High interest cost likely to weigh on Apollo Tyres margins, say analysts

Apollo Tyre Ltd plunged over 26 per cent in trade to touch its 52-week low of Rs 67.95 on Thursday, after the tyre maker announced to buy US based Cooper Tyres in an all cash transaction of $2.5 billion. 

The stock finally closed 25.43 per cent lower at Rs 68.60. It hit a 52-week low of Rs 67.75 and a high of Rs 86 in trade today on the Bombay Stock Exchange. 

According to analysts, although the acquisition of Cooper Tyres will be a good strategic fit for the Indian tyre maker but the acquisition looks overambitious given the demand scenario. 

"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," LKP Research said in a note. 

Experts say, the cost to acquire Cooper Tyres seems to be too high and Apollo might be paying over 40 per cent premium to Cooper's closing market price on Tuesday (translating it into 4.4x trailing 12 months EV/EBITDA). 

Apollo Tyres will carry this acquisition by raising 100 per cent of this cost via debt and 80 per cent 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," said the LKP report. 

The company is seeking regulatory approvals from the key markets of the US and Germany, which are likely to get completed within next 3-4 months. 

High debt burden that will ultimately come of Apollo's books and slowdown in demand environment are couple of factors which are likely to weigh on the stock atleast in near term, say analysts.