 "New acquisition sets the wheel in motion for JK Tyre")
Raghupati Singhania has been complaining about the increase in tyre imports and rubber import duty for some time, saying that these will severely impact the domestic tyre industry. This, however, has not prevented his company, JK Tyre, from going ahead with the decision to invest Rs 2,200 crore to acquire a unit from the BK Birla Group.
The money that Singhania, chairman and managing director, has agreed to pay is almost as much as the company's current market cap of Rs 2,444 crore. JK Tyre's current production capacity (domestic) is 900 tonne per day. Birla's Haridwar unit is estimated to have a capacity of 400 tonne per day.
An industry veteran says he would have paid Rs 6 crore per tonne for the acquisition. "There could also be a premium because you skip the two-year waiting period that is needed to set up a greenfield unit and also eliminate a competitor from the market" he says. In that sense, Rs 2,200 crore appears to be a fair price, even though others in the fray for the Birla unit did not find value at this price. JK Tyre did not respond to Business Standard's questions regarding the acquisition.
Paras Chowdhary, former managing director at Ceat, says the acquisition appears to be a good fit and gives JK Tyre a quick entry into the high-margin two-wheeler tyre segment.
Gains from the acquisition
The acquisition will provide JK Tyre an opportunity to expand into the truck and bus radials segment in which it is the market leader and also provide it an entry into the fast growing two- and three-wheeler tyre market. The company expects the transaction to be "strategic, revenue-accretive and synergistic" with its existing tyre business.
The two-wheeler industry might be going through a tough time but two-wheeler tyre makers are on a firm footing. Other than the softened raw material price, which is common to all tyre makers, the two-wheeler segment this year has faced a shortage that has lifted prices. This was due to a suspension of operations at Falcon Tyres' Mysore plant in January because of labour protests.
The suspension lasted eight months and helped two-wheeler tyre makers to improve profitability. Take the case of TVS Srichakra. The company reported its best operating margin of nearly 17 per cent in the quarter ended June 30 and a profit growth of 184 per cent to Rs 49 crore.
India is the largest two-wheeler market and even though the motorcycle segment has come under pressure due to weakness in rural demand, scooter sales are growing at double digits. "A larger capacity will also bring benefits like low distribution cost and better bargaining power with raw material suppliers to JK Tyre," says an analyst.
With its current capacity of 900 tonne, JK Tyre is the third biggest in terms of capacity (in India) after MRF and Apollo. This position will, however, not change once the acquisition process is completed as Apollo has a capacity of 1,450 tonne.
Singhania has also made a smart move by spreading the acquisition amount across different JK Group companies, with the result that JK Tyre's exposure in the Rs 2,200-crore acquisition will just be Rs 450 crore. The company, however, will have the largest shareholding in the acquired business and will exercise substantial management control. Other leading companies in the group are JK Lakshmi Cement and JK Paper.
The market is still not enthused. A day before the deal was announced on September 12, JK's stock closed at 108.45 at the Bombay Stock Exchange. On September 14, the first day of trade after the announcement, it touched a low of Rs 102.80 and closed at Rs 104.70. Since then, the highest price at which it closed was Rs 108.75. The Sensex has rallied over 6 per cent since September 11.
This is not JK Tyre's first acquisition. In 1997, it acquired Vikrant Tyres from the Karnataka government. In 2008, it acquired Mexican company Tornel for Rs 270 crore. Singhania has said the company had proved its strength in "undertaking acquisitions with turnaround potential and successfully delivering results". He might, however, have to wait a while before he includes the Haridwar plant in his success list.
