Though the company saw an 80.5% jump in profit the previous year and a 41.4% rise the year before that, the recent annual results are an example of the pressure tire companies are currently under. In the latest quarter to September, MRF’s operating profit fell by 75.8% and operating profit margin stood at a mere 2.5%. A few tire manufacturers even slipped into the red last quarter.
The drop in profit can be blamed on high raw material costs. In fact, tiremakers may not see the benefits of recent lower raw material costs until March 2009.
Sales to OEMs have been slow for some time now, but buoyant replacement market sales have kept volumes intact. According to the analyst, replacement sales have begun slowing down in line with the slowdown in economic activity in the past month or so.
All this seems to be reflected in MRF’s share price, which has corrected by 74% from its 52-week high. The stock now trades at less than 6 times trailing earnings, which better reflects the commodity nature of the business. At its peak, the stock had a valuation of over 20 times past earnings, when the markets were optimistic about pricing power and dismissive of competitive pressures. (Tire Review/Akron)