Why are MRF Stocks So Expensive?

I might seem out of my mind to say that MRF is not the most expensive stock when everyone is going crazy over its stock price crossing the one lakh mark, but I will prove that MRF is not the most expensive stock. You must have heard about Berkshire Hathaway, an American multinational conglomerate headed by Mr. Warren Buffet. But do you know the share price of its stock? It is more than ₹4 crore🤯($ 5,10,000 dollars as of 15th June 2023). Yes, that's some expensive stuff!
In India as well, we have expensive stocks such as Page Industries with a price of about ₹38,000, Honeywell Automation Ltd. with a share price of around ₹40,000, Shree Cement Ltd with a share price of around ₹20,000, and so many more.
We will see what makes the stock price so high. So, let’s get started.

Madras Rubber Factory (MRF): Company Overview

We all know that MRF is a major tyre manufacturing company. But they ventured into different businesses such as sports, toy manufacturing & paints. Their products include:

• Tyres
• Conveyor Belts
• Sports goods
• Funskool (toys)
• Paints & Coats

The company was incorporated in the year 1946 in Tamil Nadu and is the largest manufacturer of tyres in India. To understand the company better, take a look at the history of MRF below.

The past 5-year stock price CAGR of MRF Ltd. is 6%. In Spite of poor revenue, profit growth, and negative cash flow from operations, how and why is the stock price so much? Let’s find out!

History of MRF

How MRF came into existence is no less than a dramatic movie. The company was started by KM Mammen Mappillai as a toy balloon unit.

It was only in the year 1952 when MRF ventured into the manufacturing of tread rubber, and just in a few years of time, it became the market leader with a 50% market share. But they commercially entered into the tyre-making business in the year 1961 when they collaborated with Mansfield Tire & Rubber company based in the USA and within a few years, the company set up its overseas office in Beirut, and with this, MRF became the first company in India to export tyres. And by this time, the company had opened its various plants in different parts of India.

By the 1970s, MRF became the first company to manufacture and market Nylon passenger car tyres. Moving forward, the company launched tyres for two-wheeler vehicles. The 1980s were marked as the years of sports for MRF, where they set up the MRF pace foundation. In the same decade, MRF collaborated with Hasbro International USA, which is a toymaker company, they did so to venture into the toy-making business, and this collaboration gave birth to Funskool India.

We all know the passion MRF has for sports, and in the year 1989, the company sponsored the MRF World Series cricket tournament for the Jawaharlal Nehru Trophy. And just next year to this, MRF brought the 6th world cup Boxing Championship to Mumbai. And in the late ’90s, MRF ventured into F3 cars for the very first time. In the same decade, the first T&S store in the country was inaugurated. Fast forward to the year 2007, MRF made a turnover of a billion dollars. And in the year 2015, MRF broke into Forbes India’s Super 50 list of the best companies in India. Well, there is a lot more, and the list is never-ending.

Moving forward, take a look at the business model of MRF.

MRF: SWOT Analysis

Let’s take a look at the SWOT analysis of MRF Ltd.

Strength

Brand Value:
MRF tyres are known for their durability, top-notch quality and performance, which has created a good reputation for the brand.

Marketing Strategy:
The marketing strategy of MRF is unique. For the longest time, a lot of people were under the impression that MRF manufactures only cricket bats and sports items and that it's a sports company altogether. That’s the kind of impact they created with the aggressive sports marketing they have been doing. The marketing strategy of MRF thus stands out.

Competitive advantage:
MRF definitely has the edge over the market and gets the upper hand due to the brand reputation they have.
Other than these, the confidence and trust people have in their products, strong financial position, variety of products, PAN India presence, a 33% increase in exports, and a very low Debt to Equity ratio of 0.07 is a few strong points that make the business a cut above.

Weakness

Poor performance:
As discussed above, the company has shown poor performance, and the profit and revenue growth has also remained poor. In this year, the promoters have pledged 0.09% of their shares. Return on Equity has been low for the past three years.

