As the stock reached a peak of ₹100,300 but closed at ₹99,950.65 on the BSE with a 1% increase, market analysts were cautious about the potential of MRF stock for public investors.
MRF Ltd., a tire manufacturer with a history spanning seven decades, achieved a significant milestone on Tuesday by becoming the first Indian stock to surpass the ₹1 lakh mark. However, it is important to note that investors may not necessarily reap substantial benefits from the company’s impressive returns.
Market analysts remained cautious in expressing their opinions regarding the potential prospects of MRF stock for public investors, as the stock reached a peak of ₹100,300 before closing with a 1% increase at ₹99,950.65 per share on the BSE.
According to Sonam Srivastava, the founder of investment advisory firm Wright Research, the price of a stock alone does not determine whether it is cheap or expensive. Srivastava believes that the value of a stock is influenced by various factors including market capitalization, price-to-earnings ratio, earnings, and growth prospects.
Research conducted by Mint highlighted that MRF’s price-to-earnings ratio, which is an important measure to evaluate the fair value of a stock, currently stands at 55 times. This ratio is considerably higher than that of its peers, indicating that MRF’s stock may be overvalued in comparison.
According to Sonam Srivastava, the founder of investment advisory firm Wright Research, the price-to-earnings (P/E) ratio is used to compare a company’s share price to its per-share earnings, indicating its expected growth potential. Higher P/E ratios suggest lower room for returns.
In comparison to its peers, MRF has a significantly higher P/E ratio. Apollo Tyres has a P/E ratio of 23.4, Ceat has a ratio of 44, JK Tyre is at 18, and Goodyear India is trading at 22.6 times P/E.
Over the past 3-5 years, MRF has performed poorly compared to both its peer group and the overall market. It yielded a return of 56.9% over the last three years, while the benchmark index gained 87%. Additionally, over the last five years, investment in MRF has only provided a 33% return, while the Sensex, a leading market index, earned 77%.
Over the past three years, MRF’s competitors have outperformed the company in terms of returns. According to Bloomberg, Apollo Tyres generated a substantial return of 284.4%, Ceat earned 122.3%, and JK Tyres provided a return of 219.68% to their shareholders.
In the five-year period as well, MRF’s performance was lackluster compared to its rivals. Apollo Tyres recorded a 48.5% return, Ceat gained 48.6%, and JK Tyres earned a return of 47.37% for investors.
Furthermore, MRF’s operating profit growth in the past five years stood at 9.8%, while its closest listed rivals experienced better growth rates. Apollo Tyres achieved a growth rate of 14.9% in operating profit, JK Tyres grew at 11.9%, and Ceat’s earnings increased by 9.6%.
A financial services firm’s head suggested that investing in MRF should be done for a period of 12-18 months, taking into account the seasonality of the auto sector or the pricing cycle of petroleum products, which affects costs for tire manufacturers.
MRF, which began as a small toy balloon manufacturer in Tiruvottiyur, Madras, in 1946, has been reluctant to distribute significant dividends to its shareholders, despite experiencing a sharp increase in stock value in recent months.
For fiscal year 2023, MRF has declared a dividend of ₹175 per share, which amounts to just 0.17% of the share’s total value. In comparison, the company provided dividends of ₹150 per share in FY2022, ₹100 in FY2021, and ₹60 in FY2020, as reported by the BSE.
Although MRF’s stock has gained 20.31% in the past three months, outperforming the Sensex’s 8.42% increase, the company has not implemented any stock splits or raised dividends or bonuses for its shareholders, even as the stock reaches high levels.
MRF’s stock took approximately 33 years to reach the ₹1 lakh mark. While the absolute value may seem high in India, the primary reason for MRF’s higher share price is that the company has never split its stock since its listing at ₹300 per share in 1991.
In terms of share price denomination, Honeywell Automation India follows MRF at ₹41,250 per share, and Page Industries Ltd, the owner of the Jockey brand, has its stock trading at ₹38,350. Other high-denomination stocks include 3M India Ltd at ₹26,800, Shree Cement Ltd at ₹26,180, and Nestle India Ltd at ₹22,500 per share.
On a global scale, some of the most expensive stocks include Berkshire Hathaway, the firm led by billionaire investor Warren Buffet, with a price denomination of $509,004. Switzerland-based Lindt & Sprungli’s shares are priced at 113,800 CHF, UK-based Next Plc follows at 6,492 GBX, Seaboard Corporation at $3,799.99, NVR Inc at $5,868.86, and Booking Holdings Inc at $2,605.34. These companies are generally larger in scale and have stronger financials compared to MRF.
A cursory look at MRF’s recent financials reveals that in FY2023, the company experienced a 26% increase in net profit, amounting to ₹816.23 crore, compared to ₹647.34 crore in FY2022. Additionally, the company’s revenue grew by 19% to ₹22,578.23 crore from ₹18,989.51 crore in FY2022.
However, upon closer analysis, it becomes evident that over the 3-5 year period, which is typically the average holding span for retail investors, MRF’s net profit has declined. The net profit dropped from ₹1,395 crore in FY2020 to ₹1,132 crore in FY2018.
While MRF’s revenue has demonstrated a compound annual growth rate (CAGR) of 12.35% over the past three years, its competitors have exhibited more agile sales growth. Apollo Tyres’ revenue increased at an annualized rate of 13.8%, CEAT’s revenue grew at 14.15%, and JK Tyres’ revenue experienced a growth rate of 16.17% over the same period.
MRF currently has a market capitalization of ₹42,390 crore, with the promoters holding 27.84% of the shares and the remaining 72.16% owned by the public.
Despite MRF’s high price-to-earnings (PE) ratio and slower growth rate, one positive aspect for retail investors could be the stock’s lower vulnerability to manipulation due to its high-value price denomination, as noted by market experts.
According to Sonam Srivastava, penny stocks, despite their low price, can be expensive due to their high risk. These stocks are often less established, prone to price manipulation, and have wider bid-ask spreads, which make them costlier to trade. In contrast, MRF’s higher share price helps mitigate some of these concerns and reduces the susceptibility to manipulation, providing a potential advantage for retail investors.
