The fundamental analysis of any stock generally begins from a macro-economic perspective and then moves down to the specific sector and finally narrowing down to the company analysis. The stock for fundamental analysis is MRF Tyres.
The analysis will follow given below steps:
Economic Analysis
During the current global crisis, all the countries had suffered large amount of losses. As a result of which, all had registered a fall in GDP growth rate. However, India and China are the only two countries to register a positive rate even in this global meltdown scenario. At present, the economies are on the verge of a recovery and the recession seems to be a thing of near past. Now, India has a better chance to recover better than other countries due to its isolation from the global crisis for a relatively long period of time as well as the relatively less losses suffered unlike that of the European nation or for that matter even the USA.
The following table describes the key factors indicating Indian economic growth:
Head
2009-10
2008-09
GDP Growth Rate
8.6%
5.8%
IIP
17.6%
1.1%
Inflation
9.6%
1.3%
Fiscal Deficit
Rs 53993 Cr
Rs. 54158 Cr
FIIs
$ 66.5 Bn
$21.3 Bn
Forex Reserves
$ 279.6 Bn
$ 251.7 Bn
Sensex on July End
17868
14645
Nifty on July End
5367
4340
Clearly from above data, we can observe that the economy is on the verge of recovery and it is showing promising signs. An important factor to consider here is that, where all nations are fighting to remove deflation and accelerate growth, India on the other hand is trying to curb inflation.
Sector Analysis
The automotive sector had witnessed a large fall in demand due to the global meltdown. Apart from this, the fall of auto giants like the General Motors, Chrysler and Ford also acted as a damper for the growth of this sector. As a result of this, many companies which were directly or indirectly related faced huge amount of losses. Typically, Indian automotive sector which was on its way to be an automotive hub hit badly since it was in its nascent stages wherein huge investments were done and the recession during the payback period made companies go haywire.
Following table will describe India's position in this sector:
India
India's Competitiveness
Availability of Qualified Engineers
USA
Germany
China
The fact that India has large pool of talent available at a relatively low cost is as an added advantage for this sector.
Apart from this, this sector is composed of big Indian players like the TATA, Maruti, Mahindra and many such more. Presently, the launch of Tata Nano has received worldwide attention and marked the importance of India in this sector.
Some of the major auto players in India are:
Name
Last Price
Market Cap. (Rs. cr.)
Sales Turnover
Net Profit
Total Assets
Tata Motors
846.35
48,292.73
35,593.05
2,240.08
25,559.83
Ashok Leyland
70.95
9,438.75
7,244.71
423.68
5,936.76
Tata Motors (D)
604.75
3,881.02
-
-
-
Eicher Motors
984.10
2,634.20
378.01
37.53
413.30
Swaraj Mazda
298.25
431.62
716.76
21.46
316.81
Maruti Suzuki
1198.6
34628.76
29623.01
2497.62
10043.80
Mahindra & Mahindra
661.50
38263.44
13093.68
836.78
10710.38
Due to all these reasons, The Government of India (GoI) has identified the automotive sector as a key focus area for improving India's global competitiveness and achieving high economic growth. The Government formulated the Auto Policy for India with a vision to establish a globally competitive industry in India and to double its contribution to the economy by 2010. It intends to promote Research & Development in automotive industry by strengthening the efforts of industry in this direction by providing suitable fiscal and financial incentives.
Company Analysis
Introduction
MRF is India`s largest tyre manufacturer, having a 22% market share. The company derives over 95% of its revenues from its core business i.e. tyres, the rest comes from its presence in toys and paints. This focus on tyres has enabled it to constantly increase capacities, and maintain market leadership and profitability in most segments. MRF exports its products to over 75 countries. Credit rating agency, CARE has assigned a AA+ rating to the Long-term Bank Facilities of MRF (MRF). This rating is applicable for facilities having tenure of over one year. The company signed the memorandum of understanding (MoU) with government of Tamil Nadu for the new MRF plant to be located at Perambulur, Trichy and also for expansion of its existing plants in Tamil Nadu. This will be MRF`s third plant to be established in Tamil Nadu. MRF will invest Rs 1.25 billion in production facility of the tyres the product is produced after three years of in house research. The production will start at its Medak facility in Andhra Pradesh. The company's Net sales and PAT are expected to grow at a CAGR of 11% and 32% over FY08 to FY11E.
Key Ratios
Particulars
FY08(12 m)
FY09E(12 m)
FY10E(12 m)
OPM (%)
13
13
13
NPM (%)
4
5
5
ROE (%)
19
18
17
ROCE (%)
19
19
18
P/BV(x)
1.88
1.54
1.28
P/E(x)
10.12
8.49
7.72
EV/EBDITA(x)
1.03
3.42
3.38
Debt-Equity ratio
0.78
0.70
0.64
Key Data
Sector
Auto Tyres
Face Value
10.00
52 wk. High
8040.00
52 wk Low
4126
BSE Code
500290
Moving Average Values
Moving Days
BSE
NSE
30
7699.81
7712.13
50
7550.59
7561.96
150
6819.38
6843.95
200
6587.57
6617.71
Peer Group Comparison
The sector comprises of foreign as well as domestic players and hence represents a typical competitive market. The following table describes the typical values of these competitors:
Name
Last Price
Market Cap. (Rs. cr.)
