Brand loyalty, replacement demand keep MRF ahead; stock clocks 480% returns

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Posted by: MRF Tyres

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Published: Mon, Oct 21, 2013

The MRF stock has been one of the best performing stocks in the domestic tyre industry with manifold returns over the past five years. At its current market price of Rs 14,802.55, this 10-face value stock has clocked absolute returns of 480% over the past five years and about 44.5% in the past one year, outperforming the average gains of 224% for the 5-year period and 9.2% gains in the past one year by the Indian tyre industry.

It is one of the country's leading market players with a market share of close of 21.8% in FY10 - as per a report by Centrum Broking. The report also highlights that MRF's leadership position in the tyre market is due to its strong brand loyalty in the domestic market as well as a dedicated and well entrenched distribution network that act as a strong competitive barrier.

Given its brand loyalty, dedicated pan-India reach and stronghold in the replacement tyre market, MRF's consolidated revenues have grown by over 28% CAGR (compounded annual growth rate) over the past three years - as at September 2012 (the company follows August-September financial year), ahead of its peers such as Apollo Tyres, whose consolidated sales grew by 16.4% CAGR over the past three years and CEAT with a 3-year CAGR consolidated sales growth of 21% for the year ended March 2013.

On the margins front too, the company has been able to maintain its consolidated earnings before interest depreciation and tax (EBITDA) margins at over 10% in FY12 (September 2012). For FY13, Apollo Tyres has reported a consolidated EBITDA margins of 11.5%, MRF's annual results for the year are awaited as the company's financial year ends in September.

With business from original equipment manufacturers (OEMs) under pressure due to a slowdown in the automotive segment, tyre companies today are banking on replacement or after-sales market to boost sales. MRF enjoys a dominant position in this segment with replacement sales attributing to nearly 75-76% of its revenues.

That the replacement market will continue to be strong over the next couple of years is also apparent from the fact that almost 70.72 lakh passenger vehicles (cars and utility vehicles) and nearly 19 lakh commercial vehicles (medium, heavy and light) have been added to the Indian roads during FY10 to FY12, whose tyres will be due for replacement in the near future giving tyre manufacturers a decent business opportunity.

Given its strong and visible growth trajectory, there can be a further upside to this stock from the medium- to long-term perspective.

The stock is also fairly valued with one-year forward price-to-earnings multiple (P/E) of 7.97 as per Bloomberg estimates, which is at a discount to its international peers such as Bridgestone and Michelin that trade at one- year forward P/E of close to 9 as per the Bloomberg estimates.

While MRF's current valuation is at a premium to its closest domestic competitor Apollo Tyres that trades at one-year forward P/E of less than 5 as per Bloomberg, it may be noted that Apollo's stock had been battered earlier this year following balance sheet concerns on account of its intended acquisition of Cooper Tires. Apollo's stock has returned -22% year-to-date against 12% returns by MRF since January this year.

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