MRF Ltd.


MRF Ltd. is the first Indian company to export tyres to the US, the very birthplace of tyre technology. It is the first company in India to manufacture and market Nylon tyres passenger tyres commercially. In 2004, the company's turnover crossed INR 30 billion mark. The company was given the title of most ethical company by 'Business World' magazine after a survey conducted in 1999. The company, MRF Ltd., originally started as a small manufacturing unit of balloons, latex cast squeaking toys and industrial gloves. The company established its first office in 1949 at Chennai, Tamil Nadu and India. It began the manufacturing of tyres in 1961. Today, MRF has 6 manufacturing plants in India located in Tiruvottiyur and Arakonam in Tamil Nadu, Kottayam in Kerala, Ponda in Goa, Medak in Andhra Pradesh, and one in the Union Territory of Pondicherry. It has a distribution network of more than 2,500 outlets in the country and exports tyres in over 7 countries globally.

MRF enjoys of manufacturing the largest range of tyres in India and it has the highest brand preference for superior quality, appearance and wearability. It manufactures the largest range of tyres in the country and is the market leader with the largest Market Share almost every segment of the tyre industry.

Company Background

MRF Ltd. (MRF), India's largest manufacturer of automotive tyres and tubes, was incorporated as a private limited company in 1960 to take over the business of a partnership firm called the Madras Rubber Factory, started by late. Shri K. M. Mammen Mapillai. The company made its first and only public issue in 1963.MRF produces tyres from its six plants located at different places in South India, with the Pondicherry plant

used only for the production of radial tyres. Over the years, the company has emerged as a leader in the Indian tyre and tubes industry with a large market share and a strong brand image. The company has a strong presence in the replacement market (81% of total domestic sales) and also supplies to nearly all the major automobile manufacturers in the country. MRF has a strong presence in the export market with exports to over 60 countries spanning all segments of the tyre market. Apart from Tyres and tubes, MRF also manufactures conveyor beltings, specialty counting's, pre-cured treads etc which account for less than 10% of the total turnover.

Company History MRF


  • Entrepreneur, K. M. Mammen Mappillai, opened a small toy balloon manufacturing unit in a shed at Tiruvottiyur, Madras (now Chennai).


  • The factory was just a small shed without any machines, a variety of products, ranging from balloons and latex-cast squeaking toys to industrial gloves and contraceptives, were produced.


  • MRF ventured into the manufacture of tread rubber. And with that, the first machine, a rubber mill, was installed at the factory.


  • MRF soon became the only Indian-owned unit to manufacture the superior extruded, non-blooming and cushion-backed tread-rubber, enabling it to compete with the MNC's operating in India at that time.


  • The quality of the product manufactured was of such a high standard that by the close of 1956, MRF had become the market leader with a 50% share of the tread-rubber market in India.


  • The Company was incorporated as a private limited company on 5th November. The Company Manufacture automobile, aircraft, cycle tyres and tubes in collaboration with the Mansfield Tire & Rubber Co., Mansfield, Ohio, U.S.A.


  • The Madras Rubber Factory Private Limited was converted into public company on 1st April, and additional capital was issued in order to start the manufacture of automobile tyres and tubes in collaboration with the Mansfield Tire & Rubber Co., Mansfield, Ohio, U.S.A.


  • The main plant for production of tyres and tubes were commissioned on 4th December.


  • Nylon Hot-Stretch Unit of the latest design was commissioned in November.


  • With the commissioning of the main plant in 1964, MRF also made progress in the export of tyres.


  • MRF became the first Indian company to export tyres to USA the very birthplace of tyre technology.


  • MRF scored a major breakthrough by being among the very first in India to manufacture and market Nylon tyres.


  • During September, 12,18,714 bonus shares issued in proportion 1:2. (Only 12,18,689 shares were taken up).


  • The Company finalised a technical know-how collaboration with B.F. Goodrich Co., U.S.A., which became fully operative in early 1980-81. This agreement was revalidated for further five years.


  • The Masfield Tire & Rubber Co., U.S.A. offered for sale out of its holding 3,74,250 No. of Equity shares of Rs 10 each.


  • The Company crossed several milestones in its history. It went Into technical collaboration with BF Goodrich Tire Co., USA in the year. The name of the Company, Madras Rubber Factory Ltd. was changed to MRF Ltd in the year.


