MRF was the biggest loser on the BSE yesterday, ending the day yesterday down over 7%. And this was on account of its poor performance for its second quarter ended 31^st March 2014 (the company ends its year on 30^th Sept).  The company, which is like the bellwether for the tyre sector, posted a 19% (YoY) drop in its Q2 net profit at Rs.171 crore though net sales were up 13% at Rs.3297 crore. Two reasons for this drop – firstly the huge interest burden of Rs.63 crore and then the 17% jump in total operating expenses. Its raw material cost, which is mainly rubber, despite a 5% drop in the quarter, showed a 19% rise. Other expenses like employee costs, depreciation and other expenses all surged.

The fall in rubber prices has not helped shore up its margins, though there have been no price cuts. This is because demand from OEMs remained muted due to lower offtake of vehicles. Yet the rise in sales is better than the single digit growth seen in Q3. Replacement markets remain its biggest driver, contributing almost 75% to the topline. 50% of its sales come from Commercial Vehicle tyres. Competition is also heating up with Michelin setting up a huge factory in Tamil Nadu itself. It expects demand to pick up post elections but it could be more only after interest rates start coming down.

The company’s interest coverage ratio stands at 7.22 times at end of 6M ended 31^st March 2014, which is lower than last 6M’s 8.86 times. Interest coverage ratio indicates the comfort with which the company may be able to service the finance cost on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.  Here for MRF it has been well above 7 times and that means, it continues to remain in a comfortable position to service its debts.

Its equity remains tiny at Rs.4.24 and reserves is at rs.3641 crore. Cash is at Rs.551 crore, up from Rs.331 crore last year. The company remains a huge bonus candidate and it is this expectation which keeps its share price so high irrespective of the performance. The Rs.10 face value stock is quoted at Rs.21,000 levels, with a 52-week high at Rs.24,500.