Analysis of MRF Ltd Share Price – Watch

MRF Ltd finds its name in the Forbes list of India’s Super 50 Companies 2017. MRF Ltd operates in Tyre manufacturing sector.

In terms of net sales, MRF Ltd is the number 1 tyre company in India. It has a sales turnover of Rs.13,245 Crores. The second best is Apollo Tyres having sales turnover of Rs.8,933 Crore (32% below MRF).

In terms of net profit, MRF Ltd is again the number 1 tyre company in India having a PAT of Rs.1,451 Crores. The second best in Tyre Sector is Apollo Tyres having PAT of Rs.803 Crore (44% below MRF).

MRF Ltd has a product line of automobile tyres, tyre-tubes, flaps for the tyres, tread rubbers and conveyor belts.

They also make toys for children in Brand name of Funskool. Recently MRF has also ventured into Paint business.

Among sports enthusiasts, MRF brand name is also associated with Motor Sports, and Cricket (MRF Pace Foundation).

MRF Share Price _Products_1

MRF Ltd. has its manufacturing plants in 8 locations. Out of all the 8 locations, 3 are in Tamil Nadu, 2 in Telangana, and one each in Puducherry, Kerala, and Goa.

The manufacturing facility of Funskool toys is done in Ranipet, Goa.

The shareholding pattern of MRF Ltd as on Mar’2017 is as below:

  1. Promoters – 27.37%
  2. Institutions (MF’s, Banks, Insurance Companies, FII’s) – 20.59%
  3. Corporate Bodies – 24.58%
  4. Individuals – 27.46%

The point to note here is that, Promoters shareholding in the company is rather small. Generally I would prefer at least a majority shareholding of Promoters in the Company. So this is a small negative.

As promoters shareholding is small, there is a corresponding high percentage (27.46%) of shares hold by Indian Public (Individuals). Taking example of a typical company HUL. In HUL promoters holding is 67.19% and individual shareholders has only 11.65%.

The Founder of MRF Ltd was Mr. K. M. Mammen Mappillai who was awarded Padmashri in 1992. He died in 1992 at the age of 80.

Currently the Board of Directors of MRF Ltd is comprised of the following people:

MRF Ltd Share Price - BOD

MRF Ltd Share Price

In year 2002, total revenue of the company was Rs.1,815 Crore.

In Mar’2017 (after 15 years), total revenue of the company is Rs.13,802 Crore. This means a CAGR of 14.48% per annum.

In year 2002, PAT of the company was Rs.78 Crore.

In Mar’2017 (after 15 years), PAT of the company is Rs.1,451 Crore. This means a CAGR of 21.5% per annum.

In last five years EPS of the company has risen from Rs.1,349.54/share to Rs.3421.44/share. This is a growth of 20.45%.

By all means these figures of revenue and PAT growth is very encouraging.

Hence I checked the pattern of MRF Ltd Share price in last 5 years.

MRF Ltd Share Price - Last 5Y

In Nov’2012, MRF Ltd share price was trading at Rs.10,000 levels.

In Nov’2017, MRF Ltd share price is trading at Rs. 69,000 levels.

[Note: Since Jun’17 there has been a slight correction trend being seen in the share price]

In a span of last 5/6 years (Nov’12 to Nov’17) the price has grown at a CAGR of 47% per annum.

Such a massive increase in price in last 5 years has prompted me to check business fundamentals of MRF Ltd.

The result of my analysis is presented here for my readers knowledge…

MRF Ltd share price vs business fundamentals (5Y Data)

In last 10 years, there has been only 3 incidents where MRF Ltd PAT and EPS has fallen compared to its last year.

  1. In year 2007/2008 – PAT Rs.171/141 Crore. EPS Rs.405/334.
  2. In year 2011/2013 – PAT Rs.619/572 Crore. EPS Rs.1460/1349.
  3. In year 2016/2017 – PAT Rs.2,327/1,451 Crore. EPS Rs.5,488/3,421.

