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ApolloTyres Event Update

ApolloTyres Event Update

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Published by Angel Broking
17th June, 2013
17th June, 2013

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Categories:Types, Business/Law
Published by: Angel Broking on Jun 17, 2013
Copyright:Attribution Non-commercial


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Please refer to important disclosures at the end of this report
 Apollo Tyres (APTY) and Cooper Tire and Rubber Company (CTB) haveannounced a definitive merger agreement, under which APTY will acquire CTB inan all cash transaction valuing the firm at US$2.5bn (including minority interest). APTY will acquire 100% equity of CTB for an equity valuation of US$2.2bn, ie at a43% premium to CTB
’s 30
day volume weighted average price. The acquisitionwould be funded entirely through debt. The deal value of US$2.5bn translatesinto an implied EV/EBITDA multiple of 4.4x (TTM basis), which is broadly in-linewith the global average. Post the acquisition, the combined entity will be the7
largest tyre company in the world with combined revenues of US$6.6bn. Thecompany expects to close the transaction in the next four months.
Deal structure:
 APTY’s Management ha
s stated that the CTB acquisition would befunded entirely through debt, the cost of which would be less than 10%. Thecompany is planning to raise US$2.1bn of debt via issuing high yield bonds(duration of 7 to 8 years) at the European holding company which would houseCTB and the existing European operations (Vredestein). This debt would beserviced by operations of CTB and Vredestein. The remaining US$450mn wouldbe housed at the Mauritius subsidiary and would be serviced by the Indianoperations.
Benefits of the acquisition:
The CTB acquisition augurs well for APTY as it would
widen APTY’s
geographical footprint and provide immediate access to two of the
world’s biggest markets,
North America and China. Further, it also provides thecompany with manufacturing presence in cost efficient locations like China andEastern Europe. APTY expects to incur synergy benefits of US$80-100mn over aperiod of three years, arising out of common sourcing of raw-materials,technological and R&D benefits and reduction in administrative
expenses. APTY’s
Management expects the acquisition to be EPS accretive from the first year itself.
Implications in the short term:
 While the acquisition appears to be a goodstrategic fit for APTY in the long run, concerns regarding the large size of
acquisition, substantial increase in leverage and the Management’s ability tosuccessfully integrate the operations has led to a ~30% correction in APTY’s stock
price since the deal has been announced. According to the Management, post theconsolidation, the consolidated net Debt: Equity is expected to jump sharply to~2x from 0.6x currently. We believe that the execution would be the key thinggoing ahead, as successful execution will lend stability to the operations and leadto lower leverage over time. Additionally, sustainability of margins of CTB (EBITDA margins have been in the range of 7.5%-12.5% over the last three years) wouldbe very important given the obligation of servicing the huge debt that thecompany would be undertaking. Assuming EBITDA margins of 12% at CTB andcost of debt at 9%, we expect earnings accretion to the tune of
6/share inFY2014E as a result of the consolidation. However, a 200bp-250bp contractionin EBITDA margins at CTB would be negative for earnings. Post the acquisition,the revenue stream of the combined entity would transform completely and wouldbe dependent more on the global automotive cycle as the share of the domesticoperations to total sales will come down from 65% currently to 22%. Further,exposure t
o foreign currency debt would mean that the company’s financials
would be exposed to the fluctuations in the currency prices (actual impact in caseof interest payments and notional adjustments in case of balance sheet items).
