MRF stock strategy: With growing material costs and a high valuation, analysts predict that the MRF share price will fall by up to 31% in the near future. According to them, the stock's value is trading higher than its historical average at a time when its competitive edge is fading. In intraday trading, MRF's share price decreased 2.2% to Rs 1,37,201 per share on the BSE. At 10:15 a.m., the BSE Sensex was trading 856 points higher, or 1%, at 79,743.
"MRF stock is currently trading at 29.5x and 25.2x FY25 and FY26 estimated Earnings Per Share (EPS), above its 10-year long-period average (LPA) of around 23x, despite its weakening competitive position and similar capital efficiency as peers," analysts at Motilal Oswal Financial Services said with a 'Sell' rating and a target price of Rs 1,08,000.
According to the brokerage, MRF's competitive position has worsened in recent years, resulting in diminished pricing power in the Passenger Car Radial (PCR) and Truck, Bus, and Radial (TBR) tire sectors. This, together with the impact of the anticipated expenditure, is likely to limit MRF's return ratio growth.
"We expect MRF's return ratios to dilute over the next two years as its Return on Equity (RoE) is expected to reach 12.1 per cent by FY26E (from around 13.5 per cent in FY24)," said Motilal Oswal, a brokerage. MRF's RoE was 12.6% at the conclusion of the most recent June quarter (Q1FY25).
Its standalone Earnings Per Share (EPS) were Rs 1,326.41, while the consolidated EPS was Rs 1,346.38.
Financially, MRF recorded a 3% decrease in Q1FY25 consolidated net profit to Rs 571 crore from Rs 589 crore in the year-ago quarter. Sequentially, however, there was a substantial gain of 54.8%. MRF's gross profit margin, however, fell 150 basis points (bps) over the previous year and 160 bps Q-o-Q to 37.3% in Q1, owing to a rise in raw material prices.
According to experts, MRF's sales were driven by robust demand in the TBR/PCR/two-wheeler replacement category, as well as a comeback in the export industry. Tighter expense control helped to boost the EBITDA margin to 16.1 percent (down 150 basis points year on year but up 190 basis points quarter on quarter). Analysts at Kotak Institutional Equities expect MRF to continue to gain market share in the domestic market, citing low price rises in the replacement segment, particularly in the TBR and two-wheeler categories.
"Given somewhat competitive pricing, an improvement in export market outlook, and consistent growth in the replacement market, we estimate MRF to achieve 12% year-on-year revenue growth in FY25. However, given the recent steep increase in natural rubber prices (up 10-15% in the last two months), we expect margins to remain under pressure because the price increase implemented thus far will not be sufficient to balance commodity headwinds," they stated. The brokerage, too, has a 'Sell' rating with a target price of Rs. 97,000.
However, brokerages have boosted their profit forecasts for MRF, taking into account the Q1 earnings beat. Kotak Institutional Equities, for example, has raised its FY2025-27 consolidated EPS forecasts by 8% based on stronger sales growth expectations.
"We improve our FY25E/FY26 EPS by 4%/9% to reflect higher-than-expected revenue growth and cost reductions. The company trades at roughly 29.5x/25.2x FY25/26 EPS (higher than Apollo Tyres' 19x/15.2x and CEAT's 17.2x/13.7x), which does not reflect its deteriorating competitive position, according to Motilal Oswal analysts.
