Apollo Tyres (SELL): Aggressive and over-leveraged acquisition - AMBIT

We find Apollo Tyres' acquisition of Cooper Tires as aggressive, considering that the acquisition is valued at an EV of US$2.5bn, which is nearly 2x Apollo's current size. Also, the acquisition is over-leveraged given that 100% financing of the acquisition is through debt; we expect the company's consolidated net-debt: equity ratio post acquisition to increase to 3.8x. Whilst the deal appears to be value-accretive, note that a significant portion of the value accretion is the result of tax savings on the interest payments.

Whilst we put our target price and earnings estimates 'under review' due to the need to incorporate Cooper's financials in our estimates/valuation, given our significant concerns surrounding the acquisition, we change our stance on the stock to SELL (from BUY earlier).

The stock is currently trading at 7.6x FY14 net earnings. Apollo Tyres is one of the best-managed tyre companies in India but as pointed out in our 7 June strategy note ('Why do great Indian companies self-destruct?'), over 80% of great companies in India self-destruct through a combination of overconfidence and unbridled expansion.

Source : Equity Bulls

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