Lack of innovation:
The company is struggling to innovate in terms of its products and services as well as its marketing. Even though their marketing tactics are a strength but it has been the same for years and proves they haven’t shown any kind of innovation or creativity.

Opportunities

Automobile industry:
The auto industry is taking major twists and turns, and innovation is in full swing. The Indian passenger automobile market had a value of US $32.70 billion in 2021, and it is projected to increase at a CAGR of over 9% from 2022 to 2027 to reach US $54.84 billion. It comes with great growth potential.

Threats

Peer competition:
The peer companies which we have discussed below give tough competition to MRF.

Inflation and poor product availability:
The key raw material for tyres is rubber. And if that is not available or is available at an inflated price, then it can impact the margins of the company. Increase in the cost of raw materials, fuel prices, and shortage of semiconductors for vehicles can be other causes of concern.
The major competitors of MRF are Apollo Tyres, CEAT, JK Tyres, Goodyear India, Balkrishna Industries and more. The stock price of each one of them ranges between ₹200 - ₹2500.

Why is MRF’s Price Skyrocketing?

Do you see the growth chart below? As far as the share price is concerned, it has shown nothing but growth in the long run. It is even said that the listing price of MRF was ₹11. And as depicted in the chart, the share price was trading at ₹1900 in the year 1999, and the lifetime high of MRF was ₹1,00,849.60, made on the 15th of June 2023.

So, how is it that the stock was able to reach this height and if the stock price is very high, then is it a good stock?

Well, the answer to the second question is… No, one can not judge the good or bad fundamentals of a stock solely based on its price.
First, we will see the reason for such a high price, and then I will tell you how this stock is not the most expensive one.

Let’s understand it this way, some companies divide themselves into various shares. To understand that, first, you have to understand what corporate actions are. A corporate action is an event carried out by public companies that brings material changes to the company. There are various kinds of corporate actions, such as dividends, rights issues, mergers & acquisitions, bonuses, stock splits and more. In corporate actions such as stock splits, a company’s value is broken down even more to make them easily available at a lower price and to increase the liquidity in the market. These kinds of corporate actions are taken by companies. MRF is one such company that does not perform any kind of corporate actions such as stock split that will dilute the company's shares. This is the one significant reason why MRF's share price is trading at a value this high.

Check out the possible reasons why a company does not consider stock split here.

Now, coming to the most awaited part. The reason for MRF not being the most expensive stock is that stocks cannot be valued simply based on their price. Market Capitalisation, Price to Earning ratio, Company’s assets, Price to Book value ratio etc., contribute to the estimation of the Fair Value. Having a very high price does not particularly mean that the stock is very good.

Here are a few factors influencing the valuation:

• Financial Results
• Industry Outlook and Developments
• Competitive Environment
• Factors Associated with Macroeconomics
• Corporate governance and management

Take a look at the table below and see how the Profit has gone down compared to the previous year. (Figures in ₹ crore)

A few other parameters are stated below for the past three years:

• Low return on equity for the company, which was at 6.64%.
• The company has displayed an inadequate profit growth of -16.12% and sales growth of 6.24%.
• The company has a ₹ -657.37 crore negative cash flow from operations.

In terms of Price to Earning ratio and Price to Book value MRF is not the most expensive stock. MRF has a PE of 55.26, and the sector PE is at 59.92. Whereas there is a company here in India, DSJ Keep Learning Ltd., that offers educational services and has a market capitalisation of ₹29.5 crores and a PE ratio of 492.

I hope now you understand how other factors also play an important role in the valuation, and one should not solely focus on price as an indicator of how well a company is doing.

The Bottom Line

So, that was the story of MRF. We hope that you understood the concept that we tried to explain today. We love it when you communicate with us. Do write in the comment section if you liked the blog.. :) Until then, Happy Investing.

*Disclaimer: The stock(s) discussed above aren't recommendations from Insider; they are only picked to make you understand the concept.