MRF Ltd - Strong moat & value play

MRF Limited:
Current Price: Rs 38,853
Market Cap: Rs 16,474 Crs
Cash: ~ Rs 2,900 Crs

At P/E of 9.6x, and leadership position of MRF in Indian Tyre Industry due to its strong brand recall and premium pricing; MRF is available at discount to its long term cash earning potential.

MRF Limited was initially started as a small manufacturing unit producing balloons, latex cast squeaking toys and industrial gloves.

Today, MRF is India’s largest tyre manufacturer and ranked amongst the Top 20 Global Manufacturers. With 9 state-of-the-art factories across India, it is also India’s largest Original Equipment Manufacturer [OEM] tyre supplier with an expansive tyre range from two-wheelers to fighter aircraft. The MRF brand is the undisputed leader in the replacement market for tyres in the country and its recent partnership with the ICC for World Cup Cricket fixtures between 2015-2019, has given it a credible platform to take its brand imprint worldwide.

Promoter holding - 27.49% (as on March 31, 2016)

Annual production capacity of 53.4 million tyres and 40.2 million tubes,

Manufacturing Plants: Nine locations in Tamil Nadu, Kerala, Andhra Pradesh and Goa.

Disclosure: no positions, tracking the same for future portfolio addition.

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Tyres, Tubes & Flaps for various class of vehicles like Two wheelers, Passenger Cars, 3 wheelers, Pick up, LMV, Farm Vehicles, Trucks & Buses and OTR.

Funskool: JV with US toy major Hasbro - emerged as the largest toy company in India today.

While small toy stores catered to the mass market, Funskool was eager to increase its footprint and the visibility of its many products in large formats. To achieve this, it opened its own retail stores. Funskool boasts a wide presence with as many as 16 warehouses to serve 4,000 retail outlets. It also opened its first retail store in Chennai for one of its major partners ‘Lego’, the building-blocks brand.

Today, after being in the business for 25 years, the company has reported a growth of 20-25% and has set a target of around Rs 120 crore.

Paints & Coats:

MRF’s Speciality Coatings Division was the first paint manufacturer to bring to the Indian market, over two decades ago, the ultimate new generation Polyurethane Coating (PU) Systems, that too in retail packs. The Speciality Coatings Division was hived off into a subsidiary ‘MRF Corp Limited’ in April 2011.

MRF Polyurethane Coating systems are available for a variety of substrates and provide superior surface finish that guard against abrasion, corrosion, chemicals, elements of weather and the Sun’s UV radiation. This makes the coating virtually maintenance - free.

MRF PU Coatings cater to diverse segments such as Automotive, Decorative and Industrial through a wide range of pigmented and clear finishes across Metallic, Glossy and Matt surface finishes. Today MRF Corp retains its leadership in the Polyurethane finish segment and is the preferred choice amongst dealers and customers because of its intrinsic quality, continuous innovation and stress on
customer satisfaction.

MRF Pretreads

MRF PRETREADS is the most advanced precured retreading system in India. MRF forayed
into retreading as far back as 1970. Today, MRF has perfected the art of recured retreading with its extensive knowledge in tyres and rubber.

In the MRF PRETREADS system, the tread rubber is precured from MRF’s factory in a carefully controlled environment, thereby ensuring world-class quality. Today, MRF PRETREADS has emerged as the Mileage leader in precured retreading and also has the specialized expertise required for retreading Radial Tyres of Truck, Bus, LCV and Passenger vehicle.


Various customer touch point service initiatives in various formats like T&S, TIRETOK, TYREDROME, MRF FAST etc.

Additionally, MRF is also developing skill based employment by way of MRF INSTITUTE OF DRIVER DEVELOPMENT.

Research & Development

The Design process at MRF starts from the customer - inputs from individual customers are compiled by marketing and given to Corporate Technical MRF’s R&D and Product Development Division or vehicle specific requirements are received from the OE customer.

MRF’s team of 300 engineers and scientists gives MRF its enormous strength in product design. Requirements received, a team now works on converting the customer input into a Design Concept.

MRF uses cutting - edge technologies in predictive testing and design validation before it leaves the drawing board. These advances have significantly brought down the time to market for new designs.

