A home away from home :: Business Line

GMDC - Management Meeting Update - Centrum

Management Meeting Update/Estimate Change

GMDC

Rating: Buy

Target Price: Rs182

CMP: Rs133

Upside: 36.7%

Grappling with production issues

We met with GMDC management to gauge reasons for the sharp underperformance in volumes since Q3FY13 and other production issues. We held lengthy discussions with Mr. A.L Thakor, Mr. Pawan Bhootra and Mr. D. Chattopadhyay on the steps taken by GMDC to overcome production issues and improve performance of lignite and power divisions going ahead. We inferred that production issues were mainly at Tadkeshwar and Bhavnagar mines due to the scarcity of land for overburden dumping, increased thickness of stone (at Bhavnagar) and reduced thickness of lignite seam (at Tadkeshwar). While the company has taken various steps to mitigate these issues, progress remains slow and volume growth is expected to be subdued in FY14E. Demand however remains strong for lignite in Gujarat and price hikes (expected to be more than earlier proposed Rs100/t post coal price hike of ~10% by Coal India in May’13) could be taken soon (post board meeting in July’13).  Power division is being overhauled (after handover to KEPCO) and should stabilise from Aug’13. We have cut our volume estimates for FY14E/15E due to production issues and reduced earnings estimates. We cut our target price to Rs182. Maintain Buy on attractive valuations post recent underperformance and higher quantum of price hikes ahead.

Apollo Tyres - “Overambitious move”:LKP

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.

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.