MRF TYRES

• MRF Limited started as a balloon rubber factory in Madras (now Chennai) in 1946,

• MRF Limited is engaged in the manufacture and sale of automotive tires, tubes and flaps, among
others.

• The Company also manufactures rubber products, such as tread rubber and conveyor belt.

• It offers various categories of products, such as heavy duty trucks/bus tires, light truck tires, farm
service tires, military services tires, fork lift tires, two/three wheeler.

• It also offers paints and coats, and various services, such as Tire Tok, Tyre drome, MRF FASST
and the MRF Institute of Driver Development (MIDD).

OPERATING LEVRAGE

• Operating leverage is a financial efficiency ratio used to measure what percentage of total costs
are made up of fixed costs and variable costs in an effort to calculate how well a company uses its
fixed costs to generate profits.

• If fixed costs are higher in proportion to variable costs a company will generate a high operating
leverage ratio and the firm will generate a larger profit from each incremental sale.

• A high degree of operating leverage provides an indication that the company has a high
proportion of fixed operating costs compared to its variable operating costs. This means that it
uses more fixed assets to support its core business. It also means that the company can make
more money from each additional sale while keeping its fixed costs intact. So, the company has a
high DOL by making fewer sales with high margins

• On the other hand, a low DOL suggests that the company has a low proportion of fixed operating
costs compared to its variable operating costs. This means that it uses less fixed assets to support
its core business while sustaining a lower gross margin

OPERATING LEVRAGE ( Practical Usage Explanation: Cautions and Limitations)

• At the end of the day, operating leverage can tell managers, investors, creditors, and analysts how
risky a company may be. Although a high DOL can be beneficial to the firm, often, firms with
high DOL can be vulnerable to business cyclicality and changing macroeconomic conditions.

• When the economy is booming, a high DOL may boost a firm’s profitability. However,
companies that need to spend a lot of money on property, plant, machinery, and distribution
channels, cannot easily control consumer demand. So, in the case of an economic downturn, their
earnings may plummet because of their high fixed costs and low sales.
 MRF TYRES
Conclusion
• It is observed that for MRF Tyres DOL is decreasing trend and negative DOL. A
negative operating leverage is a situation where fixed cost has a greater portion in
the total cost structure of the company and there is decrease in sales. Such a
situation has a negative effect on the revenue of the firm so resulting in greater %
decrease in net operating income.

DOL(MRF)
0.13
Mar '21 Mar '20 Mar '19 Mar '18
-6.12
-10.13

-39.90

MRF TYRES

YEARS Mar '21 Mar '20 Mar '19 Mar '18 Mar '17
Sales Turnover 15,921.35 15,991.14 15,837.00 15,227.07 14,742.99
Total Income 15,769.22 16,296.76 16,863.07 15,028.36 13,802.91
Total Expenses 12,667.31 13,642.56 14,200.12 12,475.94 10,881.87
Operating Profit 2,894.68 2,323.70 2,245.48 2,269.94 2,586.02
PBDIT 3,101.91 2,654.20 2,662.95 2,552.42 2,921.04
PBIT 1,964.99 1,673.58 1,856.68 1,847.08 2,311.89
%Change in PBIT 17.41 -9.86 0.52 -20.11  
% Change in Sales -0.44 0.97 4.01 3.28  
Degree of Operating % Change in PBIT / % Change in Sales
Levrage (DOL)
DOL(MRF) -39.90 -10.13 0.13 -6.12  
Reported Net Profit 1,249.06 1,394.98 1,096.87 1,092.28 1,451.08
Shares in issue (lakhs) 42.41 42.41 42.41 42.41 42.41

Earning Per Share (Rs) 2,945.10 3,289.16 2,586.26 2,575.44 3,421.44

EPS
% Change in EPS -10.46 27.18 0.42 -24.73  
Degree of Financial % Change in EPS / % PBIT
Levrage (DOL)
DFL(MRF) -0.60 -2.76 0.81 1.23  
DCL 23.97 27.92 0.10 -7.53  
 MRF TYRES

FINANCIAL LEVRAGE

• The financial leverage ratio is an indicator of how much debt a company is using to finance
its assets. A high ratio means the firm is highly levered (using a large amount of debt to
finance its assets). A low ratio indicates the opposite.

• The degree of financial leverage is a financial ratio that measures the sensitivity in
fluctuations of a company’s overall profitability to the volatility of its operating income
caused by changes in its capital structure. The degree of financial leverage is one of the
methods used to quantify a company’s financial risk (the risk associated with how the
company finances its operations).

• Financial leverage is a main source of financial risk. By issuing more debt, a company
incurs the fixed costs associated with the debt (interest payments). The company’s inability
to meet the obligations may result in financial distress or even bankruptcy.

• Highly leveraged companies may face significant financial problems during a recession
because their operating income will rapidly decline and, thus, so will their overall
profitability. Note that taxes do not affect the degree of financial leverage.

• DFL is invaluable in helping a company assess the amount of debt or financial leverage it
should opt for in its capital structure.

• If operating income is relatively stable, then earnings and EPS would be stable as well, and
the company can afford to take on a significant amount of debt. However, if the company
operates in a sector where operating income is quite volatile, it may be prudent to
limit debt to easily manageable levels.

• Also, a high degree of leverage may translate to a more volatile stock price because of the
higher volatility of the company’s earnings. Increased stock price volatility means the
company is forced to record a higher expense for outstanding stock options, which
represents a higher cost of debt.

