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Monday, May 06, 2019

India Nivesh calls a 'Buy' on MRF Ltd.
CMP:     53308      Target: 70000

Operating performance miss; Other income and lower tax rescue profits
The company clearly lost its advantage of being the market leader in most segments. MRF’s Q4 FY19 revenues at Rs40.7bn, disappointed. While rubber prices have remained steady, despite crude prices cooling off sequentially, the company benefitted only 40bps QoQ versus our expectation of 200bps savings. The company continues to be the market leader and we expect a strong comeback. Natural rubber prices are expected to continue to be benign, thus supporting the already “best in the lot” margins of MRF. We now value the stock at 18xFY21e and cut our price target to 70,000 (earlier Rs80,000). This is a result of lower revenues, lower margins and lower target multiple.

  • Q4 FY19 results: MRF’s revenues disappointed at Rs40.7bn, up 5% yoy versus our expectation of Rs 43.7bn. Even the savings on account of cheaper raw material did not match our expectations. The company reported its gross margins at 39.1% versus our expectations of 40.7%. The margin was at 14.0%, down 380bps yoy. Higher other
    income, lower interest burden and lower tax expense impacted PAT positively. Adjusted PAT came in at Rs2.9bn, lower than our expectation of Rs3.1bn.
  • Steady rubber prices and higher replacement market sales to assist margins: International rubber prices have remained steady in the range of Rs105-Rs110/kg levels. The industry expects rubber prices to remain steady in the near term. However, due to increase in crude prices, crude extract raw material costs have seen a significant increase. Also, there is a general sense that OEM demand in the near term may be under stress. Moreover, ~76% of its revenue is accounted by the replacement market. With higher replacement market sales, the overall blend is expected to improve and assist margins going forward.
  • Change in estimates: Demand for CV tyres and farm tyres continue to be steady due to heightened activity in mining and infra. The company has the widest distribution network in India, establishing its strong all-India presence with ~4,500 dealers and 300 franchisees (exclusively selling MRF tyres besides offering specialised services such as computerised wheel alignment and balancing). We have cut our volume growth estimates by 200bps. We have also lowered our margin expectation to 15% (earlier 16%) for both FY20 & FY21.

Valuation: We expect the company to register a volume growth of 9% (earlier 11%) CAGR over FY19-21. We expect the company to report its EBITDA margin at ~15 (earlier 16%). We have projected revenue, EBITDA and PAT CAGRs over FY19-21 at respectively 12%, 15% and 23%.
At the current market price, the stock trades at 13.6x FY21E. Due to lower volume growth, lower margin expectations, we now value it at 18x FY21E (earlier 20xFY21E), and accordingly arrive at a price target of Rs 70,000 and retain our Buy rating.

Emkay calls a 'Buy' on Tata Chemicals
CMP:     558      Target: 723

  • Tata Chemicals’ consolidated revenue grew 8.0% yoy to Rs 27.6bn (Emkay est: Rs 28.1bn) and EBITDA grew 3.6% yoy to Rs 5.3bn (Emkay est: Rs 5.4bn). EBITDA margin declined by 82bps yoy to 19.2% (Emkay est: 19.3%).
  • Consolidated soda-ash revenue increased 13.5% yoy to Rs 22.1bn on better realizations across geographies. Total soda-ash volume declined 4% yoy due to lower volume at TCNA and the discontinuation of the trading business in Europe (from Q1FY19).
  • The first phase of the 70K MTPA soda-ash capacity will come in by Q4FY20, while the second phase of 130K MTPA will come in 3-4 years. The 400K MTPA salt capacity will come in 3 steps in 3-4 years. Mgmt expects soda-ash prices to remain firm globally.
  • The uptrend in soda-ash prices and focus on the consumer business remain the key growth drivers. We upgrade our FY20/21E EPS by 6.3%/9% due to other income and a lower tax-rate. We maintain our SoTP-based TP of Rs 723 with a Buy rating.
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