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MRF: Beats estimates on lower costs

Steep drop in natural rubber prices aids margins, net profit

Ram Prasad Sahu
Last Updated : Nov 26 2014 | 11:12 PM IST
The MRF scrip rose 4.1 per cent in trade on Wednesday, aided by better than expected results for the fourth quarter ended September 30 (MRF follows an October-to-September cycle). Driven largely by a sharp drop in raw material costs, operating profit margins rose 452 basis points (bps) year-on-year (y-o-y) to 18.1 per cent against analysts’ expectation of 16.8 per cent. Raw material costs as a percentage of sales fell 442 bps to 59.5 per cent, compared with the year-ago quarter.

Apollo Tyres, too, saw its raw material costs as a percentage of sales come down 467 bps to 62.9 per cent, which helped it report margins of 14.4 per cent (up 154 bps). Higher employee and other expenses, both of which were up 22-24 per cent, limited operating profit margin gains for Apollo.

Tyre prices, which were down 30 per cent y-o-y in the September quarter to Rs 133 a kg, are down to Rs 120 a kg currently. However, analysts expect gains to continue for tyre makers, as crude oil price (down 35 per cent from peak levels) and other key raw materials are expected to remain soft.

Given the lack of pricing action, the seven per cent gain in revenues to Rs 3,361 crore has largely been on account of volume gains.

Apollo Tyres, too, reported a similar sales growth of 6.7 per cent for its India business. Analysts expect the pricing discipline in the sector to hold, which bodes well for tyre companies. The only rise in an otherwise-muted costs for MRF in the quarter has been other expenses (promotional expenses), which were up 10 per cent y-o-y. Even as a percentage of sales there was a 60 bps increase to 17.1 per cent.

Good operational performance, coupled with the doubling of other income, reflected in the 72 per cent jump in net profit to Rs 316 crore. This was higher than the consensus estimates of Rs 265 crore.

Analysts say the performance given the drop in raw material prices for the second half of the year (June and September quarters) was better than the first half. For the September quarter, raw material costs as a percentage of sales fell 162 bps to 63.5 per cent. Raw material costs were up six per cent for the full year, while they were down 0.6 per cent in the September quarter. Most analysts tracking the stock have a buy and are likely to upgrade it.

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First Published: Nov 26 2014 | 9:35 PM IST

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