1QSY2013 Result Update | Tyre

March 4, 2013

MRF
Performance Highlights
Y/E Sept. (` cr) Net sales EBITDA EBITDA margin (%) Reported PAT 1QSY2013 1QSY2012 3,026 403 13.3 180 2,875 258 9.0 113 % chg (yoy) 4QSY2012 5.2 56.5 437bp 59.6 2,994 350 11.7 165 % chg (qoq) 1.1 15.0 161bp 9.4

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (Rs) BSE Sensex Nifty Reuters Code Bloomberg Code Tyres 4,905 1,146 0.9 13850/9453 2,994 10 18,878 5,699 MRF.BO MRF IN

`11,565 `14,331
12 Months

Source: Company, Angel Research

For 1QSY2013, MRF reported a muted 5.2% yoy revenue growth to `3,026cr (`2,875cr in 1QSY2012) on account of slowdown in auto industry. Declining rubber prices led to a 437bp yoy expansion of EBITDA margin to 13.3% from 9.0% in the same quarter last year. Consequently, the net profit for the quarter surged by 59.6% yoy to `180cr from `113cr in 1QSY2012. Declining rubber prices to drive bottom-line: Rubber, a major raw material in the manufacture if tyres have been volatile since two years. Rubber prices have declined to level of `157/kg currently due to declining demand owing to slowdown in auto industry; increased production during the last three months; and inventory pileup which resulted from huge imports in times of favorable international prices. Rubber prices are expected to remain relatively low for the next one or two quarters owing to bearish global scenario which would subsequently result in expansion of EBITDA margin and consequently improved net profit. We expect the EBITDA margin to remain relatively unchanged in SY2014E due to expected pass on of price correction in the OEM segment. Outlook and valuation: We expect MRF to post a 7.7% revenue CAGR over SY2012-14 to `13,767cr, while EBITDA margin is expected to expand by 229bp in SY2013 due to decline in rubber prices. However, we expect margin to remain stable in SY2014 at 12.8%. Consequently, the net profit is expected to post a 15.2% CAGR over SY2012-14 to `760cr. At the current market price, MRF is trading at a PE of 6.5x its SY2014E earnings and at a P/BV of 1.1x for SY2014E. We maintain our Buy rating on the stock with a revised target price of `14,331, based on a target P/E of 8.0x for SY2014E earnings.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 27.2 10.5 30.8 32.1

Abs. (%) Sensex MRF

3m (2.2) 6.1

1yr 7.0 17.9

3yr 11.2 83.6

Key financials
Y/E Sept. (` cr) Net Sales % chg Adj. Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoIC (%) EV/Sales (x) EV/EBITDA (x) SY2011 9,743 30.7 343 0.9 8.3 808 14.3 2.1 17.2 18.9 0.6 7.6 SY2012 11,870 21.8 572 67.0 10.6 1,350 8.6 1.7 22.2 23.3 0.5 4.8 SY2013E 12,422 4.7 704 23.0 12.9 1,661 7.0 1.4 22.0 23.3 0.5 4.0 SY2014E 13,767 10.8 760 7.9 12.8 1,791 6.5 1.1 19.4 21.7 0.5 3.5

Shareen Batatawala
+91- 22- 3935 7800 Ext: 6849 shareen.batatawala@angelbroking.com

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

MRF | 1QSY2013 Result Update

Exhibit 1: 1QSY2013 performance

Y/E Sept. (` cr) Net Sales Net raw material (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure EBITDA EBITDA margin (%) Interest Depreciation Other Income PBT (% of Sales) Tax (% of PBT) Extraordinary income Reported PAT PATM Adjusted PAT Equity capital (cr) EPS (`)
Source: Company, Angel Research