Advanced raw materials are tested and approved in our NABL accredited laboratories. MRF
works closely with global suppliers in using the latest developments in materials across the globe. Our laboratories which have the very latest in testing equipment closely monitor the quality of the material going into our tyres at the time of approval and regularly after that.

The prototypes for verification and validation testing are manufactured in one of MRF’s 6 factories all of which are TS 16949/ISO 9001 certified. The tyres then go through testing for confirming the architecture and a series of indoor testing to ensure that they meet MRF’s tight standards and also those required by the OEM or by any of the national standards like BIS/JIS/ETRTO/T&RA.

Tyres are now handed over to the Vehicle Dynamics Group, who now validates the design on the vehicle. These tests are done at the test track in a series of manoeuvres at various speeds, pushing the tyres to the limits of its capabilities.

MRF also tests tyres on fleets across the country to ensure that the tyres have endured successfully all the types of roads on which our customers travel daily. Race Tracks and Indian Roads are our laboratories.

Only after this do we give any tyres to the customer - all global players manufacturing a global class of vehicles. MRF has been designing tyres this class of vehicles for more than a decade now. MRF tyres have met the demanding requirements of these vehicles, backed by an R&D team which is completely in-house and self reliant.


Branding & Visibility

Pace Foundation

MRF shares a passion for quality tyres and fast cars just as it does for quality cricket and fast bowlers. It has chosen to associate itself with some of the world’s best fast bowlers through ‘Pace Foundation’ - An academy that has trained legends such as Irfan Pathan, Munaf Patel, RP Singh, Bret Lee, Shoaib Akhtar, Glenn McGrath and many more.

Motor Sport

MRF’s passion for motorsports is seen through its involvement in racing, karting, rallying and various other motorsport events. Its rallying team has won the prestigious FIA Asia Pacific Rally Championship twice and even in international championships, MRF karting tyres is the preferred choice.


The Indian tyre industry is estimated to be around Rs 50,000 crore in 2015-16 and is dominated largely by the commercial vehicle segment consisting of heavy, light and small commercial vehicles. The next largest segment is passenger vehicles constituted by cars, SUV’s, motorcycles and scooters. The Farm & Off The Road (OTR) segments consisting of the Tractor Front and Rear tyres, Tractor trailers and large tyres for earth moving and other construction and mining related equipment (OTR) are the other important segments in the market.

Traditionally tyres are classified as cross-ply (bias) and radial based on the technology deployed in their manufacture. In India, the commercial tyre segment continues to be dominated by cross-ply tyres due to road conditions, loading patterns and the high initial cost of radials. There is however a steady growth in radialisation across segments in recent years with the highest in passenger cars at almost 100% followed by heavy commercial vehicles at 33% and light commercial vehicles at 30% in 2015.

The tyre industry, which is a derived demand business, is also directly affected by the performance of the vehicle manufacturing sector which in turn is dependent on the overall economic growth. The tyre industry
consists of three distinct markets namely Replacement, Institutional/ Original Equipment Manufacturer [OEM] and Exports. By value, replacement market accounts for approximately 60% of the Industry with Institutional / OEM and Exports making up to 22% and 18% respectively. While in the Commercial and Farm segments, replacement sales forms a major chunk, in the passenger segment, both Institutional and OEM and replacement sales play an almost equal role. Of the total tyres produced in India, the top eleven tyre companies’ account for more than 90% of the volume. The truck business is controlled by nearly 2.6 million small operators.

Risk & Concerns:
Tyre imports into India, mainly in Truck and Bus Radial (TBR) tyres have grown by over 250% during the last 2 years. China’s share in the TBR imports is about 90%.This sharp rise in the Imports, if continued, will lead to under-utilisation of TBR and also Truck and Bus Bias(TBB) capacities.

Raw material prices (Mainly Rubber & Crude derivative - Carbon black) are benign and lead to historically high margins for tyre industry at present. This raw material prices may increase in future and resulting into deterioration of operating margins of tyre companies.

Inverted duty structures - Natural rubber import is subject to import duties for maintaining domestic natural rubber prices at supporting level (benefiting farmers in turn). Additionally, there is no import duty on import of finished tyres - this lead to increasing trend in tyres import (mainly from China). This will lead to low capacity utilization of domestic tyre companies.

