🛞 Why MRF is costly?

Let's try to understand the nuances of the costliest stock in the Dalal street and more about stock split in the market.

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Company Outline

Madras Rubber Factory (MRF) is an Indian multinational tyre manufacturing company. It started as a toy manufacturer unit in 1946. Now it produces a variety of products like tyres, treads, tubes, paints and conveyer belts. It is India’s largest manufacturer and the world’s sixth-largest tyre manufacturer company. In 1967, it became the first company to export tyres to the USA. It has also signed an eight-year deal with Indian cricket team captain Virat Kholi for 100 crores.

MRF currently has the highest share price in India among all the companies listed on BSE/NSE. The all-time high share price of MRF is INR 98,599.95. At the time of writing this blog where there is a market crash happening in the Indian equity market, the stock price of MRF stands stiff at INR 71,200 at the end of the day. However, the company provides a poor dividend yield of just 0.21%.

Why MRF is the costliest stock?

Before unravelling why MRF is the costliest stock in the Indian market, let's understand what is a stock split and how does it work? A stock split or stock divide is a corporate action in which a company divides its existing shares into multiple shares. It's entirely subjective to a company to divide its existing shares into many parts. It is like dividing a 100 rupee note into 5 notes of 20 each. Ideally, both are the same and it’s not gonna affect the existing shareholders of the company. So, if I hold a single stock of 100 INR in my Demat account and if the company announces a 1:5 stock spilt, then I will have 5 stocks valued at 20 INR. So, it's not gonna make any difference to the existing shareholders.

But then why does a company perform stock split? If the price of a stock reaches so high and the analysts feel that the valuation is too demanding, the company will decide to split the stock. So that it will help retail investors mostly the new investors to buy that company’s stock. For instance, if a company’s stock is priced at 5000 and if it is spilt to 1000 each, it will motivate fresh retail investors to buy them since they can afford 1000 over a 5000 rupee stock.

Some of the companies that have announced a stock spilt recently are IRCTC, Andhra sugar, Johnson pharma, IPCA labs.

Why MRF has not split its stock?

Then the next obvious question would be - if MRF valuation is so high, then why not they have split their price?

By not splitting its shares and maintaining its extremely high price, MRF has ensured to retain exclusivity. Retaining its high share price without splitting shares is a major contributing factor for its uniqueness. This symbol of status is something that makes MRF stand out.

Some companies prefer to avoid splitting because they believe a high stock price gives the company a level of prestige. A company trading at INR 10,000 per share, for example, will be perceived as more valuable even though the firm's market capitalization may be the same as a company whose shares trade at INR 1,000.