  • Mansfield Tire & Rubber Co. of U.S.A., offered for the their Balance shareholding of 3,55,537 No. of Equity shares of Rs 10 each.


  • The Company finalised a technical collaboration agreement with M/s. Marangoni TRS SPA, Italy for the supply of know-how for the Manufacture pre-cured tread rubber for retreading industry.


  • Sales crossed INR two billion. MRF tyres were the first tyres selected for fitment onto the Maruti Suzuki 800 - India's first small, modern car.


  • A letter of intent was obtained for the manufacture of conveyor beltings and hoses in collaboration with Industiral Pirelli SPA, Italy.


  • The MRF Pace Foundation was set up, with international pace bowler, Dennis Lillee as its Director. Not long thereafter, pace bowlers trained at the Foundation were selected for the Indian Cricket Team.


  • The Company was identified as `Star Exporter', a status that enables the company to get priority treatment ineveral areas concerned with customs, RBI, etc.


  • The Aruna Leathers & Exports Ltd. was amalgamated with the Company'.


  • The Company promoted a new Company viz. MRF International, Ltd., in view of the tremendous growth potential in the export market.


  • The Company has received the Top Export Award for the year from All India Rubber Industries Association.


  • The Company has received an award from CAPEXIL - Certificate of Merit based on the export performance for the year.


  • MRF Ltd has been assigned a credit rating of `PR1+' (superior) for its proposed Rs 100 crore commercial paper (CP) programme by Credit Analysis and Research Ltd (CARE).


  • MRF Tyres has signed an OEM (original equipment manufacturer) alliance with Siel Honda Motors and Hindustan Motors.
  • MRF has launched a market sampling operation for the MRF Zigma.


  • MRF Ltd has decided to set up more such clinics in Northern and Western cities.


  • MRF has launched a steel-belted premium radial tyre variant called `MRF ZVTS'.


  • MRF was ranked highest in customer satisfaction along with multinational Bridgestone in a study conducted by JD Power Asia pacific.


  • Mrf Ltd. has informed the Exchange that at its meeting held on December 19, 2003 the BOD have re-designated Jt. Managing Director Mr. Arun Mammen as Managing Director of the Company w.e.f April 01, 2004.


  • MRF Ltd. has informed that Mr Ravi Mannath has been appointed as Additional Company Secretary of the Company w.e.f. January 05, 2004


  • MRF Ltd launches premium truck tyre Super Lug 50-FS.

Working Capital Policy Of MRF Company

According to the working capital policy, there are two sources of finance. One is long-term sources and the other is of course the short term. Long term financing is done through issue of ordinary share capital, preference share capital, and debentures, long-term borrowings from financial institutions and banks and retained earnings. And short-term financing includes working capital funds from anks, public deposits, commercial paper, factoring of receivables etc. These sources of funds are for a period of one year or less. But in these short-term sources of capital you will come across one very important source that is the Spontaneous Sources of Financing. It refers to the automatic sources of short-term funds arising in a normal course of a business. For eg trade supplies & outstanding expenses. It seems very simple of how to finance your current assets but in actual it's not so. In the financing of current assets too you have to think about the fulfillment of your financial objectives. And when one talks about it automatically becomes complicated. You need here to identify the accurate mixture of long term and short term sources of funds for financing your current assets. There are different approaches for analyzing the working capital policy:

  1. Matching approach
  2. Conservative approach
  3. Aggressive approach

Matching Approach

A firm can meet its financing needs by using a matching approach in which the maturity structure of the firm's liabilities is made to correspond exactly to the life of its assets. If you refer to the above diagram, the fixed working capital is financed with the long-term capital& equity funds, whereas fluctuating current assets are financed with short-term debt.

Conservative Approach

A firm in practice may adopt a conservative approach in financing its working capital where it depends on more of longterm funds. As you can see in the diagram, the firm is financing its fixed /permanent working capital and also a part of it fluctuating working capital with long-term financing. Only a small portion is being financed through short-term financing.

Aggressive Approach

When a firm uses more of short-term sources for financing working capital; it is said to be followed aggressive policy. As it can be seen from the diagram, the fixed working capital and a portion of fluctuating working capital is finance by short-term funds. Only a small portion of fluctuating working capital is being financed by short-term funds.

