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:
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.
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
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.
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.
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
Sector Auto Tyres Face Value 10.00 52 wk. High 8040.00 52 wk Low 4126 BSE Code 500290
Moving Days BSE NSE 30 7699.81 7712.13 50 7550.59 7561.96 150 6819.38 6843.95 200 6587.57 6617.71
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
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.
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