Investor's Eye: Update - Apollo Tyres, Banking

Investor's Eye [December 27, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE Apollo Tyres Recommendation: Buy Price target: Rs116 Current market price: Rs101 Cooper Tires deal unlikely to go through; maintain Buy with revised price target of Rs116 Apollo Tyres-Cooper Tires deal likely to be called off The proposed $2.5-billion take-over of US-based Cooper Tires by Apollo Tyres Ltd (ATL) is unlikely to take place. After its announcement in June 2013 the deal has been facing trouble since Cooper Tires' Chinese joint venture partner and US workforce have opposed the takeover by India-based ATL. When due to the opposition ATL demanded renegotiation of the deal, Cooper Tires took the case to court in the USA. However, the US court has granted relief to ATL by dismissing Cooper Tires' appeal, which stated that ATL was violating the merger agreement.  The agreement is valid till December 31, 2013 after which ATL can walk away without paying the break-up fee of $112.5 million. Given the court's favourable ruling, we believe the deal is unlikely to be completed by the deadline and ATL would have no obligation to complete the deal at the original price. This would be a positive development for ATL as the acquisition was to be funded entirely using debt which would have exerted huge pressure on its balance sheet. Rubber import duty increase unlikely to have a material impact  The central government has recently hiked the import duty on natural rubber by Rs10 per kilogram to Rs30 per kilogram. However, the move is unlikely to have any significant impact on the raw material cost of ATL. ATL sources about 40% of its rubber requirement through imports. About 75-80% of the rubber imports are duty-free as these are made against the company's exports.  Other raw material prices benign-margins to sustain at higher levels Further, the prices of the other raw materials such as carbon black and nylon cord, which are crude derivatives, are benign. We expect the raw material prices to remain stable which would help ATL to maintain its margins at higher levels. We expect ATL to report margins of 13% in FY2014.  Outlook and valuation-Cooper Tires deal unlikely; maintain Buy with revised price target of Rs116 We have broadly maintained our FY2014 and FY2015 estimates. The proposal to acquire Cooper Tires had led to a sharp contraction in the valuation multiple for ATL (as a leveraged buy-out would have stretched the balance sheet making debt servicing difficult in the event of a margin contraction). However, given the scenario of the deal not going through, we see the stock returning to its long-term historical average price/earnings band. We, therefore, assign a multiple of 7x (in line with the historical average) to ATL's FY2015 estimated earnings to arrive at a revised price target of Rs116. We maintain our Buy recommendation on the stock.     SECTOR UPDATE Banking Public sector banks-fundamentals remain weak, prefer BoB  The Public Sector Bank Index has underperformed the Bank Nifty and Nifty by 22% and 30% respectively (over the past 12 months) despite a recent spurt (the Public Sector Bank Index has risen by 20% in the past three months). The underperformance was driven by a sharp deterioration in the asset quality and a weak earnings growth. We have largely been cautious about the public sector banks (PSBs) and have had a Buy rating only on a select few PSBs, viz Bank of Baroda (BoB) and Punjab National Bank (PNB). Going ahead, we maintain our Buy rating on BoB due to the bank's healthy capital adequacy ratio (CAR; tier-I CAR at 9.4%), better visibility of its non-performing assets (NPAs) and the reasonable valuation of its stock. After the recent run-up in its price, PNB trades at a valuation almost similar to that enjoyed by BoB despite a sluggish earnings growth and weak asset quality outlook. We, therefore, revise the recommendation on PNB to Hold and raise its price target to Rs670. We maintain our Hold recommendation on Bank of India (BoI) but revise its price target to Rs245. We believe lower capitalisation remains a key concern in most mid-sized PSBs (Allahabad Bank, Corporation Bank, Andhra Bank, IDBI Bank etc). Therefore, dilution risks offset the lure of lower valuation. We have a Hold recommendation on State Bank of India (SBI) though we recommend accumulation of the stock on dips.  Prefer BoB and SBI over others: PSBs in general are likely to report relatively weaker earnings over the next couple of quarters due to a slower top line growth and higher provisions (including the carry-over of treasury losses on account of a rise in bond yields) unless these are supported by strong NPA recoveries and a revival in credit growth. We reiterate our Buy rating on BoB in view of its higher capitalisation, its reasonable operating performance and relatively better visibility of its asset quality. PNB at 0.85x FY2015E adjusted book value seems fairly priced, given the stress on its earnings and asset quality. We are sanguine about SBI and recommend accumulating the stock on dips, though the bank's asset quality will be a key monitorable.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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