MRF TYRES SHARE PRICE: TALK OF THE TOWN

Let us take you back to the 60s. In 1968, only a handful of people invested in the equity market. Some of you may know the story of Mr. Sharad Banavadikar, who is one of the oldest investors of MRF. Some years ago, he did many interviews and informed us that he bought 120 shares of MRF for Rs 17.5 per share on his father's advice from his first salary in 1968. 

In the interview (2015), he said that his initial investment of a few hundred turned into Rs 40 lakh. There is no public information available on whether he still holds the same, but if he does, his 120 shares would be worth a whopping Rs 1.2 crore.

It is not an ordinary story for two reasons. First, buying MRF shares back then was a big deal - it was a small company. Second, holding the shares since then is commendable. 

You may be interested to know more about the company, right? Let us discuss the past, present, and future of the company.

MRF History

We hope you know the business of MRF - it has nothing to do with cricket. MRF Tyres is an Indian multinational company that specializes in manufacturing tires. Here is an overview of the history of MRF Tyres:

• MRF was founded in 1946 by K. M. Mammen Mappillai as a small toy balloon manufacturing unit in Chennai, India. The company's name initially stood for "Madras Rubber Factory."
• In the early years, MRF began venturing into various rubber-based products, including tread rubber, conveyor belts, and industrial rubber products. However, the focus eventually shifted to manufacturing tyres later.
• By the 1960s, MRF had established itself as a leading tyre manufacturer in India. The company started producing tyres for various vehicles, including cars, motorcycles, trucks, buses, and airplanes.
• In 1989, MRF became the first Indian tyre company to export tyres to the United States. It marked a significant milestone for the company and highlighted its global aspirations.
• MRF has been actively involved in motorsports, especially in the car and motorcycle racing fields. The company has sponsored and supported numerous racing events and teams - in India and internationally. MRF tyres have been used in various motorsport championships, including Formula 3, rallying, and motorcycle racing.

Reasons MRF shares are touching an all-time high

MRF Tyres' share price has created a new club in India by entering a six-digit figure. Let us look at the reasons for the same:

Growth: In FY16, the company had revenue of roughly Rs 20,000. The profit reported by the company was around Rs 2,500 crore, and operating margins of 22% - the highest it has reported since inception. It was on the back of low crude oil prices. Also, auto companies were doing well back then. In FY23, the topline increased to Rs 23,261 crore. The company has grown at a decent pace.

However, the profitability reported was Rs 769 crore in FY23. It is mainly due to margin pressure.

Lower crude oil price: Despite the fall in profit, why is the share price rising? To answer this, we need to understand the raw materials used by tyre companies. Crude oil is a significant raw material in synthetic rubber production - used to manufacture tyres. When crude oil prices rise, it can lead to an increase in the cost of raw materials for tyre companies. Higher raw material costs can squeeze profit margins, especially if tyre companies cannot pass the increased costs to consumers through higher prices. 

Recently, the crude oil price has come down - currently trading at around $72 per barrel. The crude oil price is likely to go down further or at least remain at these low levels. Therefore, the margins of MRF are expected to improve in the coming quarters. The market is factoring in that. Hence, the share price rose.

Market leader: The company enjoys a large percentage share of the tyre market in India. The market share has been around 25% for the past few years. In the replacement category, the market share has been approximately 70%, a key factor in its growth story. The company has been able to maintain leadership in the replacement category.

Should you buy MRF share?

Before investing in any stock, the first thing you need to look at is its valuation. The MRF share price is not expensive because it is trading over Rs 1 lakh - the valuation depends on market capitalization, price-to-earnings (P/E) ratio, price-to-book value (P/B) ratio, and other similar parameters. 

We will try to understand the valuation by looking at the PE ratio, which indicates its expected growth or lack thereof. The PE ratio (15 June) is around 52 for MRF, which makes it expensive. It is higher than the average PE of the last five years. Also, it is trading at a premium compared to its peers.

Since the company has never issued bonus shares or split stocks, the share price touched the 6-digit mark. It makes it really expensive for most investors and out of their reach for many. Let us understand how. If you have an equity portfolio of Rs 4 lakh, you should not buy MRF shares, as even with a purchase of 1 share, MRF will make up 20% of your total portfolio. Ideally, investors should not have more than a 10% allocation to a single company.

Another factor to consider is liquidity - MRF shares trade at a low volume, and selling them can be a problem on rainy days.

The future: MRF share price

The MRF topline has remained largely intact compared to peers. Based on this, the company is expected to continue to do well - report good quarterly numbers. Also, with lower crude oil prices, the margins are expected to improve further. With the 50% rally in the last year, margin improvement is factored in, and therefore, further upside is questionable given the current premium valuation.