Sales Turnover
Net Profit
Total Assets
MRF
7,329.55
3,108.57
5,672.84
253.03
1,654.21
Apollo Tyres
63.90
3,220.72
5,036.80
414.99
2,859.55
Balkrishna Ind
669.00
1,293.29
1,394.30
208.73
940.64
JK Tyre & Ind
164.60
675.84
3,691.64
163.47
1,553.60
Ceat
134.00
458.86
2,830.61
161.03
1,058.11
PTL Enterprise
34.00
225.04
25.00
2.97
90.02
TVS Srichakra
279.05
213.67
706.39
29.82
222.18
Elgi Rubber
8.40
89.88
62.01
4.25
84.63
Financials
Following tables show the performance of MRF for the past 5 years, this can be used to estimate future earnings of the stock so as to perform fundamental analysis.
The Balance Sheet for MRF is as follows:
Balance Sheet of MRF
Sep '05
Sep '06
Sep '07
Sep '08
Sep '09
Sources Of Funds
Total Share Capital
4.24
4.24
4.24
4.24
4.24
Reserves
749.81
820.05
981.91
1,116.55
1,357.18
Total Debt
542.9
539.98
607.86
962.19
292.79
Total Liabilities
1,296.95
1,364.27
1,594.01
2,082.98
1,654.21
Application Of Funds
Net Block
536.81
649.67
656.75
866.55
933.56
Capital Work in Progress
151.99
66.26
243.03
443.68
286.24
Investments
13.75
70.23
72.02
68.56
148.57
Inventories
553.56
565.63
693.34
984.28
650.47
Total Current Assets
1,061.63
1,158.02
1,318.14
1,696.39
1,290.10
Total CA, Loans & Advances
1,190.10
1,296.82
1,562.93
2,003.71
1,695.98
Total CL & Provisions
595.7
718.71
940.72
1,299.52
1,410.14
Net Current Assets
594.4
578.11
622.21
704.19
285.84
Total Assets
1,296.95
1,364.27
1,594.01
2,082.98
1,654.21
The Profit and Loss Statement for MRF is as follows:
PnL for MRF
Sep '05
Sep '06
Sep '07
Sep '08
Sep '09
Income
Net Sales
2,975.74
3,746.69
4,410.22
5,060.81
5,679.57
Total Income
3,040.00
3,772.55
4,499.37
5,147.82
5,476.62
Expenditure
Raw Materials
2,179.21
2,685.70
3,124.83
3,645.42
3,613.20
Total Expenses
2,840.98
3,477.81
4,035.76
4,711.96
4,759.90
Operating Profit
175.29
257.83
451.67
438.08
705.43
Interest
32.66
49.27
49.24
66.25
68.92
PBDT
166.36
245.47
414.37
369.61
647.8
Profit Before Tax
56.04
99.81
260.96
200.09
398.48
Reported Net Profit
40.31
79.91
171.78
141.97
256.32
Total Value Addition
661.77
792.11
910.93
1,066.54
1,146.70
Equity Dividend
8.48
8.48
8.48
8.48
10.6
Corporate Dividend Tax
1.19
1.19
1.44
1.44
1.8
Per share data (annualized)
Shares in issue (lakhs)
42.41
42.41
42.41
42.41
42.41
Earnings Per Share (Rs)
95.05
188.42
405.03
334.74
604.37
Equity Dividend (%)
200
200
200
200
250
Book Value (Rs)
1,777.94
1,943.56
2,325.20
2,642.66
3,210.03
The Cash Flow Statement for MRF is as follows:
Cash Flow
Sep '05
Sep '06
Sep '07
Sep '08
Sep '09
Net Profit Before Tax
59.52
63.4
260.96
211.39
398.48
Net Cash From Operating Activities
62.05
274.86
306.2
269
862.93
Net Cash (used in)/from
-231.55
-227.09
-335.44
-566.29
-233.46
Investing Activities
Net Cash (used in)/from Financing Activities
116.39
-40.5
49.17
326.47
-671.93
Net (decrease)/increase In Cash and Cash Equivalents
-53.11
7.27
19.93
29.18
-42.46
Opening Cash & Cash Equivalents
111.94
46.03
53.3
73.17
102.35
Closing Cash & Cash Equivalents
58.83
53.3
73.23
102.35
59.89
MRF has also been given dividends at the rate of about 250% over the face value of Rs 10 of the stock price.
From above financial tables, we have following important data:
Head
Value
D/E ratio
0.71
ROE
17%
Cost of Debt
7.14%
k
12.9%
CAGR
9.5%
Now, we can apply dividend discount model to get the present share price
P0=D1/ (k-g)
As the growth rate is 9.5%, dividend will also grow by same rate, thus share price will be
P0 = 250*1.095/ (.129-.095)
P0 = 8051.47
Calculated Price
Current Market Price
Difference
8051.47
7329.55
-8.96%
Recommendation
From above outlook and conclusion, we can infer that the stock is bound in northern direction. Also the calculated price as per the Dividend Discount Model comes to Rs. 8051.47 while it must be noted that the market price is Rs. 7329.55. This indicates an under pricing of the stock by 8.96%.
Therefore, the recommendation for MRF Tyres is BUY
We have arrived at this recommendation after indepth analysis of the macro and micro economic factors. The Dividend Discount Model used for arriving at price has mathematical validity and hence is a correct tool for deriving prices. Apart from these, the future situations of the economy, sector and the Company have also been taken into consideration.
