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B. Krishnakumar

WHILE MRF's latest performance may not appear all that impressive, the company appears well-positioned to exploit any improvement in the business environment.

Taking into account the strong fundamentals, eminent position in the industry and presence across almost all segments of the industry, long-term investors may include MRF in their portfolio.

The 49 per cent drop in post-tax earnings reported by the tyre major — MRF — does not appear too appalling if viewed in the backdrop of the recent developments.

The rising trend in the price of key raw materials such as natural rubber and other petro-based inputs, including carbon black and tyre cord, has inflated the total raw material cost for the company.

This has affected the performance of almost all tyre companies in the past few quarters and MRF is no exception.

The post-tax earnings for the fourth quarter ended September 2003 dropped to Rs 13.6 crore from Rs 26.5 crore. The turnover, however, rose a healthy 25 per cent during this period.

Despite the sharp increase in production cost, the tyre industry has not quite been in a position to offset it by revising prices upwards.

The competitive pressure along with excess capacity in the industry has prevented tyre majors from adjusting price to accommodate increased costs.

As a result, MRF's operating profit margin dropped to 9.4 per cent from 13.5 per cent recorded in the fourth quarter of the previous fiscal.

Except for a marginal increase in staff cost, there has been no major increase in overall cost structure for MRF.

Owing to the erosion in profitability, the company had to contend with a 49 per cent drop in post-tax earnings to Rs 13.6 crore. The performance would have been worse but for the 25 per cent increase in turnover.

For the year ended September 2003, the turnover rose 19 per cent to Rs 2,185.5 crore and post-tax earnings by about 50 per cent to Rs 117.4 crore.

The growth in the bottomline is explained by the extraordinary income of Rs 73.7 crore, representing refund of excise duty relating to previous years.

But for this extraneous income, MRF's full year net profit would have dropped 44 per cent to Rs 43.6 crore.

Going forward, the company's performance is likely to improve if the latest developments are any indication.

Automobile production continues to grow at a healthy rate and the impact of the normal monsoon is likely to have a positive impact on tractor tyre demand. This, in turn, would help MRF, as would be the case for the other tyre majors.

The recent signs of recovery in industrial production along with a pick-up in economic growth would propel replacement market demand for tyres.

Considering that MRF has a strong presence in the replacement market, any pick-up in demand would rub-off positively on the company's earnings. The performance of the industry could get a major boost if the price of raw materials were to soften from the current levels.

Though there is no such indication now, the increased supply of rubber in the post-tapping season could ease the pressure for tyre companies in the next couple of quarters. The company's performance and the tyre industry hinges to a large extent on raw material price trends.

The performance is unlikely to increase significantly unless the price of raw materials eases to lower levels.

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