For MRF investors, the bigger worry after the June quarter may not be the earnings miss itself, but what happens to margins from here.
Kotak Securities has retained its ‘Sell' rating and Rs 1.25 lakh fair value (FV), warning that rising crude oil and natural rubber prices could keep profitability under pressure, while a new competitor in key tyre categories could further raise the heat.
Analysts Rishi Vora and Apurva Desai said MRF's growth is likely to broadly track the industry, but the combination of raw-material inflation, slower pricing action and intensifying competition leaves limited room for upside. Kotak Securities has also cut its FY27-29 consolidated earnings per share (EPS) estimates by 2-12%, primarily on lower margin assumptions.
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Kotak Securities' Take
Kotak Securities retained its Sell rating with an unchanged fair value of Rs 1,25,000, despite incorporating what it described as elevated profitability assumptions.
The brokerage said MRF's Q1 EBITDA came in 6.5% below its estimate, primarily because of higher other expenses and a marginally weaker gross margin.
It also flagged the entry of BKT into the domestic TBR and PCR segments, which could increase competitive intensity in the replacement market.
Margins Take The Hit
MRF reported revenue of Rs 8,290 crore, up 9.7% year-on-year, but EBITDA fell 8.3% to Rs 950 crore. EBITDA margin contracted to 11.4% from 13.7% a year earlier and was 60 basis points below Kotak Securities' estimate.
The brokerage attributed the miss to higher other expenses, possibly reflecting increased marketing spending, alongside a softer gross-margin performance.
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Gross margin declined 560 basis points sequentially in Q1, although Kotak Securities noted that CEAT and Apollo Tyres had reported a similar sequential contraction.
Adjusted PAT rose 2% YoY to Rs 470 crore, marginally ahead of estimates, helped by higher other income and mark-to-market gains.
Raw Materials And BKT In Focus
Analysts expect elevated rubber prices and volatile crude oil costs to continue weighing on margins in the near term.
The brokerage also believes MRF's relatively subdued revenue growth versus peers could partly reflect market-share pressure in the replacement segment, particularly Truck and Bus Radial tyres (TBR). Aggressive pricing and slower price-hike implementation in TBR and two-wheeler segments could constrain growth, it said.
The arrival of Balkrishna Tyres (BKT) in TBR and Passenger Car Radial Tyres (PCR) is another variable to watch as competition intensifies.
With the stock trading at around 22.6 times one-year forward consolidated EPS, Kotak Securities believes valuations remain demanding. It has therefore retained Sell, with the unchanged Rs 1.25 lakh fair value based on 18x September 2028E consolidated EPS.
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