India’s largest tyre maker grew sales by 17% in the September quarter, but its profit fell 23%.
MRF has a demand problem most companies would envy: it has plenty of demand. Its problem is cost.
The Chennai-based tyre maker reported consolidated net profit of ₹417 crore for the September quarter, down 23% from ₹540 crore a year earlier. Profit also fell 13% from ₹479 crore in the June quarter. Yet revenue from operations rose 17% to ₹8,660 crore, from ₹7,379 crore.
The company said it saw sustained demand from both carmakers buying tyres for new vehicles and from the replacement market. India’s vehicle sales have been strong, and the festive season has kept showrooms busy.
The cost of materials rose 43% to ₹6,553 crore, from ₹4,577 crore a year earlier.
Put that against revenue, and the problem becomes clear. A year ago, raw materials consumed about 62% of MRF’s revenue. This quarter, they consumed about 76% (our calculation). For every ₹100 of tyres it sold, MRF spent about ₹14 more on raw materials than it did a year ago.
That gap is large enough to wipe out the benefit of higher sales, which is exactly what happened.
Tyres are made largely from natural rubber, synthetic rubber, carbon black and other chemicals. Several of those inputs are derived from crude oil.
The Iran war, which pushed Brent crude well above $100 a barrel for much of the year, drove up the cost of petroleum-based materials across the industry. MRF said the steep rise in raw material prices because of global uncertainty hurt profitability, and that price increases and cost-saving measures helped only partly.
What could change
There is a potential silver lining. Brent crude has fallen about 21% since the start of November, to around $92 a barrel. If prices stay lower, petroleum-based inputs should become cheaper over the coming months.
There is a lag, though. Tyre makers typically hold several months of raw material inventory, so lower oil prices take time to show up in costs. The benefit is more likely to appear in the March quarter than the December quarter. If US-Iran talks collapse and oil climbs again, that relief could disappear.
The other lever is pricing. MRF has been raising prices, but the replacement market is competitive, and carmakers negotiate hard on tyre prices. Pushing through further increases without losing volume is difficult.
MRF’s board declared an interim dividend of ₹3 per share, with a record date of 17 November.
For investors in tyre stocks, the lesson from MRF’s quarter applies across the sector: demand is strong, but profits depend on what happens to oil. Watch raw material costs as a share of revenue in the coming quarters. If it starts falling back from 76% towards the 60s, margins and profits should recover quickly.
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