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B. Krishnakumar

MRF: Batting on a flat pitch.

AFTER recording robust earnings growth in the past few quarters, tyre major MRF has had to contend with a relatively modest improvement in performance for the quarter ended March 2003.

The turnover growth at 18 per cent for the quarter ended March 2003 was almost in line with the growth rate recorded in the immediately preceding quarter ended December 2002.

However, the increase in post-tax earnings at 31 per cent (excluding extraordinary income) does not quite compare favourably with the 120 per cent jump recorded during quarter ended December 2002.

The reasons behind the drop in growth rates are not far to seek.

The sharp increase in the price of raw materials (natural rubber, in particular) has been the primary factor behind the slowdown in growth.

Besides, the rise in the international price of crude oil has also had an inflationary impact on price of other inputs such as carbon black and tyre cord.

As a result, the total raw material cost shot up by 58 per cent while the net turnover saw a relatively modest rise of 18 per cent to Rs 522.2 crore.

The capacity overhang and the growing competitive pressure have constrained the company from raising prices to factor in the higher input cost. As a result, the operating profit margin dropped to 9 per cent for quarter ended December 2003 from about 10.7 per cent in the corresponding previous period.

Other elements of cost, such as interest and depreciation, remained almost unchanged. Provision for taxation dropped to Rs 6.2 crore from Rs 9.1 crore.

At Rs 17.4 crore, post-tax earnings (excluding the extraordinary income of Rs 50.8 crore) rose 31 per cent for the quarter ended March 2003.

The performances in the earlier quarters were much better because of the accumulated stock of inputs and finished products that were procured and manufactured at lower costs.

However, the reality of a steady increase in input cost and the pressure on profitability have caught up with the company's performance during the quarter ended March 2003.

MRF appears to be better placed to achieve higher growth rate in the next few quarters. The optimism stems from the favourable impact of the recent drop in the price of crude oil.

Besides, with the start of the tapping season, the supply of natural rubber will increase in the following months, and its price is unlikely to go up significantly.

Given this backdrop, the chances of any further erosion of profitability appear relatively remote.

Moreover, the excise duty on tyres sold in the replacement market has been reduced in the latest Budget. This could have a major positive impact for the company as it derives a chunk of its revenues from the replacement market.

Considering that the concerns on the profitability front appear limited, the progress of monsoon and economic growth rate would turn out to be critical factors affecting the performance. The MRF share price has been moving steadily up over the past few months.

Shareholders can, therefore, capitalise on the recent rally by reducing exposure and considering re-entry at lower levels.

Taking into account the improvement in earnings and a healthy dividend yield, investors could use any sharp price declines to take fresh exposure in MRF.

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