1QSY13 3,026 2,024 66.9 134 4.4 465 15.4 2,623 403 13.3 50 89 3 267 8.8 87 32.5 180 6.0 180 4 425

1QSY12 2,875 2,110 73.4 118 4.1 390 13.6 2,618 258 9.0 32 65 4 165 5.7 52 31.5 113 3.9 113 4 266

yoy chg (%) 5.2 (4.1) 13.9 19.0 0.2 56.5 437bp

4QSY12 2,994 2,053 68.6 133 4.4 458 15.3 2,643 350 11.7 45 87 19

qoq chg (%) 1.1 (1.4) 1.3 1.5 (0.8) 15.0 161bp

SY12 11,870 8,353 70.4 514 4.3 1,743 14.7 10,609 1,261 10.6 159 301 32

SY11 9,743 7,107 72.9 447 4.6 1,385 14.2 8,938 805 8.3 93 248 25 489 5.0 274 56.0 404.2 619 6.4 343 4 1,461

% chg 21.8 17.5 15.0 25.9 18.7 56.7 29bp

61.9 66.9

238 7.9 73 30.8 -

12.2 18.6

833 7.0 261 31.3 -

70.2 (4.9)

59.6 59.6 59.6

165 5.5 165 4 389

9.4 9.4 9.4

572 4.8 572 4 1,350

(7.6) 67.0 (7.6)

Exhibit 2: Actual vs. Angel Estimate (1QSY2013)

(` cr) Total Income EBIDTA EBIDTA margin (%) Adjusted PAT
Source: Company, Angel Research

Actual 3,026 403 13.3 180

Estimate 3,127 319 10.2 134

Variation (%) (3.2) 26.3 312bp 34.4

Revenue subdued, EBITDA margin and PAT surprise positively

For 1QSY2013, MRF reported a marginally lower-than-expected top-line of `3,026cr on account of slowdown in the auto industry. Decline in rubber prices led to 437bp yoy expansion in EBITDA margin to 13.3%, above our estimate of 10.2%. This increase was partially offset by higher depreciation and interest cost. Depreciation for the quarter witnessed a substantial jump yoy to `89cr due to commencement of a new plant in Tamil Nadu, while interest cost increased to `50cr on account of rise in loan amount. Consequently, the net profit for the quarter surged 59.6% yoy to `180cr as compared to `113cr in 1QSY2012 and 34.4% higher than our estimate of `134cr.

March 4, 2013

MRF | 1QSY2013 Result Update

Investment rationale
Declining rubber prices to drive short term profits
Rubber prices have been volatile during the last two years. Since rubber constitutes a major proportion to the raw material cost, volatility in its price has impacted the profitability of tyre companies. Rubber prices have currently declined due to a number of reasons. Slowdown in production in the automobile segment has been one of the major reasons for fall in demand of rubber. Moreover, import of natural rubber through duty free channels accounted for 46% of the total during Apr- Dec 2012 due of favorable international price. This led to piling up of inventory at projected levels of 2,90,000 tonnes, thus resulting in a decline in domestic rubber price. According to an International Rubber Study Group (IRSG) report, global production in the April-December 2012 period rose 3.2%, while consumption fell by 1.1%. IRSG estimates 2012 global production and consumption of natural rubber at 11.41 and 10.95 million tonnes, respectively, with a surplus of 4,60,000 tonnes. While in 2013, production and consumption is expected to be at 11.77 and 11.59 million tonnes, respectively, with a surplus of 1,79,000 tonnes. With onset of dry season in Thailand (world's biggest rubber producer) in which the rubber supply reduces by 50% is expected to result in increase in price. However, this rise would be offset by the Thai Govt.s decision to discontinue its rubber buying scheme; thus leading to relatively stable international rubber price. In addition, Thailand decision to join key exporters- Indonesia and Malaysia, to restrict shipments led to increase in international rubber prices in past three months and consequently would lower rubber imports. However, considering the overall bearish trend in the global market, prices are expected to remain relatively low for next one or two quarters.

Exhibit 3: Rubber price trend

220 210 200 190 180 170 160 150 140

(`/kg)

Feb-12

Oct-12

May-12

Nov-12

Dec-12

Mar-12

Aug-12

Feb-13

Sep-12

Jan-12

Jun-12

Apr-12

Jan-13

Jul-12

International Price
Source: Rubber Board, Angel Research

Domestic Price

Tyre companies have taken substantial price hikes during FY2012. The decline in the price of rubber will further benefit them in the short term. However, in the long term we expect the EBITDA margin to remain unchanged owing to pass on of price correction in the OEM segment.

