Why MRF is the highest-priced stock in the market?

There are two types of people in the stock market- traders and investors. Traders buy shares for less than a year whereas, investors believe in buying shares for one to five years. Of course, traders make money faster, but the investors make more money over a long period.

For investors, their patience pays off, and they get to enjoy three times or even ten times returns. Many stocks debut at a meager price and eventually turn into multi-bagger stocks. MRF is such one stock. As of April 2021, MRF has the highest share price in the Indian Stock market. But the real question is, how did a tyre manufacturing company become the highest valued stock?

MRF is an abbreviation used for Madras Rubber Factory & is an Indian Multinational tyre manufacturing company that was founded by K. M. Mammen Mappillai in the year 1946. It focuses on the manufacturing of rubber products like tyre, tubes, threads, paints, and toys. It is the 6th largest tyre manufacturer in the world.

The company mainly produces tyres for passenger cars, two-wheelers, trucks, aeroplanes, buses, tractors, and light commercial vehicles. Apart from that, it also manufactures conveyor belts which are used in conveyor transport such as moving sidewalks or escalators, as well as on many manufacturing assembly lines.

The founder of the company, Mr K. M. Mammen Mappillai, initially started the factory in Madras (now known as Chennai) as a toy balloon manufacturing unit. Later in 1952, the company started manufacturing tread rubber. This tread rubber is used on the tyre’s circumference.

In 1960, the company was incorporated as a private enterprise, and in the same year, in partnership with Mansfield tyre and Rubber Company, they began the production of tyres. The next year, the company went public and established an office in Beirut, Lebanon, to focus on the export market.

Soon in 1967, MRF became the first Indian tyre company to export tyres to the United States.

As their partnership with Mansfield tyre and Rubber Company came to an end in 1979, the company changed its name from MRF to MRF limited.

In 1989 in collaboration with Hasbro International USA, the world’s most giant toy manufacturing company, MRF Limited launched its brand Funskool India. Under this brand name, the company launched toys and board games. Additionally, the company also started manufacturing stationery. It received a license from Disney, Warner Brothers, and to manufacture games in India.

On top of that, Funskool partnered with famous brands like Lego, Hornby, Ravensburger, Tomy Toys, LeapFrog, Siku, Jumbo, and New Bright.

It became the first Indian toy manufacturer certified by the Bureau of Indian Standards for Safety for e-toys.

Funskool not only has 18 stores across Indian but also has an international presence in countries like the United States, Bhutan, Bangladesh, Nepal, Maldives, Sri Lanka, and across the continents of Europe and Africa.

In the financial year 2018, the brand made an estimated revenue of $33 million, i.e., Rs. 235 crores.

Although the company’s IPO history is a bit blurry, in April 1993, the stock was trading for Rs. 11. With a stronghold over the Indian and International market, the company’s stock multiplied. After consolidating for a long time, between the years 2009-2019, the stock witnessed a considerable surge. According to BSE, in the years mentioned above, the stock’s value grew by 2,210%.

As of April 2021, the stock is trading at a consolidated P/E of 20.72. Even if its price is on the higher end, the stock is pretty priced since the industry’s P/E is 24.60, almost 4 points higher. Presently, the company’s market capitalization is Rs. 33,649 crores. MRF is a low debt company whose Debt-to-equity ratio is only 0.12%. As of March 2020, the ROE and ROCE of the stock was 11.64% and 12.17%, respectively. It is not an ideal stock for you if you look for a higher dividend yield because its dividend yield is only 0.13%. Although there has been a steady growth in the company’s net cash flow and operating cash flow, inefficient use of capital makes it difficult to generate profits.

In 5 years, the stock has given 120.31% returns, meaning, if one would have invested Rs. 1 lakh back in 2016, the investor would have received around Rs. 2.20 lakhs by March 2021.

MRF’s strong fundamentals have also led to an increase of Foreign Institutional investors who have increased their stake from 14.60% in September 2020 to 18.89% in March 2021.

MRF stock’s all-time high is Rs. 98,599.95, approximately Rs. 1,500 less for 1 lakh. So, what is the reason behind this? Why is it the only stock at such a high price? Why is the second-highest priced stock only half of this price?

The reason behind this is that MRF never considered splitting of stock. “What is a stock split?” you may ask. When a stock’s price rises so much that there is no new retail participation, the company considers splitting a stock. In this way, the number of shares held by the already existing investors increases whereas, the value they invested by them remains the same.

For example, if a person has five shares of Rs. 100 his total amount becomes Rs. 500. If the company announces a stock split in the ratio of 1:2, the person will now own ten shares of Rs. 50. The amount invested remains the same, i.e., Rs. 500.

Now, the stock will trade at Rs. 50 and not Rs. 100 allowing the retail investors to invest more at a reasonable price.

This doesn’t impact the company’s market capitalization, but it aims at attracting more investors.

Since MRF never split its stocks, the value of the stock increased to a record high, limiting the increase of shareholders. Some market analysts believe that the company's promoters only want serious long-term investors to buy their stock. This assures that the decision-making power is given to only a few board members.

Should you be investing now? Over the past few months, the stock’s price has increased significantly by 30%. After hitting an all-time high/52 week high of Rs. 98,575.90 in February 2021, the stock rallied downwards. As of 21st April 2021, the stock is trading below Rs. 80,000.

In the third quarter of FY20, the company reported Rs. 520.54 crores consolidated net profit and an increase in the revenue to Rs. 4,641.6 crores. Analysts believe that the demand for the products manufactured by the company is going to increase.

From Rs. 11, MRF stock almost reached up to Rs. 1 lakh. While some traders regret selling it, patient investors are still holding their shares tightly. Is patience the key?