You can find below the price vs fundamental chart for last 5 years.

As stated above, between the year 2016/2017, PAT and EPS of MRF Ltd fell drastically.

But see how its share price behaved between this period…

It almost doubled between Apr’16 and Apr’17.

MRF Share Price _FundamentalsVsPrice

Share Price: increasing almost consistently since last 5 years, except for a trivial correction between 2015-2016. Growth rate has been great at 38.81% per annum (Apr’13 to Apr’17).

Reserves & Surplus: Continuously increasing since past 5 years (Mar’13). Growth rate has been great at 24.51% per annum.

Income (Turnover): Increasing trend since past 5 years (Mar’13). Growth rate has been slow at 2.67% per annum. Between 2016-2017, there has been a major dip in income.

Net Profit (PAT): Increasing trend since past 5 years (Mar’13). Growth rate has been good at 20.45% per annum. Sales growth only 2.67%, but PAT is growing at 20%+? This can only happen when company has increased its profitability margins.

Equity dividend payout: Increasing trend since past 5 years (Mar’13). Growth rate has been good at 30.67% per annum. Between 2016-2017, the company has paid same dividends.

EPS: Increasing since past 5 years (Mar’13). Growth rate has been good at 20.45% per annum.

Between Apr’16 and Apr’17, MRF Ltd share price jumped from Rs.33,791 to Rs.68,950. In the same period, PAT and EPS of MRF has gone down.

To understand more about this price behaviour, lets look at performance of MRF in last 2 quarter (post Mar’17).

MRF Ltd share price vs business fundamentals (Post Mar’17)

The results of MRF for the first two quarters (Jun’17 & Sep’17) is available in website.

If we will see MRF’s quarterly results for the last 5 quarters, the recent surge dosen’t look justified.

In last 5 quarters, Sensex jumped from 27,000 levels to 33,000 levels (CAGR: 22.2%).

So, this may be the only reason why MRF Ltd share price has been buoyant.

MRF Share Price_QFundamentalsVsPrice

Income (Turnover): Quarterly income has been increasing at rate of 2.02% per annum since past 5 quarters (Sep’16). In such a narrow time frame, such improving turnover is encouraging.

Net Profit (PAT): Decreasing since past 5 quarters (Sep’16). Growth rate has been negative at -4.89% per annum.

EPS: Decreasing since past 5 quarters (Sep’16). Growth rate has been negative at -4.89% per annum.

Now there is less doubt in my mind that stock price of MRF has been bullish without its fundamentals supporting it.

But there must be something in the company which is supp0rting the present price levels.

Hence I decided to do a more detailed stock analysis of MRF.

Stock Analysis of MRF Ltd

My readers are aware that on getmoneyrich, a stock analysis worksheet is also offered for the readers. It helps them to learn the process of fundamental analysis of Indian stocks.

I have used this worksheet to do some number crunching for MRF Ltd.

Allow me to share some of my observations here.

#1. Price Earning (P/E) & Price Book value (P/B) Ratio:

P/E & P/B ratio is one excellent stock metric which gives us a quick idea of stocks current price valuation.

As a thumb rule, a stock whose P/E ratio is above 15 is considered expensive. A stock whose P/B is above 1.5 is also considered expensive.

But this thumb rule has now become obsolete.

Hence it is essential to use other, more relevant, comparator.

The stock analysis worksheet compared MRF’s P/E with its industries (Tyres) P/E ratio to get an idea about its price valuation.

The stock analysis worksheet also compared the companies P/E and P/B with its Sensex’s overall P/E & P/B ratio to get an idea about its price valuation.

The result was like this:

MRF Share Price_PEPB

Compared to Industry and Sensex P/E ratio, MRF share price looks overpriced.

Compared to Sensex P/B MRF looks over priced again.

#2. Simple Moving Average (SMA):

Analyzing stock price based on SMA is part of technical analysis.

