Rishabh is a Chartered Accountant and well-known personal finance expert. He advises Chairmen, Founders, HNIs/CEOs, and Top Executives on personal investment and wealth distribution. He founded NRP Capitals, a firm that, with the assistance of a highly motivated workforce, manages the distribution of financial products to hundreds of clients and assists them in choosing the best ones. He is also the author of the Book titled "Financial Spirituality".
Indian stock market witnessed a historic milestone as Madras Rubber Factory (MRF) emerged as the country's first six-digit stock, with a share price exceeding Rs1 lakh. This substantial figure has left many retail investors questioning its affordability.
Let us now compare it to a global stock, Berkshire Hathaway, the renowned business led by Warren Buffett, where Class A shares are trading at over $500,000 per share, amounting to approximately Rs4 crore.
Now the question arises: Is MRF truly an expensive stock? Compared to Berkshire Hathaway, it doesn't seem so bad. So, let us delve deeper into the depths and uncover the hidden secrets behind this intriguing MRF story.
Why is it so expensive?
Companies frequently announce stock splits to make their equities more appealing and accessible to individual investors, enhancing liquidity while maintaining dividend payments. MRF, on the other hand, has never split its shares. MRF granted bonus shares in the ratios of 1:2 and 3:10 in 1970 and 1975, respectively, but no bonus shares have been issued since then. When the number of outstanding shares remains constant and the organisation grows over time, the company's market value increases, and the stock price rises.
Expensive ≠ Quality: Debunking the myth
A costly stock does not always imply a high-quality stock. Understanding the difference between a high stock price and a high valuation cost is critical. Despite its high price, MRF is not the most expensive company in India because investors value stocks based on metrics such as price to earnings (PE) or price to book value (PB), market capitalisation and so on. MRF has never used a stock split to lower its prices.
As MRF has demonstrated throughout the years, a high-priced stock can be justified by solid earnings and good future growth prospects. As a result, it is critical to consider aspects other than the stock's price when determining its underlying value and potential.
Peer comparison: MRF's pricey reality
When comparing the price-to-earnings (PE) ratio, MRF appears expensive compared to its peers. Currently standing at a staggering 55 times, MRF's PE ratio surpasses its competitors. For instance, Apollo Tyres sits at 23.4 times, Ceat at 44 times, JK Tyre at 18 times, Balkrishna Industries at 42 times, and Goodyear India at 22.6 times.
However, higher PE ratios indicate limited room for returns. MRF has significantly underperformed its peer group and the overall market over the past 3-5 years. MRF yielded a mere 56.9 percent returns during this period, while the benchmark index soared by 87 percent. Similarly, MRF generated a paltry 33 percent return over five years, while Sensex achieved a commendable 77 percent. Meanwhile, MRF's rivals, such as Apollo Tyres, secured an impressive 284.4 percent return over three years, Ceat earned 122.3 percent, and JK Tyres rewarded their shareholders with a return of 219.68 percent. The numbers paint a compelling picture of MRF's performance compared to its peers, highlighting the need for a closer examination of investment potential.
MRF: Expensive but not in the Top 100
MRF is India's undisputed king of high-priced stocks, followed by Honeywell Automation, Page Industries, Shree Cement, 3M India, Abbott India, Nestle, Bosch, Procter & Gamble Hygiene, and Lakshmi Machine Works rounding out the top 10. But despite its Rs42,000-crore market cap, it is still not among India's top 100 listed firms in terms of market capitalisation. Reliance Industries leads the pack with a market cap of Rs17 lakh crore, followed by TCS at Rs11.9 lakh crore and HDFC Bank at approximately Rs8.9 lakh crore.
MRF's distinctive characteristics
Despite MRF's high PE ratio and modest growth pace, individual investors can take heart. Because of its high-value price denomination, investing in MRF may provide a significant advantage in terms of decreased vulnerability to manipulation and the sector's overall growth. However, as previously stated, look at its competitors—who are doing better than MRF. Always remember that stock market gains depend on future performance rather than past performance. The stock market is a forward-looking animal, so be cautious.