MRF: Stretching gains

Drop in rubber prices has come as a shot in arm for tyre companies

Tyre companies have benefited over the last few weeks, with spot rubber prices easing considerably. Spot rubber prices are currently at Rs 77.5 a kg levels, a decline of about 13.5 per cent over the past one month.

Rubber prices had reached Rs 106-107 levels in June 2006. This decline is being attributed to improved supplies in Asia, according to analysts at domestic brokerage houses. Tyre companies had shared a portion of this reduction in costs, via a cut in product prices in mid-September.

For a tyre company, rubber as a percentage of net sales, typically constitutes about 65 per cent of sales. Tyre companies are understood to utilise a combination of spot and long-term contracts, in a bid to optimise their raw material costs.

However, tyre stocks have moved broadly in line with the market over the last one month""MRF has gained 7.2 per cent during this period compared with 6 per cent rise in the Sensex, while Apollo Tyres has gained 6 per cent.

The current market rally has made tyres stocks expensive""Apollo Tyres trades at 14.5 times estimated FY07 earnings, while Ceat trades at 30 times.

Opto Circuits: Right timing

After entering the high-growth cardiac and peripheral stents business last December through the acquisition of Eurocor, Opto Circuits is now completing its offering by adding balloon catheter assemblies and related products for coronary, renal and other applications.

Though Opto Circuits has not announced the name of the company it is acquiring in Western Europe, at an enterprise value-estimated sales of 0.7-0.9, it seems like a good price.

With this acquisition, Opto Circuits will have a complete solution for intrusive procedures like coronary angioplasty, which has three key components-guide wire, stent and balloon catheter.

Eurocor manufactures both stents and guide wires, and so far, the company was purchasing the balloon catheter assembly from other manufacturers.

According to the management, the cost of balloon catheter assemblies, which accounts for about 50 per cent of the total cost, will reduce by 25 per cent, and the company will also shift manufacturing to India. This should help in improving both its market share and profitability.

In the first half of FY07, consolidated sales increased 65.2 per cent to Rs 104.57 crore, helped by Eurocor sales of Rs 22.8 crore.

Operating profit margin improved by 645 basis points y-o-y to 30.53 per cent. So it is no surprise to see the stock gaining 200 per cent since it acquired Eurocor last year. But at its current price, at 30 times estimated FY07 earnings, the stock appears expensive.