Strength of Company - MRF

Strong Brand leading to Highest Operating margin in Tyre Industry

MRF has built a strong brand after its association with legend Sachin Tendulkar and association with Indian Cricket team and ICC. Replacement market is largest market for Indian tyre companies and by having strong brand recall MRF is able to demand premium price for its products, as observed by below table.

Diversified Product mix

MRF has strong portfolio of products ranging from Two Wheeler tyres to Airplane tyres. This enables to withstand various business cycles. Considering fair share of passenger car tyres it has been able to sail through Heavy vehicles subdued demand.

Strong Capital structure
MRF has cash & cash equivalents of about Rs 2900 Crs as on 31-Mar-16. Further, its leverage (Gross Debt / Networth) is about 0.5 times, which indicates strong financial position to withstand any downturn in business environment

Disclosure: no positions, tracking the same for future portfolio addition.


Looks like the paint, toys & pretreads segment is minuscule compared to tyre business. Company in its q4fy16 results mentioned that

The Company is dealing mainly in rubber products and has no other re-portable segment.

Thanks Pranav for the thread!

Few Questions based on cursory look -

  • Based on screener numbers, there is no significant top line growth from Sept 2013 on QoQ basis but operating margin has gone up from 14% to 24%. As you mentioned there has been softening raw material prices and that can lead to two things - flat revenue and increased margins. So my questions are -
  1. Is there volume increase?
  2. Do they have pricing power? (I’m inclined to say no based on Chinese competition you mentioned)
  3. Margin increase is purely because of raw materials or has there been productivity improvement as well?
  • You mentioned that tyre market in India is worth 50k Cr and MRF approx has sales of ~13k Cr. Ignoring other segments, one can say that they have 25% market share. Can they grow market share?

  • A quick search shows that - only MRF and Balkrishna Industries have been able to scale up margins in last 2-3 years but Apollo and JK Tyres have not been able to. So one can “claim” that MRF might be the most “efficient”. What brings in this efficiency?



You are right Tyres & Tubes are responsible for majority of revenue today.

However, from future business potential - Paints and Toys both of them are very attractive business proposition. Considering this we may assign some option value to both these businesses at the time of valuing future cash-flow potential of the company.

Please find below responses for your queries:


  1. Is there volume increase? -
    Ans: There is no publicly available information on capacity utilization. However, they are investing to augment their capacity (Please see below - CWIP of Rs 1059 Crs from ARFY14-16). We may infer that their capacity is fully utilized and they are investing to augment their capacity.

  1. Do they have pricing power? (I’m inclined to say no based on Chinese competition you mentioned)
    Ans: Please refer to operating margin of all tyre companies in above post. You can easily notice that MRF’s operating margin is consistently higher than other companies operating margin. Additionally, I also checked - tyre prices of MRF is higher than other companies tyre for same category / type. This clearly indicates “pricing power”

  2. Margin increase is purely because of raw materials or has there been productivity improvement as well?
    Ans: Recent margin increase is mainly due to declining raw material prices (specially rubber / crude). There may be some amount of efficiency gain as well which is difficult to quantify based on publicly available information.

B. Yes, we can assume that MRF has about ~25% market share of Indian tyre industry. MRF is undisputed no.1 in Indian tyre industry

C. Balkrishna is niche export oriented OTR tyre maker and may not be strictly comparable with MRF and other Indian tyre manufacturers. MRF has strong brand image (due to its association with Cricket - Most popular game in Indian & car racing - logically natural extension for tyre m/f company).

As mentioned above superior operating margin is due to strong Pricing Power it has. (due to “brand”, “economies of scale” and “operational efficiency”)

In additon to this MRF is also able to mobilize its working capital requirement by Dealer deposits (Rs 1,188 Crs), as can be observed from below screenshot from AR.

Which essentially is indication of strong moat which MRF has (translating into “float” as per buffet parlance)


Curious - Why FY16 AR has soft growth guidance? Is it that management has good habit to guide low and then achieve high?