March 4, 2013

Mar-13

MRF | 1QSY2013 Result Update

Radialization to drive profitability in the long term

Radialization in the commercial tyre segment is 1518%, which is much lower as compared to 98% in the passenger vehicle tyre segment. Moreover, radial tyres are priced 20-25% higher than cross-ply tyres. Hence, most tyre companies are expanding their capacities with radial tyres. Capital expenditure incurred on this expansion is expected to reduce profitability in the short term since manufacturing of radial tyres is more capital intensive (3.2x) than cross-ply tyres. The companies will have to earn a higher EBITDA margin on radial tyres to maintain a similar return on capital employed (RoCE) as that with cross ply tyres.

Financials
Exhibit 4: Key assumptions
SY2013E Change in tyre realization (%) Change in tyre volume sales (%) Change in rubber price (%)
Source: Angel Research

SY2014E 3.0 7.0 3.0

1.0 (8.0)

Exhibit 5: Change in estimates

Y/E Sept (` cr) Net sales (` cr) OPM (%) EPS (`) Earlier estimates SY2013E 13,030 10.3 1,418 SY2014E 14,405 10.6 1,677 Revised estimates SY2013E 12,422 12.9 1,661 SY2014E 13,767 12.8 1,791 % chg SY2013E (4.7) 264bp 17.1 SY2014E (4.4) 222bp 6.8

Source: Angel Research

March 4, 2013

MRF | 1QSY2013 Result Update

Weakness in auto industry to result in subdued revenue growth

MRF is expected to post a 7.7% CAGR in revenue from `11,870cr in SY2012 to `13,767cr over SY2012-14, owing to current weakness in auto industry, which in turn will impact the tyre industry. Moreover, with decline in rubber prices, OEM segment would be required to pass on the price correction which may result in subdued revenue growth. In the replacement segment, price correction is not passed unless there is a severe reduction in demand. Since, we do not expect a 15-20% decline in replacement demand, prices of replacement tyres may not descend, thus giving support to the top- line growth in SY2014E.

Exhibit 6: Subdued revenue growth

16,000 14,000 12,000 10,000 21.8 12.3 31.6 30.7 35 30 25

(` cr)

8,000 6,000

15 10.8 10

11,870

12,422

13,767

5,664

7,453

9,743

4,000 2,000 0

4.7

5 0

SY2009

SY2010

SY2011

SY2012

SY2013E

SY2014E

Revenue (LHS)
Source: Company, Angel Research

Revenue growth (RHS)

EBITDA margin to stabilize at higher level, PAT growth to be modest

We expect MRFs EBITDA margin to expand by 229bp in SY2013 to 12.9% on the back of fall in rubber prices which constitute a major chunk of the raw material cost. However, this may subsequently result in decline in tyre prices, thus leading to a relatively stable EBITDA margin in SY2014E and consequently a net profit of 15.2% CAGR over SY2012-14 to `760cr in SY2014.

Exhibit 7: EBITDA margins to stabilize at higher levels

2,000 1,800 1,600 1,400 1,200 1,000 800 600 8.3 12.0 10.9 10.6 12.9 12.8 14 13 12 11

Exhibit 8: Net profit on an uptrend

800 700 600 500 4.4 4.6 4.8 5.7 5.5 6.0 5.5 5.0 4.5

(` cr)

(` cr)

(%)

300 200

3.5

3.5 3.0

1,261

1,605

682

809

805

1,767

249

340

343

572

704

760

400 200 0

8 7 6

100 0

2.5 2.0

SY2009

SY2010

SY2011

SY2012

SY2013E

SY2014E

SY2009

SY2010

SY2011

SY2012

SY2013E

SY2014E

EBITDA (LHS)

EBITDA margin (RHS)

PAT (LHS)

PAT margin (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

March 4, 2013

(%)

10

400

4.0

(%)

20

MRF | 1QSY2013 Result Update

Outlook and valuation

We have revised our revenue estimates marginally downwards considering a slowdown in auto industry, while earnings estimates have been revised upward due to expansion of EBITDA margin backed by falling rubber prices. At the current levels, the stock is trading at a PE of 6.5x its SY2014E earnings and at a P/BV of 1.1x for SY2014E. We maintain our Buy rating on the stock with a revised target price of `14,331, based on a target P/E of 8.0x for SY2014E.