I personally feel comfortable in including a tinge of technical analysis in my stock research.

It gives me a better feel of how the stock price has been moving in the past as compared to today’s price.

MRF Share Price_SMA

When we look at SMA (200, 150, 50 & 30 day) and compare it with current price, the trend becomes clear.

Since last 200 days, the price has been increasing for sure. But in between there is one flip (150 day and 50 day SMA). This may be due to poor quarterly results of MRF.

SMA works like a fire alarm for analysts.

If SMA is showing a growing trend, analysts become cautious about the stock price tending to become overvalued.

If SMA is showing a falling trend, analysts become cautious and dig deeper into the cause of such price fall.

In last 200 days, price of a MRF has been wavering. The price falls, and then picks-up.

In such cases, answer to such erratic price movements is often hidden in stocks intrinsic value.

#3. Intrinsic Value:

This is the heart of my stock analysis worksheet.

Though I am no expert of estimating intrinsic value of companies, but still this worksheet works for me.

It gives me a rough idea of where the current price of stock is trending (undervalued or overvalued).

Though I know that the calculation is not immaculate, but who can claim to know the exact intrinsic value of a company? Even the great Warren Buffett prefer not to boast about his ability to estimate intrinsic value of stocks.

This worksheet confirms that MRF is capable of generating decent free cash flow in next 10 years.

Still the calculated intrinsic value of this stocks is very inviting.

Using this worksheet, I could understand that the current share price of MRF Ltd is not undervalued. But it is treading very close to it.

The intrinsic value verses current share price looks like this:

MRF Share Price_IV

Current market price is Rs.69,650.

Calculated intrinsic value by this worksheet is Rs.100,886. But as per value investing rules, the calculated intrinsic value must be applied with “margin of safety“.

Generally, the agreed price after application of margin of safety is two-third (2/3rd) of the estimated intrinsic value.

Hence: 2/3 x 100,886 = Rs.67,250

After application of the Margin of Safety, MRF Ltd share price looks expensive only by a very fine margin.

But we shall not forget the fact that, there are chances stock market correction in 2017-18. Hence, it will be better to wait for it and then attack MRF.

Anyways, in ideal case people must wait for further price dips (till 67,000 levels) then take the next step.

#4. Overall Rating of MRF Ltd:

This is the best part of my stock analysis worksheet. It consolidates the results and gives a one line, clear answer.

The worksheet has analyzed MRF based on the following parameters.

* Price Valuation
* Business Fundamentals
* Profitability &
* Price history

Though this worksheet gives more weightage on Price valuation and Business fundamentals, but it also considers companies profitability and price history.

For MRF, the overall grading looks good. The main reason being, its current market price is so close to its intrinsic value.

Only those stocks which is both fundamentally strong, and also displays undervalued market price, this worksheet will give it high grades.

The overall results looks like this:

MRF Share Price_OverallGrade

According to the rule of my stock analysis worksheet, any stock which obtains an overall grades of 85% or more, is a good stock.

MRF Ltd has scored 91.1%.

Considering the overall numbers of MRF, I consider this stock as reasonably valued. But I will surely wait for the stock market to correct slightly before taking a plunge.

Final words about MRF Ltd net profit decline in last quarters…

The company has officially made a statement that in “the recent years saw the range of economic upheaval both favourable and un favourable”.

The impact of GST on the supply chain has been felt in last quarters.

I am not sure if Demonetisation has any direct impact on Tyre sales or not. But cash crunch has certainly effected the transportation business.

As per Supreme Court’s order, all vehicles that is being sold after 1-April’17 must be BS-IV compliant. The problem is, automobile manufacturers already had a huge inventory of BS-III compliant vehicles. The BS-IV rule forced the automobile manufacturers to slow-down their production. The impact of this will surely be felt on Tyre companies.

Disclaimer: All blog posts of are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.

1 Comment on "Analysis of MRF Ltd Share Price – Watch"

  1. great analyss keep it up i appreciate ou

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