BackJK Tyre completes Rs2,195 crore Cavendish Industries acquisition
JK Tyre will fund the deal through a mix of internal accruals and debt raised by JK group associates
PremiumPhoto: Pradeep Gaur/Mint
JK Tyre and Industries Ltd on Monday said that it had completed the acquisition of tyre, tube and flap maker Cavendish Industries, a unit of Kesoram Industries Ltd, for ₹ 2,195 crore. Kesoram Industries is a B.K. Birla Group company.
The New Delhi-based company will fund the deal through a mix of internal accruals and debt raised by JK Group associates, said Raghupati Singhania, chairman and managing director of JK Tyre.
Of the total deal size, ₹ 700 crore is fresh equity and ₹ 1,495 crore debt.
Singhania said while JK Tyre had invested ₹ 450 crore in the deal, it had not taken any debt on its books. Money has been raised by Cavendish itself as well as JK Group’s associate firms such as Bengal & Assam Co. Ltd (the holding company) and Valiant Pacific LLC, a trading firm.
JK Tyre will hold a 64% stake in Cavendish, while the rest will be held by Bengal & Assam and Valiant.
The deal will add a capacity to produce 10 million tyres a year and enables JK’s entry into the fast-growing two-wheeler and three-wheeler tyre market, and will also boost its capacity to produce truck and bus radials.
After the acquisition, JK’s total manufacturing capacity in India will increase to 26 million units a year; it will reach annual revenue of ₹ 10,000 crore in the domestic market.
“Numbers for the last fiscal are not out yet, but what I can say is we expect around ₹ 7,800 crore from domestic operations, and going ahead, we are looking to close the current fiscal at ₹ 10,000 crore," Singhania said.
The firm plans to start production at a facility in Haridwar in the next 15 days; it may also look to rationalize its manpower. Cavendish’s Haridwar facility employs around 5,000 people.
After the JK Group first informed the stock exchanges about the deal last September, analysts said that the company was paying too much and even if the benefits of size and scale accrue with time, the concerns outweigh the gains in the near to medium term.
But Singhania said it was a matter of “perspective".
“I don’t think we have paid too much," Singhania said, adding that factors such as the state of the plant, ready access to capacity, truck and bus radial capacity and a chance to enter the two- and three-wheeler markets, made Cavendish an ideal buy.
Market leader MRF Ltd and others were also in the fray for buying Cavendish.
Analysts have also expressed concern that Kesoram’s business fell short on transparency. In spite of being a listed company, it last filed quarterly results with the stock exchanges in December 2014 and has sought time to file both the March 2015 and June 2015 results.
Singhania maintained that Cavendish’s divestment was an asset sale and his company was not inheriting any legacy issues.
“We will do a proper accounting. It should not take more than 12 months to turn the company around. We are going to start operations in the next 15 days," Singhania said.
Kesoram’s tyre segment posted an operating loss at a time when tyre companies are riding high on plummeting rubber and raw material prices.
Angel Broking Ltd, in its brief note on the deal, said that the financials of January-September 2015 show that the tyre segment (comprising of two plants in Haridwar and Balasore) generated revenue of ₹ 2,045 crore and a loss of ₹ 294 crore.
The deal would close the gap in revenue between JK Tyre (currently the third-largest tyre maker in India) and Apollo Tyres Ltd (the second largest). MRF Ltd is ahead by a wide margin.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
