In the previous article, we discussed the operational performance of the two largest tyre manufacturers viz. Apollo Tyres and MRF Ltd. We will now focus on how the two companies stack up on the capital efficiency front.
Like in the case of operational performance, there is very little to choose between the two in terms of efficient usage of capital as well. MRF’s consolidated ROE came in at an average of around 17% for the last five years whereas the same for Apollo Tyres stood in the region of 18%. Although it looks like Apollo Tyres has nosed slightly ahead, it is worth noting that the ROE for Apollo Tyres has come at the expense of a higher D/E ratio that stood at around 1x at the end of FY11. MRF however has seen its debt to equity ratio come down from 0.8x to 0.7x during the same period.
In the last article we saw how net profit CAGR for Apollo Tyres and MRF came in at 37% and 34% respectively for the five year period between FY06 and FY11. And while the growth has been impressive, what also matters is the resources that have been used to bring about the growth in profits. After having a look at the growth in capital employed by both the companies, it becomes clear that a slightly higher growth for Apollo Tyres is a result of a slightly higher growth in its capital employed vis-a-vis MRF.
A glance at the consolidated balance sheet of both the companies shows that while Apollo Tyres has registered a 29% CAGR in capital employed during the period, the same for MRF came in slightly lower at 24% CAGR.
Therefore, based solely on the past performance, there is very little to choose between the two companies. But have investors treated them the same way? An idea of this can be had from the movement in the share prices of these firms over the last five years and the valuation multiples that they have commanded.
Well, even here, there is very little to separate between the two we believe. Between 2006 and 2011, while every one rupee invested in Apollo Tyres became Rs 2.4, the same for MRF became Rs 2. In CAGR terms, while Apollo Tyres returned 19%, returns from MRF came in at 15% per annum.
If the current valuations are any indication though, MRF seems to be trading cheaper than its counterpart what with its consolidated TTM P/E of 6.6x versus a multiple of 8.8x for Apollo Tyres.
Does this mean that MRF is an attractive bet at the current juncture than Apollo Tyres? Well, going by the past performance, it certainly looks so. But if the past history was all there was to the game, the richest people would have been librarians. Both the businesses, Apollo Tyres in particular, have undergone a change with respect to their business models. And therefore we believe a thorough evaluation of the same will have to be done before pulling the trigger.
By Equitymaster - India's leading 'independent' equity research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian share market.