LKP Research view on Apollo Tyre's plan to buy US based Cooper Tyres in an all cash transaction of $2.5 bn. For more information log on to www.lkpsec.com

1. Ashwin Patil
ashwin_patil@lkpsec.com
+91 22 6635 1271
Disclaimer:
The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and is
for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company makes no guarantee and
assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. LKP
Securities Ltd., and affiliates, including the analyst who have issued this report, may, on the date of this report, and from time to time, have long or short positions
in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage o
compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation
and related information and opinions. LKP Securities Ltd., and affiliates may seek to provide or have engaged in providing corporate finance, investment banking
or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.
June 13, 2013
Under Review
Apollo Tyres
Industry: Auto and Auto Components Industry View: Neutral l Company update
“Overambitious move”
The Development –
In a path-breaking development, Apollo has announced to buy US based Cooper
Tyres in an all cash transaction of $2.5 bn. This cost seems to be too high according
to us as Apollo will be paying at 42% premium to Cooper’s closing market price on
Tuesday (translating it into 4.4x trailing 12 months EV/EBITDA) and will carry this
acquisition by raising 100% of this cost through debt. 80% of this debt will be
serviced by the holding entity housing the target company and Apollo’s European
business Vredestein. Post this acquisition, the Net Debt/EBITDA will expand to 3.8x
and the consolidated net D/E will move up from 0.53x to 1.35x. The company is
seeking regulatory approvals from the key markets of the US and Germany, which is
likely to get completed within next 3-4 months.
About Cooper Tyres
Cooper Tyres is the ninth largest company globally with a strong distribution network
in both North America and China. It had sales of ~US$4200 mn (double the
revenues of Apollo) in 2012 and EBITDA margins in the range of 11-12% during the
same period. ~70% of revenues come from North America; ~25% from China and
neighbouring regions (South East Asia, Australia) and remaining from Europe. ~95%
of the revenues come from passenger cars and light trucks predominantly
replacement and this has been the primary focus area for the company. Cooper has
a 14% market share in this segment in the US. OEM share is very low as it has a
single OEM client in the US and only a couple in China. Apart from North America, it
also has manufacturing facilities in both China and Europe (UK, Serbia) with a total
production capacity of 53 mn tyres.
How will it look post Consolidation?
The combined entity with ~US$6.5 bn revenues would become the seventh largest
tyre company globally with 14 manufacturing units across the globe. Management
feels that this will complement Apollo’s current business. Moreover, Apollo will now
put on hold plans of greenfield expansion in Eastern Europe and South East Asia
(since Cooper is already present in these geographies). It hopes to realise synergies
of ~US$80-120 mn from this acquisition (operating leverage, sourcing benefits on
raw material procurement, R&D etc) over the next three years; though Apollo may
have to incur some one-off costs initially. The transaction would be EPS accretive
given that Cooper had earnings of US$215 mn in CY12 and finance costs post tax
will move up by US$175 mn and there is no dilution at Apollo. Also, Apollo will now
become a global player with presence across all the 5 continents (Americas,
Europe, Africa, Asia and Australia), with the domestic business just contributing 19-
20% of the consolidated revenues. However, net debt/ EBITDA and net debt/equity
will significantly jump up.
Stock Data
Current Market Price Rs) 72
Target Price Rs) NA
Potential upside (%) NA
Reuters APLO.BO
Bloomberg APTY IN
Key Data
Market Cap (Rs bn) 36
52-Week Range (Rs) 102 / 72
Avg. Daily Trading Value (Rs mn) 200
Promoters (%) 43
FII Holding (%) 29
DII Holding (%) 7
Public & Others Holding (%) 21
Fiscal YE
( Rs mn) FY 12 FY 13P FY 14E FY 15E
Revenues 121,532 127,946 136,027 147,085
EBITDA (%) 9.6% 11.4% 12.1% 13.2%
PAT (%) 3.6% 4.7% 5.6% 6.4%
EPS (Rs) 8.7 11.8 15.2 18.7
EPS growth (%) -0.9% 36.5% 28.6% 22.5%
P/E (x) 10.8 7.9 6.2 5.0
P/B(x) 1.7 1.5 1.2 1.0
EV/EBITDA (x) 6.2 5.0 4.1 3.0
ROCE(%) 31.2% 36.9% 35.3% 33.4%
ROE(%) 14.7% 19.6% 19.8% 19.7%
Dividend yield (%) 0.6% 0.6% 0.6% 1.0%
Relative Price Performance
One Year Indexed
(%) 1 Month 3 Months 12 Months
Absolute 2 7 14
BSE Relative 5 9 1
20
40
60
80
100
120
140
Jun-12 Oct-12 Feb-13 Jun-13
Apollo Tyres S&P Bse Sensex

2. Apollo Tyres
LKP Research
Deal structure and valuation
Apollo Tyres would be making an offer of US$35 for ~63 mn shares at Cooper Tyres
which represents a 42% premium to Tuesday’s close price. This along with
~US$300 mn of net debt and minority would take total enterprise valuation of
~US$2.5 bn. Given that Cooper’s EBITDA was ~US$521 mn, it translates into ~4.4x
trailing EV/EBITDA which is in line with where global tyre companies trade at. While
regulatory approvals would be required in the US and some other geographies like
Germany, the company doesn’t foresee anti-trust or any other hurdle.