Output of MRF Ltd

Assuming a constant level of fixed assets, a higher CA/FA ratio indicates conservative current assets policy (greater liquidity & lower risk) and a lower CA/FA ratio means an aggressive current assets policy assuming other factors to be constant (higher risk & poor liquidity). In the above diagram, alternative A indicates the most conservative policy, where CA/FA ratio is greatest at every level of output. In the same way, Alternative C is the not aggressive policy & alternative C lies between the conservative & the aggressive and is the average one.

The major components of the working capital of MRF Ltd are Inventory, Debtors, Cash and Bank balance and the Creditors. In this working capital structure too there are few interesting things to note and analyze. These are as follows Presence of short term borrowing: in order to finance its current assets MRF Ltd had to take short term borrowings from the bank. This was the highest in the year 2004-05, followed by the year 2008-09. In the intervening years the borrowings from the bank were minimal and was even nil for the year 2006-07This trend comes as a consequence of the changes in the net working capital that has been explained next.

Net Working Capital: the net working capital of MRF Ltd is negative for most of the years except for the year 2004-05 when it was positive. The reason for this has already been given while explaining the negative working capital for JK Tyre. However one interesting thing to note is that the company's short term borrowing was the maximum in the same year when its net working capital was also maximum. We will see an interesting trend regarding this relationship between NWC and short term borrowings when we discuss TVS.

Current Ratio: the current ratio for the company is less than 1 for most of the years except for the year 2004 -05. This shows that the company is following an aggressive policy. But again as compared to JK company seems less aggressive which can be seen from the higher values of its current ratio.

Costs Involved in Maintaining a Level of Current Assets

The Cost Trade-off

In determining the optimum level of current assets, the firm should balance the profitability-solvency tangle by minimizing total costs-cost of liquidity & cost of illiquidity.

Cost of liquidity

In the cost of liquidity the level of current assets, the cost of liquidity increases while the cost of illiquidity decreases. & Vice-a-versa. The firm should maintain its current assets at that level where the sum of these two costs is minimized. Aggressive asset management results in capital being minimized in current assets versus long-term investments.This has the expectation of higher profitability but greater liquidity risk. As an alternative, a more conservative policy places a greater proportion of capital in liquid assets, but at the sacrifice of some profitability. To measure the degree of aggressiveness the current asset to total asset ratio is used, with a lower ratio eaning a relatively more aggressive policy. Aggressive financing policies utilize higher levels of normally lower cost short-term debt and less long-term capital. Although lowering capital costs, this increases the risk of a short-term liquidity problem. A more conservative policy uses higher cost capital but postpones the principal repayment of debt, or avoids it entirely by using equity. The total current liability to total asset ratio is used to measure the degree of aggressive financing policy, with a high ratio being relatively more aggressive. The data set includes quarterly levels of current liabilities, current assets, and total assets for companies in ten different industries between 1984 and 1993.

According to the tyre demand in 2003 and 2004, capacity utilization of MRF registered sharp increase to 97% for the year ended September'03 from 93% a year earlier. The increase in capacity utilization in automobile tyres has come even though the installed capacity has been increased by 12% (by 1.6 mn tyres per annum). Non core business areas of specialty coating as well as conveyor belting also registered operational improvements. Tyres, which account for 83% of the sales value of MRF, registered a high 17% volume growth in FY'03. Significant growth rates were observed both in the truck (27%) and 2/3 wheelers (16%) segments. Car tyre segment where MRF is a strong player saw the volumes grow by 5%, much better than the 9% decline registered in FY'02. In terms of sales value, truck tyres continue to account for more than 50% of the sales. Replacement market account for 80% of the domestic sales while Original equipment market accounts for 15%. Tyre exports, which amounted to 12.3% of net sales in FY'02 increased to 14.5% in FY'03 on the back of 40% growth in exports.