65Target Price -
Investment Period -
Stock InfoSectorBloomberg CodeShareholding Pattern (%)Promoters43.4MF / Banks / Indian Fls14.4FII / NRIs / OCBs29.2Indian Public / Others13.0 Abs. (%)3m1yr3yrSensex(2.0)15.010.6 Apollo Tyres(26.3)(18.6)(3.7) APTY@INFace Value (
)BSE SensexNifty Reuters CodeTyre Avg. Daily VolumeMarket Cap (
cr)Beta52 Week High / LowNet Debt (
cr)19,1785,808 APLO.BO3,2631.1102/63430,06711,947
Yaresh Kothari
022-3935 7800 Ext: 6844yareshb.kothari@angelbroking.com
Apollo Tyres
 Acquisition of Cooper Tire
Ambitious move
Event Update | Tyre
June 14, 2013
 Apollo Tyres
Event Update
June 14, 2013
Outlook and valuation:
 We remain cautiously optimistic on the M
ability to successfully integrate CTB
operations, given that the company hasalready demonstrated its execution skills with the successful integration of Vredestein
operations in the past. We retain our estimates and are not factoringCTB
operations into our estimates or valuations yet, given that the Managementexpects to complete the acquisition in 2HFY2014 after securing all the necessary regulatory approvals. We believe that the large size of the CTB acquisition coupledwith significant increase in leverage is expected to remain an overhang on the
company’s stock price performance in the near term.
We recommend a Neutralrating on the stock and wait for more clarity to emerge on the CTB acquisitionfront.
Exhibit 1:
 Valuation matrix 
Global Peers
P/E EV/EBITDACompany FY12 FY13E FY14E FY12 FY13E FY14E
Bridgestone 10.1 9.3 8.9 4.6 5.0 7.2Continental 9.3 9.9 8.5 5.0 5.2 4.8Pirelli 10.7 10.3 8.8 5.5 5.6 5.1Michelin 8.3 7.9 7.2 4.2 NA NA 
 Source: Bloomberg, Company, Angel Research
Exhibit 2:
 APTY - Key financials (Consolidated)
Y/E March (
cr) FY2012 FY2013E FY2014E FY2015ENet Sales 12,153 12,795 13,852 15,487
% chg 37.1 5.3 8.3 11.8
Net Profit 411 596 647 750
% chg (4.3) 45.1 8.7 15.9
EBITDA (%) 9.4 11.4 11.4 11.5
) 8.1 11.8 12.8 14.9
P/E (x) 7.9 5.5 5.0 4.3P/BV (x) 1.2 1.0 0.8 0.7RoE (%) 15.7 19.1 17.5 17.3RoCE (%) 14.9 17.3 17.5 18.0EV/Sales (x) 0.5 0.4 0.4 0.3EV/EBITDA (x) 4.9 3.5 3.2 3.0
 Source: Company, Angel Research
Cooper Tire and Rubber Company:
Cooper Tire and Rubber Company (CTB)is the fourth largest tyre manufacturer in North America, and eleventh largest inthe world. The company derives ~70% of its revenues from North America and~30% from international operations (21% from China). CTB caters to the US lightvehicle replacement tire market and commands a market share of ~14% in thesegment. The company has also recently forayed into the OEM segment in the USand China. With 9 manufacturing facilities across 4 geographies (US, UK, Serbia,Mexico and China), the total capacity of the company stands at 53mn tires/ year.The popular brands of CTB are
Cooper, Mastercraft, Starfire, Chengshan,Roadmaster
. The company registered revenues of US$4.2bn in CY2012with EBITDA margins of 12.5%. On a net debt basis, the company is cash positiveas of CY2012.
 Apollo Tyres
Event Update
June 14, 2013
Exhibit 3:
Geographical revenue-mix 
North America69%China21%Rest of World10%North AmericaChinaRest of World
 Source: Company, Angel Research
Exhibit 4:
Passenger Car47%Light Truck23%CommercialTruck20% Winter5%Speciality 5%Passenger CarLight TruckCommercial TruckWinterSpecialit
 Source: Company, Angel Research
Exhibit 5:
Key financials
Year end December (USD ‘000)
2010 2011 2012Net sales 3,342,708 3,907,820 4,200,836
EBITDA 332,744 286,200 525,878EBITDA margin (%)
10.0 7.3 12.5
Profit before taxes 159,826 134,146 368,450PAT 139,769 269,603 252,426
PAT after MI 140,449 253,503 220,371
Total debt 326,609 350,695 338,461Cash and cash equivalents 413,359 233,710 351,817Total equity 460,789 577,801 757,624Pension and related liabilities 515,978 653,899 724,468Minority interest 62,261 120,089 150,792
 Source: Company, Angel Research

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