Disc: No holding currently (on radar)

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Hi. I have been covering tyre companies for last many years mainly apollo , mrf and Goodyear. The main issue faced by tyre industry is huge dumping of Truck and Bus radials by China which are around 25 to 30% cheaper than Indian tyres. Further , there is inverted duty structure wherein rubber imports from outside is liable for custom duty however tyre imports from China are not. This has resulted in significant disadvantage to indian tyre companies since indian rubber prices are higher than Thailand whereas tyre prices of China are cheaper. Agreed, MRF is the most efficient tyre manufacturer in India and commands around 5% premium compared to second player Apollo but problem is Indian tyre companies are losing market share in overall terms (all indian companies put together ) in last few years. Companies are largely dependent on raw material prices for margin expansion and hardly have any pricing power. So these companies have performed in the past but future share price growth would be slower than the market in my opinion.


I think this article is well-written. I do feel that although the operating margins may be higher, MRF does suffer from low Net Profit Margins (just like everyone else in the tyre industry). This is mainly due to the fact that, while the tyre manufacturers might be relying on a brand recognition (MRF for instance), the moat factor itself does not lead to price differentiation. If you notice, the NP Margins last year were much better (9.7) than the years before that, when they were subdued (6.6).

I have done a comprehensive analysis of the numbers on MRF but am unable to post a link to it as I’ve been asked to refrain from self-publicity. I do like the company though, in addition to liking Balkrishna Industries. Both of these companies will do better, in my opinion, as opposed to others in the same industry.

I would also suggest taking a look at TVS Srichakra. This one is enjoying it’s own private moat with TVS Motors.

Do MRF own rubber estates in India and abroad to get good quality rubber from their estates itself.
News were there
In AR 14-16,page 67 there is an addition of land assets from 345.57Cr to 490.2Cr.

Management is very cautious and conservative and hardly ever gave any favourable / bullish outlook commentary. Please find below Extract from AR FY13 (FY ending on Sept-13) & AR FY 14 (FY ending on Sept-14) respectively.

You may observe the growth in subsequent quarters / years from thereon.



I tried to find about any ownership of rubber plantation but I didn’t get any concrete answers to it. Apart from your livemint aritcle we may infer that they are not having any such asset presently and to hedge against any adverse rubber price movement they were looking to rubber plantation assets overseas.

Further, land addition may not be concluded as buying of rubber plantation. We may till any further evidence conclude that there is no rubber plantation is owned by MRF.


I agree with you and same two issues 1) cheap BTR tyre imports from chinese suppliers and 2) Inverted duty structure is already highlighted in opening thread.

However, despite such unfavorable market structure tyre companies are able to report good operating margins & net profit margins. This indicates their ability to thrive and survive despite such adverse conditions.

Further, they are also adding capacities (by way of investments in new plant & equipment) which enhances that future demand for their product is likely to be increased.

Please see below excerpt from MRF AR 14-16


I was reading this discussion.
One question that immediately came to mind was the use of funds.
In spite of such good profitability, why is the dividend payout so pathetic? And it is not a new phenomenon. It has always been like so.
What does the management has to say about his? They may be using to fund growth…that can be a reason. But is the management transparent about it ??
Answers to these questions shall go a long way in better analysis of the stock.


Company is reinvesting its entire operating cashflow hence dividend is low. In fact they have borrowed money as their re-investment requirement is more than their operating cashflow. So the question we should really ask is if all this reinvestment of profits is paying off or not?
So far, the profits have gone up and ROE is trending up as well. This indicates that profits are reinvested at higher than cost of capital and shareholders have also validated this by offering a higher price. Price to book ratio has gone up indicating for every rupee reinvested in the business, company has created more than a rupee of market value.
what I don’t understand is the debt on the balance sheet along with current investments in liquid funds. They have a total debt of 2385 cr (not including dealer deposits) and investments of 2772 Cr as of March 31 2016 On this debt they are paying an interest of 343 Cr so these are interest bearing liabilities. Why would they not payoff the debt with investments?


Hi… though It must be prudent to pay of debt by selling the investments, I would like to mention that the interest they are paying is 8.90% (317.51cr on total loan of 2370.89 cr - incl long term and short term borrowings considering the 2016 results are 18 month figures). They have also earned interest of Rs 64.75 cr and a dividend of Rs 0.22 cr against such investments.

The loan breakup
721 cr in foreign currency, which could be paid by sales or profit of foreign subsidiary. Thus avoiding currency conversion costs and hedging costs.

500 cr debentures which were issued in 2011. I do not think they can be prepaid. The rate of interest is 10.09% which is much below the market rates

Short terms loans are working capital loans.