Therefore, companies with extremely volatile operating incomes should not take on
substantial leverage because there is a high probability of financial distress for the business.
 MRF TYRES
CONCLUSION

It is observed that for MRF Tyres DFL is decreasing trend. It indicates the decrease in debt of the
company. This ratio indicates that the higher the degree of financial leverage, the more volatile
earnings will be. Since interest is usually a fixed expense, leverage magnifies returns and EPS. This
is good when operating income is rising, but it can be a problem when operating income is under
pressure

DFL(MRF)
1.23
0.81

Mar '21 Mar '20 Mar '19 Mar '18

-0.60

-2.76

MRF TYRES
YEARS Mar '21 Mar '20 Mar '19 Mar '18 Mar '17
Sales Turnover 15,921.35 15,991.14 15,837.00 15,227.07 14,742.99
Total Income 15,769.22 16,296.76 16,863.07 15,028.36 13,802.91
Total Expenses 12,667.31 13,642.56 14,200.12 12,475.94 10,881.87
Operating Profit 2,894.68 2,323.70 2,245.48 2,269.94 2,586.02
PBDIT 3,101.91 2,654.20 2,662.95 2,552.42 2,921.04
PBIT 1,964.99 1,673.58 1,856.68 1,847.08 2,311.89
%Change in PBIT 17.41 -9.86 0.52 -20.11  
% Change in Sales -0.44 0.97 4.01 3.28  
Degree of Operating Levrage
% Change in PBIT / % Change in Sales
(DOL)
DOL(MRF) -39.90 -10.13 0.13 -6.12  
Reported Net Profit 1,249.06 1,394.98 1,096.87 1,092.28 1,451.08
Shares in issue (lakhs) 42.41 42.41 42.41 42.41 42.41

Earning Per Share (Rs) EPS 2,945.10 3,289.16 2,586.26 2,575.44 3,421.44
% Change in EPS -10.46 27.18 0.42 -24.73  
Degree of Financial Levrage
% Change in EPS / % PBIT
(DOL)
DFL(MRF) -0.60 -2.76 0.81 1.23  
DCL 23.97 27.92 0.10 -7.53  

PEER COMPARISON
 MRF TYRES
• JK Tyres have high DOL

• BK Tyres Have High DFL

• Apollo Tyres Have Negative DOL and DFL

DFL
0.80 0.61
0.60 0.38
0.40 0.34
0.22
0.20
0.00
-0.20 MRF CEAT JK BK APPOLO
-0.40
-0.60
-0.80 -0.6

DOL
100.00 83.87
80.00
60.00
40.00
20.00 13.43
2.54 1.78
0.00
MRF CEAT JK BK APPOLO
-20.00
-40.00
-39.9
-60.00

LEVRAGE MRF CEAT JK BK APPOLO

DOL -39.90 2.54 83.87 1.78 13.43

DFL -0.60 0.38 0.22 0.61 0.34

DCL 23.97 3.5 18.52 1.09 4.61

MRF DIVIDENT POLICY

 MRF TYRES
• For the year ending March 2021 MRF has declared an equity dividend of 1500.00%
amounting to Rs 150 per share.
• The company declared a dividend of Rs 94 as well as a special dividend of Rs 50 per
share to mark the 75th anniversary of the establishment of the Madras Rubber
Factory in 2021. During the year two interim dividends of Rs 3 each were declared,
bringing the total dividend to Rs 150 per share for FY21.
• At the current share price of Rs 80095.35 this results in a dividend yield of 0.19%.
• The company has a good dividend track report and has consistently declared
dividends for the last 5 years.
• MRF has not split the face value of the share so far.
• The last bonus that MRF had announced was in 1975 in the ratio of 1:2.

Why do companies split a share?

• Stock splits help the companies to make the share price affordable for retail investors. For
example,  if a company is trading at a share price of Rs 3000 and it offers a stock split of
10:1, then it means that its price will drop to Rs 300 per share after the split. Now, which
Rs 300 price is more affordable to the public.
• The stock split makes the stock more liquid and hence increases its trading volume. This
is because the total number of outstanding shares increases after the stock split.
• Splitting a stock does not affect the financials of a company. Although the outstanding
shares of the company will increase after the split, however, the face value will decrease
in the same proportion. Overall, stock splits don’t affect the financials and hence the
companies are willing to go for it.
• As small and retail investors are more interested in affordable shares, stock splits help in
increasing their participation and overall helps the companies to build a broadly
diversified investor base for their stock.

Why MRF Don’t Split the Stock?

• IF Already doing good No need to Split-MRF was trading at a share price of Rs 6,358
in March 2010. Currently, as of March 2021, it is trading at Rs 84,470. The people might
have argued that the stock was expensive and not affordable even in 2010. However, it
has done pretty well in the last 11 years and given a return of over 1,100% to its
shareholders.
• Keeps Speculators away- a high share price helps to keep the traders and speculators
away from the stock. Only serious investors are the ones who can find these companies
appealing and might want to enter these stocks.
• Limited Public Shareholding-The high share price of a company results in limited
public shareholding. Retail investors and traders can’t easily enter such stocks.
Sometimes, this also helps in decreasing the volatility in the share price. Moreover, by
allowing the high share price, the promoters tend to keep the voting right in their hands.
This helps in maintaining a static voting right which allows the owners to make key
decisions without much interference
• A high share price can be sometimes regarded as a symbol of status. Splitting that share
means losing this exclusiveness.

DIVIDENT PEER COMPARE

 MRF TYRES
dividend yield(%)
1.6 1.54
1.35 1.42
1.2
0.8 0.73

0.4 0.19
0
MRF CEAT JK BK APPOLO

Dividend (Rs)
160 150
140
120
100
80
60
40
18 17
20 2 3.5
0
MRF CEAT JK BK APPOLO

DIVIDENT(MARCH 21) MRF CEAT JK BK APPOLO

Dividend (%) 1500 180 100 850 350
Dividend (Rs) 150 18 2 17 3.5
dividend yield(%) 0.19 1.35 1.42 0.73 1.54