The over 5% decline in shares of Apollo Tyres and JK Tyre and Industries perhaps is a sign of investor nervousness. Photo: Mint
MRF's net profit, which analysts had expected to be little changed from the year-ago level, dropped by about 19% to Rs.170.8 crore. This was in spite of the 13% rise in net revenue to Rs.3,298.9 crore. One key reason for the net profit decline is the 19% rise in interest charges and 18% jump in depreciation because of capital expenses.
What's puzzling though is the drop in operating performance as well. March quarter's operating profit contracted by 7.2%. Operating margin narrowed by 280 basis points compared with the year-ago period. This is despite a 23% drop in rubber prices and no significant price cuts in the retail replacement market.
Dealers say that sales were damp during the March quarter, especially in the passenger car segment where MRF is a significant player. Slowing vehicle sales in the last 12-18 months has trickled down into weakness in the replacement market sales growth rates. Evidently, the expansion in costs, including staff costs and other expenses, at a time when sales volumes are not robust translated into poor operating leverage pulling down profitability. The company did not get any relief in costs even when compared with the December quarter.
On a positive note, however, dealers talk of a pick-up in replacement market sales in the last 30-45 days. There is some optimism that vehicle sales would also get better from the second half of fiscal 2015. But tyre sector investors do not seem to be buying that story.
In any case, tyre stocks have had a good run-up in the last three years and some analysts say that a correction is due. A pickup in demand while rubber prices still remain soft is key to the sustainability of this rally.
via Business - Google News http://ift.tt/1iGhkE1
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