Other loans (not included in total loans above)
1188 cr is dealer’s security deposit + 33.39 cr retention money which I think must be interest free.

If you check the investments they have

1,16,665 icici bank shares, 2000 EIH associated hotels, 4000 HDFC, 2000 HDFC bank shares and a few other minor investments with a total cost of just Rs 9,00,000.

Other than this they have unquoted investments mainly in Short Terms / Treasury Management funds mainly which do not pay dividend but are cumulative in nature. Now debt funds, if held for 3 years carry no tax and they historically provide 7-8% return per year.

So, this is a part of efficient treasury management on the part of the company, since you pay interest and get a tax deduction on that so your net cost of owning a debt comes down from 8.90% to 6.23% (considering 30% tax) and capital gains from holding debt funds for 3 years will be nil thus earning 7-8% p.a. Overall there is net inflow due to this strategy of 1.0%-1.7%.

Disc: Invested at lower levels.

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Thanks for your detailed explanation. Usually a debt along with investment is a red flag. Not many companies do that. If your cost of debt is lower than return on your investment (post-tax) then it makes some sense to carry that debt but that’s banking and not manufacturing.

Can you please explain why MRF (and other Tyre) companies trade at a persistently low PE ratio? Even after such a sharp run up in price, MRF trades at at a single digit PE. Usually I have found that asset heavy manufacturing companies that do not generate lot of free cashflow trade at such a low valuations (e.g. Reliance Industries). Can you validate this? The other reason could be that if a company has some chronic issue (bad management, customer concentration, narrow product range, hole in balance sheet, aggressive accounting etc) then PE ratio is low. But none of this is true with MRF (or at least I haven’t found any). It is also a big enough company in an essential industry so should trade at mid teens valuations. What am I missing?

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Further to my earlier post, I also noticed that fixed asset turnover has dropped consistently over last 10 years from 8 to 4 while it’s capex is consistently sharply higher than depreciation. While a company can always invest more than it’s sustainable rate, this should result in growth in sales and profits that are also higher than it’s sustainable growth rate (ROE * retention rate). In case of MRF, growth in profits in last 2-3 years is a result of pick up in margins and not pickup in sales or volumes. So I don’t think reinvestment is the primary reason for higher profits. Story for Apollo Tyres is similar.
Only exception is Goodyear tyre. While the growth is slow for this company, it does generate good free cashflow and distributes most of that as dividends. Rest of it is sitting on it’s balance sheet as investments without any debt.
All this leads me to suspect that Indian Tyre companies capitalize at least some of the manufacturing expenses leading to higher assets, higher profits, higher ROE. However, it also leads to lower asset turnover, higher debt and little or no free cashflow. Market knows this and assigns a low PE ratio.
Goodyear being an MNC follows accounting practices of it’s US parent hence has a conservative balance sheet and higher valuation despite lower growth rates.


Low PE ratio is not for this company only but for the whole sector. I think Low PE ratio is due to commodity based business. The main raw material is rubber which is a commodity play.

It might be true that company may be capitalizing some of the interest costs since there is capital work in progress on regular basis.

Regarding asset turnover ratio, kindly check your calculations again or may be I am missing something. It is more or less stable from past 11 years. I am attaching a screenshot of data of ratios as collected from AceEquity. I have checked the calulation myself also and it seems ok to me. The calculation of year 2016 might be questionable, since it does not take in to consideration that it is 18 month sales. So you can reduce that figure to 2.04 instead of 3.15. (ACE have taken gross block in consideration, you may redo the calculation considering net block but the result will still remain the same)

Debtor turnover ratio, ROCE, ROE all are showing an improvement over time.

Regarding Free Cash Flow, I personally check Cash from operation less purchase of fixed assets and this has a healthy growth year-on-year.

The pickup of margins is there but since volumes data is not available I cannot comment on that.

Goodyear being an MNC generally gets a higher PE due to lack of available float and general love of buying into MNC’s in India. I do not think it is comparable to MRF since Goodyear it is just 10% of the size of MRF (Sales). Also, their ROEs and ROCEs are on a constant decline from year 2006-07. The only advantage is their Fixed assets turnover is better, may be they are importing tyres from foreign parent or something, so as to reduce their dependence on Fixed Assets. I am not sure, I have not studied Goodyear much.

