Good Q2 for Apollo Tyres, Street awaiting Cooper deal progress

Margins at the consolidated level were up 140 bps year-on-year to 12.3% due to lower rubber costs

Apollo Tyres beat Street expectations reporting higher revenues, margins and net profit. Margins at the consolidated level were up 140 bps year-on-year to 12.3 per cent due to lower rubber costs. Net profit growth at 44 per cent year-on-year to Rs 219 crore were led by better operating performance, higher other income and lower taxes.

Revenue growth on a year-on-year basis which came in at two per cent to Rs 3,433 crore were led by volume growth in European operations with revenues for that geography up 27 per cent year-on-year. At the operating profit level, growth was led by India operations while European margins softened.  

While results were better, the key monitorable will continue to be the newsflow from the $2.5 billion acquisition of Cooper Tire, the fourth largest tyre maker in the US. The company recently won a temporary victory in a US court which ruled that Apollo Tyres had fulfiled its obligations on negotiating with the United Steel Workers Union.

The positive ruling on its case against Cooper Tires saw the company’s share move up over five per cent in the morning trade. The stock ended the day with gains of four per cent and closed at Rs 74.50. While the ruling is a positive most analysts continue to have a sell on the stock given the uncertainty on the deal. The stock which has a lost 22 per cent since the announcement of the deal in June is trading at just over six times its FY14 consolidated earnings per share.  

Uncertainty on Cooper deal
The negotiation with the United Steel Workers Union and the issues with Cooper’s Chinese unit are the reasons why Apollo Tyres has asked for a $2.5-drop in its $35 a share offer for Cooper Tires. Any fall in the offer price or the deal falling through will be a positive for Apollo shareholders. However, given that Cooper Tire is likely to appeal to higher court if it loses the case and the uncertainty of the final outcome, most analysts continue to be bearish. The key issue of the proposed acquisition continues to be the increase in debt from the existing Rs 2,000 crore to about Rs 17,000 crore. While cash flows from Cooper Tire will be enough to fund the interest payment, there is little room for error.

Says Ashwin Shetty and Ritu Modi of Ambit Capital, “One bad year of operations can severely hamper the ability to service the interest as well as the principal repayment.”