No splitting headache

The Apollo Tyres-Michelin break-up may not affect shareholders

Apollo Tyres and Michelin's decision to part ways even before production began at their joint venture was surprising, to say the least. When the two joined hands in November 2003, it was well understood that it would take a while before Michelin Apollo Tyres delivered.

Therefore, Apollo's reason for the exit that the pace of radialisation in truck and bus tyre segments over the last two years was at a pace slower than that projected by the partners doesn't hold water, say analysts.

The Apollo Tyres stock ended flat compared with last Friday's close, and about 5 per cent higher compared with levels two years ago. True, getting out of the JV itself doesn't affect Apollo much - all the venture did was to import truck and bus radial tyres from Michelin's overseas unit and distribute it here.

Apollo's revenue share in the JV amounted to Rs 10.86 crore in FY05, about half a per cent of its consolidated revenues of Rs 2,251 crore. Its profit share (at the PBT level) was even lower at Rs 3 lakh. Also, Michelin will buy Apollo's share in the venture, which means the financial impact will not be much.

Michelin continues to hold a 14.9 per cent stake in Apollo Tyres, and, according to the agreement inked between the two companies, Michelin's nod will be required if Apollo wants to buy back shares above 10 per cent of its share capital, make any amendments to the memorandum of association, issue shares or convertible options, issue sweat equity shares, change the rights of a class of shares, or enter into any new business.

That should normally have affected the stock, but it hasn't. Also, the concern that Michelin could offload its stake in the market doesn't seem plausible since this would depress Apollo's stock price and hurt Michelin's return from the investment.

The other scenarios of what Michelin could do with its stake, including an open offer to raise its stake or a sale to competitors, would turn out to be a bonanza for shareholders.

Polymer prices

Higher international prices of naphtha have led to Reliance Industries revising its polymer prices upwards. The price of this key input has gone up about 5 per cent in the last three weeks.

Prices of polypropylene, for instance, have been hiked by about 5.8 per cent "" domestic polymer prices move by and large in tandem with international prices.

Higher naphtha prices will also have an impact on RIL's petrochemical business in the second quarter. The segment operating margins of RIL's petrochemical business had declined slightly to 13.22 per cent in Q1 FY 06, largely owing to higher input prices.

And given that naphtha prices have not signs of easing in the September quarter, analysts are not expecting a substantial recovery in this segment's profit margins. Nevertheless, another quarter of buoyant gross refining margins (GRMs) is expected to be the key growth driver.

Analysts estimate the company's GRMs at about $11-12 per barrel in the last quarter compared with the benchmark Singapore GRM which was pegged at $8 a barrel. Reliance's GRM in Q2 FY05 was about $ 8 per barrel.

The company has managed to beat the benchmark GRMs by about $3 a barrel over the last few quarters thanks to its ability to refine large quantities of sour type crude. As a result, analysts are expecting a 30-35 per cent growth in the company's earnings in the September quarter.

Shree Renuka Sugars

Shree Renuka Sugars is cashing in on the current investor interest in the sugar sector via its forthcoming issue of Rs 100 crore. Assuming the lower price band, investors would be buying into the stock at about 11.7 times estimated earnings for the year ended September, 05 compared with a discounting of 17 times for Bajaj Hindusthan.

In contrast, as recent as May 5, 2005, one of the company's co-promoters Murkumbi Industries had bought a 11.88 per cent pre-IPO stake at a mere Rs 10.

Senior company management highlighted the long term nature of the investment. The company would be utilising the resources raised via its IPO for expanding its cane crushing and distillery capacity and repaying debts.

To leverage the well-documented buoyancy in sugar prices over the last 12 months, the company has been focusing on taking over sick sugar mills and turning them around. For instance, in the last 18 months, it has added about 5000 TCD capacity in interior Maharashtra via lease.

As a result, its company's earnings before tax and extraordinary items grew by 191 per cent to Rs 37.06 crore, riding on the back of a 126 per cent growth in net revenue in the first nine months of its financial year.

Senior management highlighted the long term relationships established with suppliers via their strategy of making sugarcane farmers shareholders of the company.

Nevertheless, higher inputs prices, such as that of sugarcane resulted, in operating profit margin shrinking marginally to 12.3 per cent in the first nine months of September 05.

With sugar prices expected to remain bullish in the medium term, investors would be eyeing the listing premium.

With contributions from Mobis Philipose and Amriteshwar Mathur