The deal would be fully debt funded. Cooper and Vredestein would come under a
holding company based out of Netherlands which would be taking US$2.1 bn debt
and it would be serviced by operations of these two entities. Apollo is also taking a
US$450 mn debt in a Mauritius based entity which will be used to fund the equity
contribution of the Netherlands entity; this debt would be serviced by Apollo’s Indian
operations. The debt will be raised via bonds in the US market which are likely to
have a 7-8 year maturity, a funding cost of ~10% and a bullet repayment. The
company has no intention of any equity dilution in the near future (QIP approval
taken earlier would be expiring by November).
Outlook
In our view, the acquisition looks over ambitious viewing the current demand
scenario across the globe. Although the management has mentioned that this move
will be EPS accretive right from the first year of operations, we have our reservations
on it viewing the limitations on the topline growth and profitability at the EBITDA front
considering the challenges both Apollo and Cooper are facing currently. In FY 12,
Cooper has posted its peak margins, and given the competitive intensity in the US
from Chinese and Japanese players, we remain concerned over the pricing stability
over there. In India too, given the falling CV industry growth (~70 % of Apollo’s
business), earning incremental cash flows to pay off the debt seems difficult. Also
execution is a key to earn stable margins considering the volatile demand and raw
material environment across the globe. Few years back, when the company had
acquired Vredestein’s operations, it was acquired from a loss making company at
reasonable valuations, which paid off well for Apollo. Though Cooper seems like a
good strategic fit, Apollo is paying a huge price for it (the debt raised for buying it,
itself being more than 3x times Apollo’s market cap), and hence gaining synergies
and the timeline of achieving it is important. We also await more visibility on the
complex funding structure and approval process in the next few months. Despite the
20% fall in the stock price today, we believe there will be an overhang on the stock
due to the complexity of the deal and expectations of investors from the deal going
forward. We need to wait and watch over the next few quarters, as in how the
synergies of this deal shape up. We are reviewing our numbers and hence the stock
is ‘Under Review’.The financial projections in this report does not include numbers
of Cooper.

3. Apollo Tyres
LKP Research
Financial Summary
Income statement
YE Mar (Rs.mn) FY 12 FY 13 FY 14E FY 15E
Total Revenues 121,532 127,946 136,027 147,085
Raw Material Cost 80,370 79,969 81,055 84,800
Employee Cost 13,350 14,714 17,386 19,464
Other Exp 16,195 18,697 19,316 21,180
EBITDA 11,617 14,567 16,498 19,444
EBITDA Margin(%) 9.6% 11.4% 12.1% 13.2%
Other income 326 944 1070 1000
Depreciation 3,256 3,966 3,895 4,615
Interest 2872 3128 2409 2148
PBT 5,815 8,418 10,984 13,490
PBT Margin(%) 4.8% 6.6% 8.1% 9.2%
Tax 1,443 2,449 3,305 4,086
Adj PAT 4,372 5,970 7,679 9,404
Adj PAT Margins (%) 3.6% 4.7% 5.6% 6.4%
Exceptional items 293.0 -168.6 0.0 0.0
PAT 4079 6138 7679 9404
PAT Margin (%) 3.4% 4.8% 5.6% 6.4%
Key Ratios
YE Mar FY 12 FY 13P FY 14E FY 15E
Per Share Data (Rs)
Adj. EPS 8.7 11.8 15.2 18.7
CEPS 3.4 16.2 27.8 40.2
BVPS 55.2 62.1 76.8 94.5
DPS 0.6 0.6 0.6 0.9
Growth Ratios(%)
Total revenues 37.0% 5.3% 6.3% 8.1%
EBITDA 20.3% 25.4% 13.3% 17.9%
PAT -0.9% 36.5% 28.6% 22.5%
EPS Growth -0.9% 36.5% 28.6% 22.5%
Valuation Ratios (x)
PE 10.8 7.9 6.2 5.0
P/CEPS 27.4 5.8 3.4 2.3
