While there is no doubt that MRF commands the highest share price tag among all other stocks on D-Street, the six-digit value does not make it the most expensive stock. Find out why.
Despite its high share price, MRF is not Dalal Street’s most expensive stock. (Photo: Reuters)
Tyre manufacturer MRF created history after its share price crossed Rs 1,00,000 apiece on Tuesday and many retail investors were quick to name it as the “most expensive” stock available on Dalal Street.
While there is no doubt that the Chennai-based tyre manufacturer commands the highest share price tag among all other stocks on D-Street, the six-digit value does not make it the most expensive stock.
Reason behind MRF’s high share price
For starters, MRF has never gone for a stock split, which involves dividing existing shares into multiple new shares. For instance, a 2-for-1 stock split would result in each shareholder owning twice as many shares, but each share would be worth half as much.
Companies typically do stock splits to make their stock more affordable to a wider range of investors.
A lower share price can make the stock more attractive to retail investors, who may be more likely to buy and hold the stock. This can increase the company’s liquidity and trading volume, which can be beneficial to both the company and its shareholders.
It may be noted that stock splits have no impact on the total value of a company, but only increase the volume of traded shares. The only thing that changes is the price per share, which comes down after the move.
Moreover, MRF has not announced any bonus since Jan 1, 2000, according to Trendlyne data. A bonus issue is a corporate action in which a company issues additional shares to its existing shareholders on a pro-rata basis. For example, if a company declares a 1:1 bonus issue, then for every share that a shareholder owns, they will receive one additional share for free.
Why isn’t MRF the most expensive stock?
Despite its high share price, MRF lags behind many stocks in terms of key valuation metrics such as price-to-earnings (P/E) ratio, price-to-book-value (P/BV) ratio, market capitalisation and more.
Simply put, MRF’s high share price does not translate to the stock being the most expensive, which is usually determined by the aforementioned metrics.
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MRF’s market capitalisation as of Wednesday stood at Rs 42,390 crore and it is not even enough to place it among the top 100 listed companies in India.
To put things in perspective, Reliance commands the highest market capitalisation in India at over Rs 17 lakh crore, while TCS is second with a market value of 11.8 lakh crore and HDFC is third with nearly 9 lakh crore.
So, MRF’s high share price definitely does not translate into a strong market cap as it only has a fraction of tradable shares, compared to the most valued companies in India.
Soon after MRF’s share value hit six digits, analysts were quick to clarify that investors should look beyond share price and make investments based on research and evaluation.
Sonam Srivastava, founder of Wright Research, an investment advisory firm, told Business Today that a stock’s price tag does not indicate whether it is cheap or expensive. Srivastava said the value of a stock depends on several factors like market capitalisation, price-to-earnings (P/E) ratio, earnings, and growth prospects.
“Market capitalisation considers a company’s total value by multiplying its stock price by outstanding shares. The P/E ratio compares a company’s share price to its per-share earnings, indicating its expected growth or lack thereof,” Srivastava added.
MRF’s P/E ratio currently stands at 55.13, making it expensive compared to peers like Apollo Tyres and Balakrishna Industries. It may be noted that the price-to-earnings ratio is a financial ratio that compares the market price of a stock to its earnings per share (EPS). A high P/E ratio means that investors are paying a premium for the stock, while a low P/E ratio means that investors are not willing to pay as much for the stock.
Retail investors should not that even a stock with a low price or a penny stock can be expensive, even more MRF for that matter of fact, as they are usually considered high-risk investments. Such stocks are often less known and vulnerable to price manipulation, said Srivastava.
Therefore, looking beyond the price tag of a stock is crucial for making the right investment choices.
Is there more upside to MRF stock?
MRF shares have witnessed a strong rally in the past six months, climbing nearly 10 per cent. This year, the stock has gained nearly 14 per cent, while it is up over 46 per cent in one year.
Gaurav Bissa, VP, InCred Equities, told Business Today that there is “more steam” left in the MRF stock, adding that it has witnessed a strong upside in the last few months with continued outperformance against broader market indices.
He added that the stock is currently forming a bullish flag pattern on the weekly charts. He added that if the stock closes above Rs 1 lakh then it will confirm a bullish flag breakout, which can push it towards Rs 1.15 lakh levels.
However, Trendlyne data suggests that brokerages are not too optimistic about the stock, with five out of seven analysts giving it a sell rating.
Motilal Oswal and Kotak Institutional Equities are two brokerages that are not too optimistic about the MRF stock, going forward.
In a note last month, Motilal Oswal said, “MRF’s competitive positioning within the sector has weakened over the past few years, which is also being reflected in the dilution of pricing power in the PCR and TBR segments.”
“This, coupled with the impact of capex being carried out, should result in limited expansion in return ratios,” the brokerage added.
Meanwhile, brokerage firm Anand Rathi has given a ‘hold’ rating on the stock with a target price of Rs 96,000. However, it said the stock shows limited upside from the current market price.
It said replacement demand would gradually recover as economic activity rise and the impact of the high base fades. It also predicted MRF’s OEM demand to be healthy at high single digits.
“We expect a 6 per cent volume growth over FY23-25. EBITDA margins would be stable from Q4 as most of the benefit of lower input costs have already been factored in,” the brokerage added.
