June 15, 2013

Mumbai

Apollo Tyres Limited

Ratings downgraded to CRISIL A/Negative/CRISIL A1

Total Bank Loan Facilities Rated
Rs.17,250 Million
Long-Term Rating
CRISIL A/Negative (Downgraded from ‘CRISIL AA/Stable’)
Short-Term Rating
CRISIL A1 (Downgraded from ‘CRISIL A1+’)

(Refer to Annexure 1 for details on facilities)

Rs.3.25 Billion Non-Convertible Debentures
CRISIL A/Negative (Downgraded from ‘CRISIL AA/Stable’)
Rs.2 Billion Non-Convertible Debentures
CRISIL A/Negative (Downgraded from ‘CRISIL AA/Stable’)
Rs.2 Billion Non-Convertible Debentures
CRISIL A/Negative (Downgraded from ‘CRISIL AA/Stable’)
Rs.9 Billion Commercial Paper Programme
CRISIL A1 (Downgraded from ‘CRISIL A1+’)

CRISIL has downgraded its rating on the bank facilities and other debt programmes of Apollo Tyres Ltd (Apollo) to ‘CRISIL A from ‘CRISIL AA’ and revised the rating outlook to ’Negative’ from ‘Stable’. CRISIL has also downgraded the company’s short-term rating to ‘CRISIL A1’ from ‘CRISIL A1+’.

The rating downgrade follows Apollo’s announcement of acquiring Cooper Tire and Rubber Ltd (Cooper; rated BB-/Stable by Standard & Poor’s) in an all-cash-transaction of USD 2.5 billion. The transaction will be funded entirely through foreign currency debt to be raised at the level of two international subsidiaries. Apollo [Mauritius] Holdings Pvt Ltd will contract USD 450 million of debt whereas Apollo Vredestein BV (Vredestein) will raise USD 2.1 billion through USD denominated bonds. These bonds will have a lengthy maturity of 7 to 8 years, and their redemption will be back ended. The transaction is structured such that the debt of USD 450 million will be serviced by Apollo’s India operations and the remaining debt will be serviced jointly by Vredestein and Cooper. The management anticipates completion of the transaction over the next six months contingent upon getting regulatory approvals and go-ahead from majority share holders.

CRISIL believes that the fully debt-funded acquisition, which is much larger than Apollo’s existing consolidated balance sheet, will deteriorate its financial risk profile. Post-acquisition the consolidated entity will have a net gearing of around 4 times (pro-forma calculation on Cooper’s balance sheet ended December 31, 2012 and Apollo’s as on March 31, 2013). The entity’s debt protection metrics are also likely to weaken significantly from current levels.

With interest servicing burden on the newly contracted acquisition debt of USD 450 million, the interest coverage ratio for Apollo’s India operations will decline to around 2 times, whereas for the Vredestein and Cooper (combined) the ratio will be at around 3 times. Historically, Apollo’s interest coverage has been in the range of 4 to 5 times. Similarly, the net cash accruals to total debt (NCATD) ratio will decline to around 0.18 times, calculated on the pro-forma consolidated balance sheet as against a comfortable 0.44 times as on March 31, 2013, prior to the acquisition. In the backdrop of this transaction, sensitivity of Apollo’s debt protection metrics to its operating cash flows has magnified. Apollo operates in a cyclical business, where volatility in raw material prices could sharply impair profitability and will be the key rating sensitivity factor.

CRISIL believes that the acquisition will be complementary to Apollo’s existing business risk profile, adding diversity to its geographic presence, customer profile and product mix. Apollo will get access to the high growth market of China and also a sizable presence in the largest global tyre market of North America. The management believes that the combined entity will derive significant synergy through raw material sourcing and economies of scale and scope. However, the benefits of synergies will take at least two to three years to manifest. Over the medium term, CRISIL will monitor the growth in Cooper’s international business and resilience of its operations in North America, where it is mainly present in the replacement market.

The ratings continue to reflect Apollo Tyres’ strong market position in the Indian tyre industry, diversified revenue profile emanating from presence across geographies, products/brands and consumer categories. These rating strengths are partially offset by the company’s exposure to a cyclical industry and volatile raw material prices.

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Apollo and its subsidiaries Vredestein and Apollo Tyres South Africa Pty Ltd (earlier known as Dunlop Tyres International (Pty) Ltd). CRISIL will also combine the business and financial risk profiles of Cooper with Apollo post announcement of the acquisition.

Outlook: Negative

CRISIL believes that the susceptibility of Apollo’s debt servicing ability to the cyclical nature of the tyre industry and volatility in raw material prices is magnified post this acquisition. Moreover, Apollo could face issues with integrating the combined entity and exploiting the benefits of synergies in initial years. The rating could be downgraded if there is a sharp decline in the operating cash flows of any of the company’s key operations/geographies resulting in a further deterioration of its debt protection metrics. The outlook may be revised to ‘Stable’ if there is a significant augmentation in the operating cash flows of Apollo benefitting from the synergies resulting in an earlier-than-expected improvement in capital structure and/or timely and adequate deleveraging through fresh equity infusion.

About the Company

Set up in 1972, Apollo Tyres manufactures automotive bias and radial tyres, and tubes. The company has plants in Kochi (Kerala), Vadodara (Gujarat), Pune (Maharashtra), and Chennai (Tamil Nadu). Its product profile includes leading brands in the T&B, light truck, passenger car, and farm vehicle segments in India, which cater to both the OEM and replacement markets. In May 2009, Apollo Tyres acquired Vredestein, a niche player in the premium, high-speed PCR segment in Europe—from Amtel NV, Russia. Vredestein has a manufacturing unit at Enschede, near Amsterdam (The Netherlands), with capacity to manufacture 6.5 million tyres per annum. Vredestein has two brands: Vredestein in the premium segment and Maloya in the mid-range segment.

In May 2013, Apollo announced selling off part of its South African operations which included Ladysmith passenger car tyre plant and the rights to use Dunlop brand to Sumitomo Rubber Industries, Japan, for a consideration of USD 60 million. Apollo will retain the Durban plant, which manufactures truck & bus radial (TBR) tyres and off highway tyres (OHT) and will continue to sell the Apollo, Vredestein and Regal brands in Africa. The transaction is likely to be completed in four months after obtaining regulatory approvals.

For 2012-13, Apollo Tyres had a profit after tax (PAT) of Rs.6.14 billion on net sales of Rs.127.95 billion against a PAT of Rs.4.12 billion on net sales of Rs.121.5 billion for 2011-12.

For 2011-12 (financial year ended December 31, 2012), Cooper had a net income of USD220 million on net sales of USD4.2 billion against a net income of USD86 million on net sales of USD3.9 billion for the previous year.

Annexure 1 - Details of various bank facilities

Current facilities
Previous facilities
Facility
Amount
(RS. Million)
Rating
Facility
Amount
(RS. Million)
Rating
Cash Credit Limit*
10,000
CRISIL A/Negative
Cash Credit Limit*
10,000
CRISIL AA/Stable
Letter of Credit@
6,750
CRISIL A1
Letter of Credit@
6,750
CRISIL A1+
Long-Term Loans
500
CRISIL A/Negative
Long-Term Loans
500
CRISIL AA/Stable
Total
17,250

Total
17,250

* Interchangeable with working capital demand loan

@Interchangeable with bank guarantee

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Last updated: May, 2013

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June 15, 2013

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