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Business News/ Companies / Neeraj Kanwar’s pursuit of building a global company
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Neeraj Kanwar’s pursuit of building a global company

Failed acquisition of Cooper Tire hasn't deterred Apollo Tyres' Kanwar from seeking to invest a little under $1 bn over five years in Hungary and India

Neeraj Kanwar, vice-chairman and managing director of Apollo Tyres. Photo: Ramesh Pathania/MintPremium
Neeraj Kanwar, vice-chairman and managing director of Apollo Tyres. Photo: Ramesh Pathania/Mint

New Delhi: His attempt to make a mark in a perennially consolidating industry such as tyres may have received a setback with the failed acquisition of Cooper Tire and Rubber Co., but that hasn’t deterred Neeraj Kanwar from seeking to invest a little under $1 billion over five years in Hungary and India.

Kanwar is creating a global team as he attempts to build India’s first global tyre company. The 41-year-old vice-chairman and managing director of Gurgaon-based Apollo Tyres Ltd is also spending a lot of time in London at his “travelling office".

Apollo will spend 3,800 crore in setting up a factory in Hungary, the largest outside India for an Indian tyre company. It will also spend 2,000 crore on expanding the capacity of the company’s factory in Chennai, where it makes truck radials, and upgrading the machinery of the Kerala plant that will now be used by the company to manufacture products for the agriculture and farm equipment sector. This investment, Kanwar said, will further Apollo’s cause in becoming a $6 billion company by 2020.

To be sure, Kanwar has tried his hand, and burnt it, some would say, at going global. His attempt to acquire Ohio, US-based Cooper Tire in an all-cash transaction for $2.5 billion (around 15,000 crore), fell through because of obstacles created by Cooper’s Chinese joint venture partner Cooper Chengshan (Shandong) Tire Co. Ltd (CCT).

The deal would have been the largest in India’s automotive industry, ahead of Tata Motors Ltd’s $2.3 billion purchase of Jaguar and Land Rover in 2008. It would have catapulted Apollo to the top seven among global tyre-makers with immediate control over Cooper’s 14 manufacturing plants around the world with a combined annual revenue of $6.5 billion.

Today, Apollo is ranked 16th in revenue, according to Tyrepress, an industry-specific journal.

Before the Cooper bid in 2013, Apollo had ventured global in a smaller way.

In 2006, it acquired Dunlop Tyres International in South Africa; in 2009, it bought Vredestein Banden BV in the Netherlands. Last year, the company sold its South African operations to Sumitomo Rubber Industries Ltd.

Going global is both a strategic imperative—the number of tyre companies around the world continues to come down in a perennially consolidating industry where the benefit of scale and relationships, with vehicle makers as well as suppliers, is key—and a financial one.

“The basic idea is to globalize the organization and look outside and de-risk being in only one market. In early 2000s, we were only in India. Today, 65% of revenues are from India and 35% coming from outside India. And if you see profit pools, they are better in developed markets. In Europe, Ebitda margins are 18-19% whereas in India they are still 13-14%," Kanwar explained in an interview at his sprawling residence in New Delhi’s posh Shanti Niketan neighbourhood on Friday.

Ebitda (earnings before interest, taxes, depreciation and amortization) margins—a measure of operating profitability—in Europe are higher because of the demand for performance, winter and high-speed tyres.

Given the focus on globalization, Kanwar does not spend much of his time in India these days. His new address is 3rd floor, Maddox House, 1 Maddox Street, London, the firm’s London office. The company’s new chief marketing officer (CMO) and human resources chief, among 25 others, work out of that office.

Kanwar is in India for few days and then will take a short break with his family over Christmas, in Italy, during which he plans to try skiing, something he has never done before.

“There are a lot of things that I have not done before. But that does not stop me from doing them," Kanwar said.

The choice of London as his “travelling office", Kanwar says, was prompted by the fact that foreign institutional investors (FIIs) own 44% of Apollo. The promoters (Kanwar’s family) own 37%. By being based out of London, his logic goes, he is close to his investors (who are in the US and Europe), markets and potential acquisitions.

The big leap for Apollo, he added, will come “not only from India". Hungary is a big and safe bet that Kanwar has made. Big because it is the company’s largest investment overseas and safe because companies with manufacturing facilities in Eastern Europe have better profitability due to lower cost of production than those based out of Western Europe.

“So, like Chennai gave me a big leap in India, my next bet, Hungary, will be my next leap in Europe," Kanwar said.

“Given all these investments in India and Europe, I think you can see where Apollo’s money is going and what lies ahead of us."

Kanwar expects the global markets to contribute 50% to Apollo’s business by 2020. From revenue of 2,027 crore ($300 million at today’s exchange rate) in 2002-03, Apollo Tyres expanded rapidly to become a 13,310 crore ($2.2 billion) company by 2013-14. Over the past five years, it has grown at a compounded annual growth rate (CAGR) of 20%.

Still, “to become a $6 billion company from where it is right now is quite a leap (for Apollo). It is something which is achievable but I would stay clear of saying whether it can do it," Sharma of IHS said. Europe is a good launchpad for the company’s global play, he admitted.

Finance will hold the key (like it usually does).

For Apollo to become a $6 billion (by revenue) company, it will have to expand its balance sheet size from the current $1 billion to $3 billion, according to Mahantesh Sabarad, deputy head of research, SBICap Securities Ltd.

Kanwar said his company has its board’s approval to raise capital from the market, but Sabarad says that “from the financial perspective, Apollo does not have the wherewithal to raise such amounts of capital".

“Not many companies in India have been able to raise $1 billion from equity markets," he added, pointing out that Apollo’s cash flows aren’t strong, ruling out funding from the money it generates.

Debt or listing the company outside India could be ways Apollo could raise money, though—just as it planned to do to fund its attempt to buy Cooper.

The aftermath

Kanwar said the Cooper experience had given him and his team a better understanding of acquisitions, and experience of the American and Chinese systems.

“Last year is history now," he said. “It is not going to stop me. Right now, I am going after organic (growth) as I don’t see anything out there, which is of substance for Apollo" in terms of acquisitions.

Meanwhile, Apollo has put together a “global" team.

Martha Desmond, the new chief human resources officer, is based in London, as is Marco Paracciani, the CMO; Seshu Bhagavathula, the chief technology officer (it is a new position in Apollo Tyres), and Markus Korsten, the new chief manufacturing officer, are based in Enschede, the Netherlands.

“We are running a matrix organization. We have two presidents responsible for P&L (profit and loss). One looks after Asia Pacific, Middle East and Africa. He sits out of India. Then there is the president of Europe and Americas operations. He sits in Europe. Marketing, manufacturing, procurement and quality (heads), all these guys are global and they have dotted line relationship for all the operations," Kanwar said.

Many of the new hires have been brought in with specific mandates. Desmond’s is to create a global talent pool. Korsten’s is to integrate all seven factories of Apollo around the world.

An analyst, who spoke on condition of anonymity, described hiring global managers as an important development and said that during the failed Cooper deal, “the inexperience of Apollo management was seen as a major deterrent".

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Published: 23 Dec 2014, 12:05 AM IST
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