Exhibit 9: One-year forward P/E band

21,000 18,000 15,000

(`)

12,000 9,000 6,000 3,000 0 Mar-08 Mar-09 Price Mar-10 2x 5x Mar-11 8x Mar-12 11x Mar-13

Source: Company, Angel Research

Exhibit 10: Relative valuation

Year end Apollo Tyres MRF
Source: Company

Sales (` cr) 14,503 13,767

OPM (%) 11.8 12.8

PAT (` cr) 729 760

EPS (`) 14.5 1,791.4

ROE (%) 19.4 19.4

P/E (x) 5.9 6.5

P/BV (x) 1.0 1.1

EV/EBITDA (x) 3.8 3.5

EV/Sales (x) 0.4 0.5

FY2014E SY2014E

March 4, 2013

MRF | 1QSY2013 Result Update

Risks
Volatile rubber prices: Natural rubber is the major raw material used in the manufacture of tyres. Rubber prices were at a high of `243/kg in April 2011; however, prices have now fallen to a low of `157/kg (in February 2013). Increased volatility in rubber prices would have a direct impact on the companys EBITDA margin and consequently its profit.

Exhibit 11: Rubber price trend

250 230 210 190 170 157 150 243

(`/ kg)

Dec-11

Mar-11

Mar-12

Dec-12

Source: Rubber Board

Company Background
MRF manufactures rubber products such as tyres, tubes, flaps, tread rubber and conveyor belts. The company is present across all categories of tyres, with an installed capacity of 3.2cr tyres. MRF is a market leader in the tyre industry with an ~27% market share currently. The company is also a leader in the passenger car tyre segment with a 23.9% market share and holds a third position in the MHCV segment with a 21.4% market share. MRF also exports tyres to over 65 countries in America, Europe, Middle East, Japan and the Pacific region.

March 4, 2013

Mar-13

Sep-11

Sep-12

Jun-11

Jun-12

MRF | 1QSY2013 Result Update

Profit & Loss Statement (Standalone)

Y/E Sept. (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Net Raw Materials Personnel Other Total Expenditure EBITDA % chg (% of Net Sales) Depreciation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of sales) PBT % chg Tax (% of PBT) PAT (reported) Minority interest Extraordinary (Exp)/Inc. Tax on extraordinary exp ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg 340 36.5 4.6 801 801 36.5 SY2010 8,080 628 7,453 7,453 31.6 5,023 371 1,249 6,644 809 18.5 10.9 261 548 26.5 7.4 63 42 0.6 527 32.2 181 34.3 346 7 SY2011 10,645 902 9,743 9,743 30.7 7,107 447 1,385 8,938 805 (0.5) 8.3 248 557 1.7 5.7 93 25 0.3 489 (7.1) 274 56.0 619 1 (404) 128 343 0.9 3.5 808 808 0.9 572 67.0 4.8 1,350 1,350 67.0 704 23.0 5.7 1,661 1,661 23.0 760 7.9 5.5 1,791 1,791 7.9 SY2012 13,062 1,192 11,870 11,870 21.8 8,353 514 1,743 10,609 1,261 56.7 10.6 301 960 72.3 8.1 159 32 0.3 833 70.2 261 31.3 572 SY2013E 13,696 1,274 12,422 12,422 4.7 8,408 547 1,863 10,818 1,605 27.3 12.9 388 1,216 26.7 9.8 206 25 0.2 1,036 24.3 331 32.0 704 SY2014E 15,129 1,362 13,767 13,767 10.8 9,247 620 2,134 12,001 1,767 10.1 12.8 465 1,301 7.0 9.5 195 28 0.2 1,134 9.5 374 33.0 760 -

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MRF | 1QSY2013 Result Update

