This Company's Stock Price Just Hit Rs 100,000. Is it Still Value for Money?

Editor's Note: MRF was the biggest story in the stock market today. The stock was up over 1% but that's not the interesting part. MRF became the first Indian company to hit the six-digit mark.

MRF shares rallied 1.4% to hit a new 52-week high of Rs 100,300 on the Bombay Stock Exchange (BSE).

In this editorial, published in early May 2023, we had highlighted how MRF share price was on an upward trajectory and what lies ahead for this highly priced stock. We wrote about MRF in May when it was short of just Rs 66 to hit the Rs 100,000 mark.

Continue reading...

Why MRF Share is Rising

India's most expensive stock MRF is only a couple hundred bucks away from touching the Rs 1-lakh per share mark.

In fact, the stock has already created history as in the futures market, shares of the tyre company crossed the Rs 1 lakh mark intraday.

On Monday, 8 May 2023, the stock opened flat at Rs 98,587 on the BSE and went on to touch a high of Rs 99,880 per share.

Tyre stocks have been on a roll in the past two weeks. The stock price of India's largest tyre manufacturer nearing Rs 1 lakh per share has made investors wonder whether there's still steam left in this rally or whether the air will blow out soon?

The company is the largest tyre manufacturer in India and accounts for about 25% of the total tyre sales in the country.

In the past one year, shares of the company have gained around 40%.

MRF has had its fair share of downfalls in the past. In the Covid crash, the stock dipped to Rs 50,000 levels from a high of Rs 72,000 per share at that time.

Before we take a look at its growth prospects and the road ahead, let's understand why the stock has hit a new high in the first place.

Why MRF share price is rising

#1 Strong quarterly earnings

On Wednesday last week, the Chennai based company reported a consolidated profit after tax (PAT) of Rs 3.1 billion (bn) for the fourth quarter ended March 2023. This was up 86% on a year-on-year (YoY) basis.

The company's revenue grew by 11% on a YoY basis and came in at Rs 58.4 bn. MRF's operating margins expanded by over 400 basis points led by lower raw material costs and operating leverage.

'On the back of our brand and product performance, we were able to increase sales across most of our product categories', said Rahul Mapillai, the company's MD.

The company's board also recommended a dividend of Rs 169 per share. This is in addition to two interim dividends of Rs 3, so the total dividend for FY23 comes to Rs 175 per share.

You might remember ITC facing a lot of criticism and hate due to its laggard performance. Similarly, when MRF declares dividends, investors are not very excited as it doesn't really matter if a highly priced stock declared a lower dividend payout.

But this time, MRF didn't disappoint and declared its highest ever dividend payout per share.

Also, not just MRF but other tyre companies have also reported good earnings. Another tyre major, CEAT, reported healthy volume growth as exports showed signs of recovery.

Owing to falling rubber prices, CEAT's raw material costs came down around 10% this quarter. Which brings us to the second reason why MRF share price is rising.

#2 Sectoral tailwinds

We recently wrote to you about why tyre stocks are rising.

Here's an excerpt:

• Another reason behind the rally in tyre stocks is the declining price of crude oil and natural rubber.
  
  Since the start of 2023, crude oil prices have fallen due to concerns about interest rate hike, growing recession fear, and uncertainty surrounding Chinese demand.
  
  Rubber constitutes a major portion of the total cost for the tyre industry. Rubber manufacturing companies use crude oil derivatives as their raw material for making synthetic rubber.
  
  MRF uses crude waste carbon black as the major raw material for making tyres. The crude oil derivative used in the manufacturing of tyres constitutes around 30% of the total raw material cost.
  
  Hence, the decline in crude oil prices has a direct bearing on the gross margins of tyre companies.

Declining rubber prices and growing demand for tyres have put tyre companies and MRF in a sweet spot.

The Federation of Automobile Dealers Association (FADA) recently said that demand for tyres may pick up steam on the back of the upcoming wedding season.

MRF: What next?

MRF reversed the trend and improved its operating margin for the second straight quarter. Prior to this, the company's margins were on a decline for a stretch.

Going forward, experts are of the view that margins may stabilize as rubber prices have come down a bit.

Also, the auto sector is currently enjoying long term tailwinds in the form of improving disposable income, a low base for the past three financial years, and an improvement in supply chains. All these factors should continue to support the recovery.

As a result, rubber companies might see strong demand from original equipment manufacturers (OEMs) and rising demand for vehicles will lead to growing demand for tyres.

Another segment that needs to be watched closely is the replacement segment. Reportedly, factors like improving economic activities, increasing freight movement, higher spending on infrastructure, absence of material price hikes, etc., will support growth in the replacement segment in the financial year 2024.

All these factors indicate that MRF is currently in a sweet spot and might cross the Rs 1-lakh per share mark soon.

The company is also expecting traction from other segments including radial tyres, passenger car radials (PCR), and light and medium commercial vehicles (LMCV).

What has worked in the past for MRF is its domestic brand and established market position. While other players are expanding in the exports market, it is likely that MRF will cater more towards the domestic market.

MRF share price performance

Even though MRF has always been high priced, it has still delivered returns of over 600% in the past 10 years. This proves that a highly priced stock can still be an outperformer if the valuations are justified.

Today, after touching a new 52 week high of Rs 99,880, the stock witnessed some profit booking and fell a percent on an intraday basis.

MRF has a 52-week low of Rs 65,900 touched on 17 June 2022.

Have a look at the table below to compare MRF with its peers on some important metrics.

Comparative Analysis

Company	MRF	Apollo Tyres	Balkrishna Industries	CEAT	JK Tyre & Ind
ROE (%)	5.2	5.5	22.2	5.1	7.3
ROCE (%)	8.9	7.4	24.2	10.0	9.5
Latest EPS (Rs)	1813.1	12.5	60.7	46.1	7.9
TTM PE (x)	54.4	29.6	35.3	37.2	26.1
TTM Price to book (x)	2.8	2.1	5.4	2.0	1.7
Dividend yield (%)	0.2	0.9	1.3	0.7	0.7
Industry PE	45.5
Industry PB	3.1

Data Source: Equitymaster, Ace Equity

Interestingly, due to its high price, the average quantity of shares traded per day on BSE stands at just 1,482 with an average number of trades at 885.

This works out to an average of just 1.6 shares (essentially 1 or 2 shares) bought and sold per trade! Such are the quirks of being the most expensive stock traded in India.

For more details, check out MRF's financial factsheet and its latest quarterly results.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...