MRF continued its journey north on Wednesday, with the stock rallying over 7% in intra-day deals to hit a new high of Rs 50,000 on the Bombay Stock Exchange (BSE) in intra-day deals. It finally ended the day a tad lower at Rs 49,734 levels, up 6.7% or Rs 3,135 levels. MRF is now the most expensive stock in price terms on the BSE.
On the National Stock Exchange (NSE), MRF hit an intra-day high of Rs 50,190 in intra-day trade before finally settling at Rs 49,955 levels.
MRF has surged nearly 60% from its 52-week low of Rs 30,464 hit on June 24 in intra-day trade. The up move comes on the back of expectations of a lower nature rubber prices that could improve the profit margin of tyre companies, as it accounts nearly 40% of the input cost.
“Once again MRF has breached our revised target price. Normally, we would have closed the call as it has risen 32% from its recent bottom. However, we are afraid to give ‘SELL’ call as this tyre leader still trading around only 12x price-to-earnings (PE) on current year earning, and its floating stock is too low as its paid up capital itself is only around 42.41 lakh shares,” said G. Chokkalingam, founder & managing director, Equinomics Research & Advisory.
Given the run-up and the fact that the counter is the most expensive in price terms on the BSE, analysts now remain cautious on the road ahead for the counter. However, they do expect more headroom in the months ahead, but suggest investors with an appetite for risk only invest in this scrip at the current levels.
“Depending upon the risk profiles, maybe the investors, who like short-term gains, can take out profits in small proportion. However, considering the valuation and possibility of anti-dumping duty on imported tyres, we suggest the investors to hold the stock with long-term investment perspective with a long-term target price of around Rs 65,000 in the next two - three years,” Chokkalingam adds.
Going ahead, analysts expect the natural rubber prices to remain soft, which in turn, will help tyre manufacturers improve margins.
“Raw material accounts for 65% – 70% of the production cost (around 55% - 60% of revenues) for tyre manufacturers, thus making this industry raw-material intensive and sensitive to movements in prices of the key raw material, natural rubber (NR). Globally weak raw material prices have aided tyre industry margins. We expect the softness in raw material prices to continue over the next three years,” says Nishant Vass, an analyst tracking the sector at ICICI Securities in a September 27 co-authored report with Jeetendra Khatri.