowing this fully, the company should have avoided opening a factory in Kottayam. But because the company’s management are Catholic Christians hailing from Kerala, they opened the factory on emotional grounds as they are very much attached to Kerala. They are paying the price now.

 

 

The share price is ruling very high. The yearly high and low prices of the company’s shares are Rs.9812 on 28.10.10 and Rs.5332 on 10.02.11 respectively. The present share price is in between the high and the low. Stock market indices are declining. The performance of the company is also declining as its margins are under pressure. Tyre industry is experiencing difficult times. There is uncertainty in the industry because of the competition posed by the Chinese tyre companies. Considering all these reasons, it will be prudent for the investors to avoid investing in the shares of MRF at present. One can consider investment when the industry prospects improve.