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Thursday, June 13, 2013

Cooper Tire and Rubber Company...sign of Indian appetite?

...Now bought by Apollo Tyres in the largest M&A of India's automotive history.The all cash transaction valued at $2.5 billion would leave the Ohio headquartered firm in Indian hands.
 
At a time when global risk appetite is low,this deal signifies a bold new initiative for a company that is familiar to Indians but not that big an international 'face'.The leverage will substantially increase the debt:equity ratio of Apolloto 1:4 on consolidated basis,  which currently stands at 1:1.In times of strained cash flows and high interest rates its a risky move.
 
Banking solely on opening doors to the mature American market where Cooper Tire get 70%  of their revenue from,as well as providing a base for the entire South Americas.It makes the Apollo+Cooper entity 7th on the global list of biggies behind leader Bridgestone and just behind Pirelli.
 
The bold move of the Tata Motors  buy of Jaguar-Landrover has show on balance sheet of the parent company this year.Less hyped was the Hindalco buy of Novelis for $6 billion and two smaller buys in Australia to secure supplies for its copper smelters.
 
Is it more important to find new markets or secure the raw materials or supply pipeline?The Chinese have been very clear about finding new markets for their products after having sewn up 30% of the raw materials from across the world.


Indian businesses have been generally risk averse and conservative.The few exceptions eg.Bharti,Tatas etc have faced shareholder pressure,bad press and regulatory hurdles.Assuming the Indian economy growing around 5% will still leave substantial cash flows on company books for them to leverage their balance sheets and buy profitable assets.
 
No other Indian behemoth signifies this conundrum more than Infosys.Holding a  mamoth 22000 Crores in cash without seeking options to deploy has left the Infosys stock down 35% from its peak,a high attrition rate and the need for a former star to try a comeback.
 
Do comebacks works?Thats another story.
 
But the Infosys example should guide perception of business leaders in india to seek new ground.Sometimes the risks are worthwhile.
 
As for Apollo,hindsight will be the best judge.