P/BV 1.7 1.5 1.2 1.0
EV/Sales 0.6 0.6 0.5 0.4
EV/EBITDA 6.2 5.0 4.1 3.0
Operating Ratios (Days)
Inventory days 93.0 98.0 92.0 91.0
Recievable Days 58.7 62.0 58.0 55.0
Payables day 18.6 18.0 17.0 17.0
Net Debt/Equity (x) 0.90 0.83 0.53 0.23
Profitability Ratios (%)
ROCE 31.2% 36.9% 35.3% 33.4%
ROE 14.7% 19.6% 19.8% 19.7%
Dividend payout 6.1% 5.0% 4.0% 5.0%
Dividend yield 0.6% 0.6% 0.6% 1.0%
Source: Company, LKP Research
Balance sheet
YE Mar (Rs. mn) FY 12 FY 13P FY 14E FY 15E
SOURCES OF FUNDS
Equity Share Capital 504 504 504 504
Reserves & Surplus 27,319 30,815 38,186 47,121
Total Networth 27,823 31,319 38,690 47,625
Total debt 17,550 25,157 26,157 23,157
Current liabilities
Short term borrowings 9,339 8,839 8,339 7,839
Trade payables 12,935 13,652 12,707 12,214
Other current liabilities 7,645 8,145 8,645 9,145
Short term provisions 4,089 4,589 5,089 5,589
Total Current Liabilities 34,008 35,225 34,781 34,787
Deferred tax liabilities 4,051 4,051 4,051 4,051
Total shareholder equity and
Liabilities
83,944 96,256 104,183 110,124
APPLICATION OF FUNDS
Net block 39,180 39,215 38,320 36,704
Capital WIP 3,305 4,500 7,500 7,501
Intangible Assets 1,058 1,208 1,358 1,508
Long term Investments 158 59 59 59
Goodwill 1,338 1,338 1,338 1,338
Deferred tax assets 25 25 25 25
Long term loans and advances 2,207 1,907 1,607 1,307
Total non current assets 47,271 48,251 50,206 48,442
Current Assets
Cash and Bank 1,731 8,153 14,014 20,237
Inventories 19,991 21,471 20,430 21,142
Sundry Debtors 11,458 11,217 11,180 11,686
Loan, Advances & others 3,341 7,011 8,199 8,462
Short term Loans and Advances 3,341 7,011 8,199 8,462
Other Current Assets 153 153 153 154
Total Assets 83,944 96,256 104,183 110,124
Cash Flow
YE Mar (Rs mn) FY 12 FY 13P FY 14E FY 15E
PBT 5,565 8,587 10,984 13,490
Depreciation 3,256 3,966 3,895 4,615
Interest 2,867 3,128 2,409 2,148
Chng in working capital (3,099) (3,692) (555) (1,476)
Tax paid (953) (2,449) (3,305) (4,086)
Other operating activities (42) (2,351) 0 0
Cash flow from operations (a) 7,594 7,189 13,428 14,693
Capital expenditure (7,930) (5,195) (6,000) (3,001)
Chng in investments (52) (51) (150) (150)
Other investing activities (77) 300 300 300
Cash flow from investing (b) (8,059) (4,946) (5,850) (2,851)
Free cash flow (a+b) (465) 2,243 7,577 11,842
Inc/dec in borrowings 3,372 7,607 1,000 (3,000)
Dividend paid (incl. tax) (293) (298) (307) (470)
Other financing activities (2,783) (3,128) (2,409) (2,148)
Cash flow from financing (c) 295 4,181 (1,716) (5,619)
Net chng in cash (a+b+c) (170) 6,424 5,861 6,223
Foreign excg fluctutions (9) 0 0 0
Closing cash & cash equivalents 1,729 8,153 14,014 20,237
Less: Unpaid dividends bank accounts 28 66 66 67
Adj. Closing cash & cash eqvts 1,635 8,087 13,948 20,171

4. Apollo Tyres
LKP Securites Ltd, 13th Floor, Raheja Center, Free Press Road, Nariman Point, Mumbai-400 021. Tel -91-22 - 66351234 Fax- 91-22-66351249. www.lkpsec.com
Team LKP
Pratik Doshi Director 98210 47676 pratik_doshi@lkpsec.com
S. Ranganathan Head of Research 98212 22510 6635 1270 s_ranganathan@lkpsec.com
Ashwin Patil Research Analyst 98195 78395 6635 1271 ashwin_patil@lkpsec.com
Chirag Dhaifule Research Analyst 98679 80172 6635 1220 chirag@lkpsec.com
Rajeev Gupta Head of Sales 98203 07797 6635 1230 rajeev@lkpsec.com
Hardik Mehta Sales 98190 66569 6635 1246 hardik_mehta@lkpsec.com
Varsha Jhaveri Sales 93241 47566 6635 1296 varsha_jhaveri@lkpsec.com
Hitesh Doshi Sales 93222 45130 6635 1281 hitesh_doshi72@lkpsec.com
Bharat Shah Dealing 98337 97256 6635 1210 bharat_shah@lkpsec.com
Kaushik Doshi Dealing 93205 23595 6635 1207 kaushik_doshi@lkpsec.com