The high growth in 2008-09 will due to huge volumes, which overtook BAL's volumes. Sales grew at a CAGR of 22% between FY01 to FY04. Net sales and income from captive wind power plant in 2008-09 stood at registering a growth of 14.3% in 2008-09. Sales growth has been driven by high volume growth in mrf tyre on exports. The rising trend in operating profit margins (OPM) was reversed in FY04. OPM Rises 200 basis points to 15% in 2008-09 from 17% in 2008-09. This was mainly due to the continuous rise in steel prices, which lead to the share of materials to increase to 66.9% as a percentage of net sales in 2008-09 from 64.3% in 2002-03. The company, however, was able to partially offset this high raw material cost by saving on other costs. Rationalization of manpower and increased productivity led to labor cost as a percentage of net sales and revenue from captive power plant income, to go down to 5% in 2008-09 from 5.7% in 2008-09 The company paid Rs235mn as compensation under its voluntary retirement scheme in 2008-09. It reduced the number of employees to 11,531 in 2008-09 from 12,338


An investment in Equity Shares involves a high degree of risk. You should carefully consider all the implications of information in this Letter of Offer, including the risks and uncertainties described below, before making an investment in the Equity Shares. If any of the following risk factors actually occur, business, results of operations and financial condition could suffer and the price of Equity Shares and the value of your investment in our Equity Shares could decline. Unless specified or quantified in the relevant risk factors below, we are not in a position to quantify financial any of the risks mentioned below:


Their business is vulnerable to interest rate risk and volatility in interest rates which could adversely affect their income from their operations and their financial performance and adversely affect their profitability. Net interest income constituted 73% of their total income for fiscal 2006. An increase in interest rates applicable to their liabilities, without a corresponding increase in interest rates applicable to our assets shall result in a net decline in the net interest income. Furthermore in the event of rising rates our customers who usually pay a fixed interest rate may not be willing to pay correspondingly higher interest rates on their borrowings and may choose to repay their loans with us if they are able to switch to more competitively priced loans offered by their competitors. In addition, potential customers may be deterred from entering into any financing Arrangements in an increasing interest rate scenario. Any inability on our part to retain or attract customers as a result of rising interest rates may adversely affect our earnings in future periods. Interest rates are volatile and are highly sensitive to many factors beyond our control, including the monetary policies of the RBI, deregulation of the financial sector in India, domestic and international economic and political conditions and other factors. Due to these factors, interest rates in India have historically experienced volatility. Yields on the Government's ten-year bonds were 5.2%, 6.7% and 7.5% as of March 31, 2004, March

They have experienced high growth in recent periods. Their disbursements across their business operations have grown by 39% from fiscal 2005 to fiscal 2006. However, their future growth plans can place significant demands on the management and other resources. There can be no assurance that we will be able to execute our strategy on time and within the stipulated budget or that they will meet the expectations of the customers and achieve our planned growth.

There are operational risks associated with our industry which may have an adverse impact on our performance.

We are exposed to many types of operational risk, including the risk of fraud or misconduct by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record keeping errors or errors resulting from faulty system. We also outsource some of our key functions such as debt recovery, repossession of the products, loan application processing and credit verification. Further, for our rural operations, a substantial amount of our collections are in the form of cash transactions. There can be no assurance that we will be able to safeguard these collections from all of our rural branches. Given the large volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. We also face the risk that our control and procedure may prove inadequate or may be circumvented thereby causing delays in detection or errors in information. Although we currently maintain and are in the process of upgrading our systems of controls to keep operational risk to a minimum, there could be no assurance that we will not suffer loss from operational risk in the future that may be material in amount.


After analyzing the MRF company's working capital policy industry groups to examine the relative relationship between their aggressive/conservative working capital policies. Regarding the degree of aggressive asset management, the industries had distinctive and significantly different policies. In addition, the relative nature of the asset policies between industries exhibited remarkable stability over the four year study period. Industry policies concerning the relative degree of aggressive liability management also were significantly different, but not to the same extent or with the same stability. Interestingly, this study also showed a high and significant negative correlation between industry asset and liability policies. In general, it appears that when relatively aggressive working capital asset policies are followed they are balanced by relatively conservative working capital financial policies.

The profitability of MRF companies has a correlation to key raw materials like rubber and crude which account for approximately 70% of costs. There is a respite in prices of key raw materials. However, the future remains uncertain. Liquidity and high interest costs is another area of concern and . the company is focusing on cost reduction and cost optimization process across the plants.

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