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Apollo Tyres-Cooper Tire Deal: Who gains, who loses?

Riken Mehta
Follow me on Twitter @mehtariken

Gurgaon based Apollo Tyres announced on June 12 that it would acquire Ohio-based Cooper Tire in an all cash deal for USD 2.5 billion. The merged entity would become the seventh largest tire company in the world. Shares of Cooper gained 37 percent on the New York Stock Exchange while that of Apollo Tyres lost over 37 percent in the same week post deal announcement.

The reason for this- Apollo Tyres was buying Cooper at USD 35 apiece, three times its current market cap and at 40 percent premium.

In the past, big ticket acquisitions have not gone down well for the Indian companies. Tata Steel-Corus and Hindalco-Novelis are some examples wherein the acquirer even after several years post deal continued to reel under huge debt that was raised to fund acquisitions Investors and analysts were surprised by the Apollo's plan to fund such a mammoth acquisition at a time when the interest rates are very high and rupee at all-time low.

After nearly three months, the deal has now taken a twist. It seems Apollo Tyres has realized that the Cooper deal is too much to handle and has now backed out of the deal citing Cooper failing to meet its contractual obligations. Both companies have filed several litigations in the US court and the outcome is still pending.

Analysts are of the view that the deal might be called off and the same is now reflecting in the share prices of both companies. Cooper Tire has lost all the gains and is now trading around the same level before the deal was announced. Apollo on the other hand has recovered nearly 15 percent of its lost ground. However, the stock is still down 21 percent from its pre-deal price.

Analysts on Dalal Street are now upgrading Apollo Tyres to 'Buy' from 'Sell' on hopes of deal fallout. At current market price, the stock is trading at a price to earning (P/E) multiple of 5.5 in contrast to P/E of 7.2 prior to the deal. If the deal does not happen, then analysts expect Apollo to trade at P/E of 7 (same levels before the deal) and the stock price will factor it in the coming days based on the developments. However, Apollo Tyres will have to pay USD 112.5 million in order to withdraw from the deal, while Cooper will have to pay a termination penalty of USD 50 million if it decides to do the same. In past three months, its peers like Ceat, MRF and JK Tyres have gained 27 percent, 8 percent and 6 percent respectively. It seems Apollo has to catch up a lot in the coming days.

Q3 traditionally weak, maintains guidance of 20-25% EBIDTA growth: RS Software (India)

Riken Mehta Follow me on Twitter @mehtariken

RS Software (India), a leading software solutions provider for electronic payments industry reported its highest-ever consolidated sales of Rs 104 crore in the second quarter of FY14, a growth of 25 percent over the same quarter last year. The company's net profit also jumped by 22 percent to Rs 11.6 crore. However, what needs to be highlighted is the expansion of operating profit margins by 490 basis points to 21.2 percent from 16.3 percent last year.

“The revenue growth was led by healthy expansion in businesses from existing as well as new clients,” Raj Jain, chairman and managing director at RS Software (India) told moneycontrol.com in an exclusive interview.

Quarterly Review

The company crossed a turnover of Rs 100 crore for the first time in a single quarter. The investments made in its prime products like Payment Labs, School of Payments and Knowledge Management System are now beginning to pay off, explains Jain. The revenue growth in constant currency terms was four percent, quarter-on-quarter (QoQ).

Guidance

RS Software's guidance of 20 to 25 percent growth in operating profits in FY14 over previous year remains unchanged despite rupee fall. "The third quarter traditionally remains a weak quarter as two of our key clients have September year ending, so the spending from these two clients will be on the lower side in December quarter,” he added.

Industry Outlook

“The evolution is happening in the electronic payment industry as major central governments across the globe are emphasizing the need of higher security for electronic payments and fraud management. We are seeing the momentum picking up in the first half of FY14," said Jain. "Around 85 percent of the payments in the world are still done via cash and cheques. In US, around 60 to 65 percent of the payments are done via electronic while in India the share is just 7 percent. So there is a huge potential for this industry to grow,” explained Jain.

Operating margins expansion

The fall in rupee coupled with the cost efficiency measures undertaken by the company led to this massive improvement in margins of 490 basis points, year-on-year. "There is still room for improvement as we will install ERP (Enterprise Resource Planning) program by the end of FY14 which will lead to further cost cutting and margins expansion,” said Jain.

Patents

The company has not filed for any new fresh patents after receiving its first patent this year in the Customer Acquisition space, clarified Jain.