Balance Sheet (Standalone)

Y/E Sept. (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves& Surplus Equity share warrants Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Other Long Term Liabilities Long Term Provisions Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Long Term Loans and adv. Other non-current assets Current Assets Cash Loans & Advances Inventory Debtors Other current assets Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 3,368 2,039 1,329 498 73 2,095 45 127 1,111 811 964 1,131 3,030 3,832 1,860 1,971 1,042 73 146 24 3,079 56 182 1,526 1,309 7 1,699 1,380 4,637 5,063 2,149 2,914 415 425 57 30 3,371 61 203 1,646 1,454 7 1,541 1,830 5,671 6,581 2,537 4,044 539 425 60 32 3,247 81 213 1,642 1,304 8 1,612 1,636 6,735 7,503 3,002 4,500 701 425 66 35 3,557 69 236 1,825 1,418 8 1,788 1,770 7,497 1,691 1,354 (15) 3,030 2,298 1,372 142 776 50 4,637 2,858 1,631 187 908 87 5,671 3,549 1,958 187 950 91 6,735 4,296 1,860 187 1,053 101 7,497 4 1,686 4 2,294 4 2,854 4 3,545 4 4,292 SY2010 SY2011 SY2012 SY2013E SY2014E

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MRF | 1QSY2013 Result Update

Cash Flow Statement (Standalone)

Y/E Sept. (` cr) Profit before tax Depreciation Change in Working Capital Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Decr)/Incr in Long term provisions (Inc.)/Dec. in Investments (Incr)/Decr In L.T loans and adv Other income Others Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances SY2010 527 261 (492) 42 (181) 157 (846) 76 42 (58) (786) 682 (25) (43) 614 (15) 60 45 SY2011 489 248 (238) 409 (274) 634 (1,008) (0) 50 (170) 25 43 (1,061) 793 (12) (342) 438 11 45 56 SY2012 833 301 (445) 595 (261) 1,023 (603) (352) 38 82 32 (126) (929) 392 (12) (469) (89) 5 56 61 SY2013E 1,036 388 215 (25) (331) 1,282 (1,643) 4 (4) 25 (1,618) 369 (13) 356 20 61 81 SY2014E 1,134 465 (145) (28) (374) 1,052 (1,083) 10 (10) 28 (1,056) 5 (13) (8) (12) 81 69

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MRF | 1QSY2013 Result Update

Key Ratios
Y/E Sept. Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover Inventory / Sales (days) Receivables (days) Payables (days) WC (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 0.7 1.5 8.7 0.5 1.5 6.0 0.4 0.9 6.0 0.4 0.9 5.9 0.3 0.8 6.7 2.4 43 34 47 41 2.7 49 40 54 45 2.7 49 37 54 48 2.1 48 38 54 49 2.0 46 38 54 43 21.7 27.8 22.3 14.5 18.9 17.2 18.6 23.3 22.2 19.6 23.3 22.0 18.3 21.7 19.4 7.4 0.7 3.1 14.8 4.1 0.7 22.6 5.7 0.7 2.8 11.0 4.7 0.5 14.4 8.1 0.7 2.5 13.8 7.3 0.4 16.5 9.8 0.7 2.2 14.5 7.8 0.4 17.3 9.5 0.7 2.2 13.8 6.9 0.3 16.1 801.2 801.2 1,416.1 58.3 3,987 808.4 808.4 1,392.4 29.1 5,419 1,349.9 1,349.9 2,060.1 25.0 6,740 1,661.0 1,661.0 2,576.8 30.0 8,371 1,791.4 1,791.4 2,888.5 30.0 10,133 14.4 8.2 2.9 0.5 0.8 7.6 2.0 14.3 8.3 2.1 0.3 0.6 7.6 1.3 8.6 5.6 1.7 0.3 0.5 4.8 1.1 7.0 4.5 1.4 0.3 0.5 4.0 0.9 6.5 4.0 1.1 0.3 0.5 3.5 0.8 SY2010 SY2011 SY2012 SY2013E SY2014E

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MRF | 1QSY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

MRF No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

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