Buy Apollo Tyres - Kotak

Cooper Tire announced that they have terminated the merger agreement with Apollo Tyres. Cooper Tire management said that it is clear that the merger agreement will not be consummated by Apollo Tyres and that Cooper Tires have been notified that financing for the transaction is no longer available. Cooper believes that Apollo Tyres has breached the merger agreement and thereby they will pursue with necessary legal steps. Given that the transaction with Cooper Tires would have been a highly leveraged one for Apollo Tyres, deal getting terminated is positive for the stock. Post deal announcement in June 2013, the stock got de-rated in view of enhanced risk arising from its agreement with Cooper Tires. However, now that the agreement stands terminated, we expect the stock to get re-rated. We thereby raise our target PE multiple to 8x (earlier 5x on account of deal with Cooper Tires) and revise our target price to Rs120 (earlier Rs75). However, ambiguity continues to stay over the break-up fee of $112.5mn. Given uncertainty, we have not incorporated the impact of break-up fee and other damages in our estimates. Thereby, we may have to review our financial estimates/target price in future depending on the ruling on penalty payment. We upgrade our rating on the stock to BUY (ACCUMULATE earlier).

Source : Equity Bulls

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