Infosys earnings: How Infy P/E contracts/expands on result day

Riken Mehta

Infosys may have lost its mojo as the IT bellwether in past few years but it still remains the darling stock for option traders ahead of its quarterly earnings. Erratic movements of Infosys stock price post results have rewarded bearish traders with huge chunks of money every three out of four occasions in the last 12 quarters.

Infosys will announce its second quarter results of FY14 on October 11 and the F&O traders once again have positioned themselves in the Infosys for a big vicious movement post results.

In today’s article, we will compare how the price earning multiple (P/E) of Infosys changes before and after result announcement.

Price earnings multiple is calculated by dividing the stock price to earnings per share of the company. In simple terms, if Infosys P/E is 18, it means the company will take 18 years to generate profits equal to the current market price based on the current earnings per share.

For calculation, we have taken trailing 12-month consolidated EPS. The average change in P/E for Infosys on the result day for last 12 quarters or 3 years (15-Oct-10 to 11-Jul-13) is 2.45.  

The management’s commentary on different business verticals performance, revision in guidance, client’s spending scenario and key business verticals exit are some of the factors along with quarterly earnings performance that the market will watch it closely on result day and based on them market will factor it in price.

Currently, its trading at 18.67 P/E based on consolidated EPS (Price Rs 3100). Considering the huge built-up in options and based on the quarterly earnings performance on either side if the stock's P/E changes by an average 2.45  (assuming Infy posts close to Rs 42 EPS in Sept quarter as well, TTM EPS will be Rs 166 ) then expect 400 rupees or 13 percent movement on either side (CMP Rs 3100). In that case, option buyers will not make money

If TTM EPS expands or contracts by 5% (TTM EPS Rs 175, Bullish scenario where Infy posts an EPS close to Rs 50 or TTM EPS Rs 158 highly bearish scenario where Infy posts an EPS close to Rs 33) then change in P/E and price adjustment will take Infy close to Rs 3700 (Bullish) or Rs 2550 (Bearish) translating Rs 550-600 movement on either side.

QUARTER	EPS	TTM EPS	Prev Day	Prev Day P/E	Result Day	Result Day P/E	Change in P/E	Price % Chg
11-Jul-13	41.54	166.36	2526.75	15.32	2802.75	16.85	1.52	10.92%
12-Apr-13	41.89	164.88	2,917.85	17.84	2,295.45	13.92	-3.92	-21.33%
11-Jan-13	41.47	163.53	2,322.30	14.20	2,712.10	16.58	2.39	16.79%
12-Oct-12	41.46	163.57	2,533.25	16.29	2,395.35	14.64	-1.65	-5.44%
12-Jul-12	40.06	155.47	2,471.00	16.98	2,264.40	14.56	-2.41	-8.36%
13-Apr-12	40.54	145.55	2,750.65	20.10	2,402.55	16.51	-3.60	-12.66%
12-Jan-12	41.51	136.83	2,826.65	22.35	2,588.25	18.92	-3.43	-8.43%
12-Oct-11	33.36	126.47	2,504.55	20.28	2,679.35	21.19	0.91	6.98%
12-Jul-11	30.14	123.52	2,921.15	24.46	2,791.55	22.60	-1.86	-4.44%
15-Apr-11	31.82	119.44	3,306.20	28.52	2,989.50	25.03	-3.49	-9.58%
13-Jan-11	31.15	115.93	3,377.30	30.01	3,205.20	27.65	-2.36	-5.10%
15-Oct-10	30.41	112.53	3,185.30	29.21	3,076.30	27.34	-1.88	-3.42%
13-Jul-10	26.06	109.03	2,895.90	26.42	2,796.75	25.65	-0.76	-3.42%
13-Apr-10	28.31	109.63	2,683.10	24.51	2,781.90	25.38	0.87	3.68%
12-Jan-10	27.75	109.48	2,489.65	22.55	2,586.95	23.63	1.08	3.91%
9-Oct-09	26.91	110.39	2,210.80	20.38	2,177.60	19.73	-0.65	-1.50%
10-Jul-09	26.66	108.5	1,677.55	16.04	1,721.15	15.86	-0.18	2.60%
15-Apr-09	28.16	104.59	1,409.30	14.34	1,370.60	13.10	-1.24	-2.75%
13-Jan-09	28.66	98.26	1,159.70	12.72	1,228.15	12.50	-0.23	5.90%
10-Oct-08	25.02	91.14	1,254.25	14.69	1,225.20	13.44	-1.25	-2.32%