Shares of India’s largest tyre manufacturer–Madras Rubber Factory (MRF)–scaled 52-week high after the tyre maker reported a decent set of June quarter numbers on August 3, yet Kotak Institutional Equities and Motilal Oswal Financial Services have maintained their ‘sell’ rating on the stock.

The scrip hit 52-week high at Rs 1,11,939.95 on the BSE. It has rallied 26 percent YTD. On August 4, the stock settled 4.1 percent higher at Rs 1,11,264.65 on the BSE.

The stock is trading at expensive valuations of 23 times FY2025 consolidated Earnings Per Share, said Kotak Institutional Equities. Though, the brokerage firm has raised its fair value on the stock to Rs 77,250 from Rs 66,000.

In addition to the rich stock valuation, the brokerage firm’s ‘sell’ recommendation is influenced by a subdued replacement demand trend and indications of margins peaking out.

Read more | MRF at Rs 1 lakh: Is it an ‘expensive’ stock?

Kotak Institutional Equities is of the view that all the commodity tailwinds have already been realised during the quarter and it now expects margin to moderate with recent uptick in raw material prices.

“Further, muted demand trends in the replacement segment and moderation in growth of OEM segment will weigh on growth trajectory and put pressure on profitability as competitive intensity may increase,” the brokerage firm said.

Margin sustenance – a challenge

Kotak Institutional Equities sees maintaining current margins to be a challenging task considering a significant 14-15 percent rise in crude oil basket prices in the past month and a 4-6 percent increase in the prices of international and domestic rubber QoQ in April-June.

Read more | India’s first 6-digit stock: MRF share price crosses Rs 1 lakh

Overall, it expects operating margin to peak out during the quarter, and moderate to 16 percent in Q4 of FY24 and 15 percent over FY2025-26.

Even Motilal Oswal Financial Services believes margin to moderate in the coming quarters to around 16-16.5 percent. The brokerage firm has also maintained its ‘sell’ rating with a target price of Rs 94,500.

Earnings show

Consolidated net sales rose 13 percent YoY to Rs 6,440.29 crore in the quarter ended June 2023, whereas net profit jumped 376 percent to Rs 588.75 crore.

Earnings Before Interest Tax Depreciation and Amortization (EBITDA) came in at Rs 1,204.54 crore in the quarter under review as compared with Rs 527.84 crore a year ago.

Read more | After scaling Rs 1 lakh, does the MRF stock have the muscle to climb higher?

EBITDA margin in the June quarter largely reflects softening raw material cost and price hikes. In Q1 of FY24, margin expanded to 17.5 percent from 8.7 percent a year ago.

Raw material costs slumped to Rs 3,780.67 crore in the June quarter against Rs 4,114.06 crore in the corresponding period last year.

Over the past few years, MRF’s competitive positioning within the sector has weakened, which is also being reflected in the dilution of pricing power in the Passenger Car Radial (PCR tyre) and Truck and Bus Radial (TBR tyre) segments, analysts have pointed out.

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