Disc: Invested in MRF at lower levels.


Q2 Results:

MRF FY18 Annual Report Notes

  • Company’s Sales was Rs. 14822 crore as against Rs. 13252 crore in the previous year. The net profit for the financial year was Rs. 1092 crore as against Rs. 1451 crore in the previous year.
  • Company witnessed higher raw material prices in 2017-18 as compared with the previous year.
  • Company’s exports stood at 1353 crore for the financial year ended 31st March 2018, as against 1316 crore for the previous year. Following a 27.5 per cent growth in financial year 2017, exports volume increased by 10 per cent during financial year 2018. The outlook for the coming years is expected to be favourable, with tyre export volumes projected to grow by about 8-10% compounded annual growth rate (CAGR) during financial years 2019-22 riding on bullish demand prospects (despite strict import regulations in a few countries). There has been increased acceptance of Indian tyres in overseas markets, both in terms of quality and pricing. Your Company has been awarded the Highest Export Award 2016-17, by All India Rubber Industries Association (AIRIA).
  • R&D expense for the year is Rs. 158.96 cr (Rs. 199.68 cr in fy17) i.e. 1% of sales.
  • Advertisement exp for FY18 Rs. 259 cr at 1.75% of sales. For FY17 it was Rs. 256.82cr at 1.91% of sales.
  • Across the board, there was an overall increase in all segments adding up to a 8 % increase in total tyre production. In the Heavy Commercial Vehicle segment, the increase was 5% over the previous year while Light Commercial Vehicle tyres increased by around 4%. The Small Commercial Vehicle tyres grew by a marginal 2% in the 4-wheeled segment, while it rose by 3% in the 3-wheeled segment, over the previous year. Passenger & SUV showed a 7% growth. The Farm segment grew at 4%. The Motorcycle and Scooter segments rose by 10% and 13% respectively. The OTR segment grew at 2%.
  • Industrial Relations in all our manufacturing units had been harmonious as well as cordial, except in Thiruvottiyur unit wherein long term wage settlement case has been referred to Industrial Tribunal. Efforts are made to resolve it bilaterally.
  • The Indian tyre industry is estimated to be approximately `60,000 crores in 2017-2018 and the top eleven tyre companies’ account for more than 90% of the volume.
  • Replacement accounts for approximately 60% of the Industry with Institutional/OEM and Exports making up 22% and 18% respectively. While in the Commercial and Farm segments, replacement sales form a major chunk, both Institutional/OEM and Replacement sales play an almost equal role in the Passenger segment.
  • While India’s passenger car segment is fully radialized, radialization in the T&B segment has increased from 36% in financial year 2016 and now stands at 40%.
  • The domestic tyre sales for financial year 2018 grew on the back of traction in OEM volumes, pick-up in replacement demand and the positive impact of Anti-Dumping Duty (ADD) imposition on Chinese TBR in September 2017.
  • Overall, the domestic tyre volume growth is pegged at a strong 8-10 per cent. Of this, the Original Equipment Manufacturer is likely to mirror the overall trend with growth in the region of 8-10 per cent and Replacement demand is expected to post 6-8 per cent growth.
  • Given the healthy growth of demand in the industry across segments, capacity addition will continue to dominate the narrative in the industry given the large cash balances, strong accrual position and favourable demand scenario.
  • During financial year 2018, tyre companies had to face a triple whammy of high input costs, namely those of natural rubber, carbon black and crude oil and this may continue to be the case in the foreseeable future too.
  • Your company’s latest premium product – PERFINZA, has won the “Product of the Year’’ award from the prestigious Car India/Bike India magazine. MRF also has the unique distinction of being the only Tyre Company to be awarded the “JD Power India Customer Satisfaction Original Equipment Tyres Award” for Passenger Cars and Utility Vehicles in 2018 for a record 13th time.
  • MRF is one of the major suppliers of terrestrial and aviation application tyres to the Indian Armed Forces and exclusively developed tyres for the Indian Army for their special application vehicles like the Kraaz, Kolos and Tatra. MRF is also one of the major suppliers of tyres to Ashok Leyland and BEML for their defence application trucks and Pinaka rocket launchers.