Event Update | Tyre

June 14, 2013

Apollo Tyres
Acquisition of Cooper Tire – Ambitious move
Apollo Tyres (APTY) and Cooper Tire and Rubber Company (CTB) have announced a definitive merger agreement, under which APTY will acquire CTB in an 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 a 43% premium to CTB’s 30 day volume weighted average price. The acquisition would be funded entirely through debt. The deal value of US$2.5bn translates into an implied EV/EBITDA multiple of 4.4x (TTM basis), which is broadly in-line with the global average. Post the acquisition, the combined entity will be the 7th largest tyre company in the world with combined revenues of US$6.6bn. The company expects to close the transaction in the next four months. Deal structure: APTY’s Management has stated that the CTB acquisition would be funded entirely through debt, the cost of which would be less than 10%. The company 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 house CTB and the existing European operations (Vredestein). This debt would be serviced by operations of CTB and Vredestein. The remaining US$450mn would be housed at the Mauritius subsidiary and would be serviced by the Indian operations. 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 the company with manufacturing presence in cost efficient locations like China and Eastern Europe. APTY expects to incur synergy benefits of US$80-100mn over a period 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 good strategic fit for APTY in the long run, concerns regarding the large size of acquisition, substantial increase in leverage and the Management’s ability to successfully 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 the consolidation, 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 thing going ahead, as successful execution will lend stability to the operations and lead to 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) would be very important given the obligation of servicing the huge debt that the company would be undertaking. Assuming EBITDA margins of 12% at CTB and cost of debt at 9%, we expect earnings accretion to the tune of `5-`6/share in FY2014E as a result of the consolidation. However, a 200bp-250bp contraction in EBITDA margins at CTB would be negative for earnings. Post the acquisition, the revenue stream of the combined entity would transform completely and would be dependent more on the global automotive cycle as the share of the domestic operations to total sales will come down from 65% currently to 22%. Further, exposure to foreign currency debt would mean that the company’s financials would be exposed to the fluctuations in the currency prices (actual impact in case of interest payments and notional adjustments in case of balance sheet items).
Please refer to important disclosures at the end of this report

CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Tyre 3,263 1,947 1.1 102/63 430,067 1 19,178 5,808 APLO.BO APTY@IN

`65 -

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 43.4 14.4 29.2 13.0

Abs. (%) Sensex Apollo Tyres

3m (2.0)

1yr 15.0

3yr 10.6 (3.7)

(26.3) (18.6)

Yaresh Kothari
022-3935 7800 Ext: 6844 yareshb.kothari@angelbroking.com


Apollo Tyres | Event Update

Outlook and valuation: We remain cautiously optimistic on the Management’s ability to successfully integrate CTB’s operations, given that the company has already demonstrated its execution skills with the successful integration of Vredestein’s operations in the past. We retain our estimates and are not factoring CTB’s operations into our estimates or valuations yet, given that the Management expects to complete the acquisition in 2HFY2014 after securing all the necessary regulatory approvals. We believe that the large size of the CTB acquisition coupled with significant increase in leverage is expected to remain an overhang on the company’s stock price performance in the near term. We recommend a Neutral rating on the stock and wait for more clarity to emerge on the CTB acquisition front.

Exhibit 1: Valuation matrix – Global Peers
P/E Company Bridgestone Continental Pirelli Michelin FY12 10.1 9.3 10.7 8.3 FY13E 9.3 9.9 10.3 7.9 FY14E 8.9 8.5 8.8 7.2 FY12 4.6 5.0 5.5 4.2 EV/EBITDA FY13E 5.0 5.2 5.6 NA FY14E 7.2 4.8 5.1 NA

Source: Bloomberg, Company, Angel Research

Exhibit 2: APTY - Key financials (Consolidated)
Y/E March (` cr) Net Sales % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2012 12,153 37.1 411 (4.3) 9.4 8.1 7.9 1.2 15.7 14.9 0.5 4.9

FY2013E 12,795 5.3 596 45.1 11.4 11.8 5.5 1.0 19.1 17.3 0.4 3.5

FY2014E 13,852 8.3 647 8.7 11.4 12.8 5.0 0.8 17.5 17.5 0.4 3.2

FY2015E 15,487 11.8 750 15.9 11.5 14.9 4.3 0.7 17.3 18.0 0.3 3.0

Cooper Tire and Rubber Company: Cooper Tire and Rubber Company (CTB)
is the fourth largest tyre manufacturer in North America, and eleventh largest in the world. The company derives ~70% of its revenues from North America and ~30% from international operations (21% from China). CTB caters to the US light vehicle replacement tire market and commands a market share of ~14% in the segment. The company has also recently forayed into the OEM segment in the US and 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 and Avo. The company registered revenues of US$4.2bn in CY2012 with EBITDA margins of 12.5%. On a net debt basis, the company is cash positive as of CY2012.
June 14, 2013


Apollo Tyres | Event Update

Exhibit 3: CY2012 – Geographical revenue-mix
China 21%

Exhibit 4: CY2012 – Product-mix
Winter 5%
Speciality 5% Passenger Car 47%

Rest of World 10%

Commercial Truck 20%

North America 69% North America China Rest of World

Light Truck 23%

Passenger Car

Light Truck

Commercial Truck



Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 5: CTB – Key financials
Year end December (USD ‘000) Net sales EBITDA EBITDA margin (%) Profit before taxes PAT PAT after MI Total debt Cash and cash equivalents Total equity Pension and related liabilities Minority interest
Source: Company, Angel Research

2010 3,342,708 332,744 10.0 159,826 139,769 140,449 326,609 413,359 460,789 515,978 62,261

2011 3,907,820 286,200 7.3 134,146 269,603 253,503 350,695 233,710 577,801 653,899 120,089

2012 4,200,836 525,878 12.5 368,450 252,426 220,371 338,461 351,817 757,624 724,468 150,792

June 14, 2013


Apollo Tyres | Event Update

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Apollo Tyres No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

June 14, 2013


Apollo Tyres | Event Update
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Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Bhavesh Chauhan Viral Shah Sharan Lillaney V Srinivasan Yaresh Kothari Ankita Somani Sourabh Taparia Bhupali Gursale Vinay Rachh Amit Patil Twinkle Gosar Tejashwini Kumari Akshay Narang Harshal Patkar Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Tejas Vahalia Dilip Patel Research Editor Production Incharge tejas.vahalia@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Sr. Executive mayuresh.joshi@angelbroking.com hiten.sampat@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Sr. Analyst (Metals & Mining) Sr. Analyst (Infrastructure) Analyst (Mid-cap) Analyst (Cement, FMCG) Analyst (Automobile) Analyst (IT, Telecom) Analyst (Banking) Economist Research Associate Research Associate Research Associate Research Associate Research Associate Research Associate sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com bhaveshu.chauhan@angelbroking.com viralk.shah@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com ankita.somani@angelbroking.com sourabh.taparia@angelbroking.com bhupali.gursale@angelbroking.com vinay.rachh@angelbroking.com amit.patil@angelbroking.com gosar.twinkle@angelbroking.com tejashwini.kumari@angelbroking.com akshay.narang@angelbroking.com harshal.patkar@angelbroking.com

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June 14, 2013


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