ICRA has upgraded the long term rating outstanding on the Rs. 500.0 Crore Non-Convertible Debenture (NCD) and Rs. 100.0 crore proposed NCD programme of MRF Limited (“MRF”/ “the company”)‡ from [ICRA]AA+ (pronounced ICRA double A plus) to [ICRA]AAA (pronounced ICRA triple A). The outlook on the rating is stable.
The upgrade in the rating reflects the strong business profile of MRF and sustained improvement in the company’s financial performance over the years, driven by robust growth in earnings and cash flows. Amidst heightened competition and large supply additions by key industry players, MRF’s ability to sustain the market leadership position in the Indian tyre industry buttressed by a well-balanced product mix and diversified segmental mix underpins the rating. Favourable skew towards replacements (72% of revenues), presence across all product segments, wide distribution network and pricing power on the back of strong brand equity ensures stability to MRF’s business profile going forward.
MRF’s financial risk profile is strong with a sizeable networth of Rs. 68.6 billion, cash and liquid investments of Rs. 29.0 billion and comfortable capitalization and coverage indicators as on March 31,
2016. Over the years, the accruals were largely reinvested in the business towards capacity expansion and brand promotion purposes. Steady fall in raw material prices in the last two years coupled with operational synergies arising from cost control measures, near-full utilization of capacities and better absorption of fixed costs supported MRF’s profitability indicators. The consolidated operating and net margins stood at 22.0% and 11.5% for the 18 month period ending March 2016 against 15.1% and
6.8% respectively reported during the period, September 2013 to October 2014. MRF has been investing steadily towards capacity additions in the last few years with a capital expenditure (capex) of over Rs. 53.4 billion during the period, October 2010 to March 2016. With only portion of the capex being debt funded and further supported by strong cash accruals, MRF’s capitalisation indicators are comfortable with a net gearing of 0.11x. On the coverage front, the interest coverage ratio and net debt to OPBDITA stood satisfactory at 12.85x and 0.16x respectively as on March 31, 2016. Over the medium term, MRF is estimated to spend ~Rs.10.0-12.0 billion on an annual basis towards ramping up of its capacities.
ICRA expects the domestic tyre demand to remain favourable over the near to medium term on the back of revival in OE demand with recovery in economic activities in the country, pickup in rural demand with expectancy of a favourable monsoons and higher replacement sales with growing fleet on ground and higher miles driven. Given its market leadership position, diversified presence across product categories and large capacities getting added in the recent years, MRF is well positioned to meet the expected rise in tyre demand and sustain its market share. While MRF remains exposed to the challenges of cyclicality in auto and tyre demand and also pricing pressures in the industry due to large supply additions and heightened competition, the company’s strong financial profile insulates the impact to a large extent. However the profit margins remain susceptible to the vagaries of commodity price cycles.
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