First Published: Mon, Mar 03 2014. 12 37 AM IST

Apollo Tyres’ Neeraj Kanwar goes back to the drawing board

Kanwar had a Plan B before his company Apollo Tyres signed on to buy Cooper Tire last year
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Apollo Tyres’ Neeraj Kanwar goes back to the drawing board
Neeraj Kanwar had made his ambitions clear about expanding Apollo into a global top 10 tyre maker in 2012 while addressing executives and workers at its Vredestein brand plant in the Netherlands. Photo: Ramesh Pathania/Mint
New Delhi: Neeraj Kanwar had a Plan B before his company Apollo Tyres Ltd signed on to buy Cooper Tire and Rubber Co. last year; it’s what he’s turned to now after what could have been the Indian auto sector’s largest ever acquisition fell through.
The pace, though, isn’t what he had hoped for.
Apollo had expected to be catapulted to the top seven among global tyre makers by buying Cooper, a deal that would have immediately given it 14 manufacturing plants around the world with a combined annual revenue of $6.5 billion (around Rs.40,300 crore).
Plan B is to double revenue to more than $5 billion by 2020, and re-launch expansion by investing €500 million (around Rs.4,430 crore) to set up two manufacturing facilities in Europe and South-East Asia to begin with.
“Yes, it puts me back in time,” said Kanwar, the 39-year-old managing director and vice-chairman of India’s second largest tyre company by market value and the 14th biggest globally. He had personally worked on the Cooper deal.
“I need to keep moving and get to the next level, and in the past I have done it through organic and inorganic growth and I will be doing that,” Kanwar said. “So, on the organic side, we have moved very quickly. Immediately after the agreement fell through (in late December), in the second week of January itself we were starting projects in eastern Europe, basically reopening what I left out.”
In the two months since the Cooper fiasco, Apollo has been quick to open sales and marketing operations in Hungry, Slovakia and Poland, and has started selling in Thailand and West Asia by exporting tyres from its plants in India and Europe, hoping to sustain the growth it has seen in the past decade.
From revenue of $300 million in 2002-03, Apollo Tyres expanded rapidly to become a $2.6 billion company by the end of fiscal 2013. Over the past five years, it accelerated at a compounded annual growth rate (CAGR) of 20%.
The past
Apollo announced its deal to buy Cooper for $2.5 billion (around Rs.14,575 crore then) on 12 June last year. Investors worried the deal was too expensive at a 43% premium to market price, and that Apollo would have to take on huge debt to finance the purchase. Its stock fell 25.43% the day after the deal was made public.
But no one, neither Kanwar nor the investors, had anticipated the bigger problem that was to come from Cooper’s Chinese partner.
Days after the deal was announced, the union at Cooper Chengshan (Shandong) Tire Co. Ltd (CCT) in China, which accounts for 30% of Cooper’s global revenue, announced a strike on 21 June, and on 11 July wrote an open letter to Standard Chartered Plc, one of the four lenders to Apollo, asking it to reconsider the deal. CCT followed this up with an advertisement in The Wall Street Journal calling the deal into question.
Kanwar said he learnt later from a court filing that CCT chairman Che Hongzhi was one of the bidders for Cooper. “So if you are a partner as well as a bidder and if you don’t get the bid, then you can act funny. I wish I had known that,” he said.
“He (Che) stopped giving them (Cooper) financial data. I can’t raise money if I don’t have financial data. Thirty percent of the entire pie is China, so how can one go and raise $2 billion without 30% of the balance sheet,” Kanwar said.
With both Cooper and Apollo unable to find a solution to the problem, Neeraj Kanwar and his father, Apollo Tyres chairman Onkar S. Kanwar, met the CCT chairman again in the final quarter of 2013.
“He (Che) wanted to sell his 35% stake (in the joint venture). We said we will buy your 35%. Then he came out with a ridiculous figure of $500 million (for his stake), which was 14 times’ Ebitda multiple,” Neeraj Kanwar said. “We were willing to pay $150 million. He came down very casually to $450 (million) at one point. He was trying to see if I was very desperate to get the deal done. I was not desperate.”
Ebitda is short for earnings before interest, tax, depreciation and amortization, an indicator of operating profitability.
The future
Soon after the acquisition was scrapped by Cooper on 30 December, a day before the deadline for completion of the deal, Apollo Tyres’ management began to revisit earlier plans.
The company already has a well-established marketing and sales network in India and Europe. Kanwar said his company’s priority is to build its presence in Europe, where it may face direct competition from Cooper and other global manufacturers such as Michelin and Cie, Goodyear Tire and Rubber Co. and Hancook Tire Co.
Europe will be tough to crack, with 200 tyre brands and 300 million tyres sold there every year. Gurgaon-based Apollo claims a mere 3% share in the continent, but this accounts for 24% of its overall revenue, showing why Europe is crucial to its operations.
“In Europe, I can take up more production. Therefore, I am putting up my first plant in Europe. By the time that comes up and we finish Europe in maybe three-four years, then I will come to South-East Asia. By then, the critical mass of demand will be there. That’s what I am trying to do. In the next two years, I see a unit in South-East Asia,” Kanwar said.
In Europe, the company will make high-end passenger car tyres and commercial vehicles tyres. It will manufacture both Apollo- and Vredestein-branded tyres in Europe. And in South-East Asia, it will look to develop its brand presence in countries such as Indonesia, the Philippines, Thailand, Malaysia and Singapore.
Abdul Majeed, auto practice leader at consultancy PricewaterhouseCooper, said Apollo will have to again look at acquisitions again to be able to grow rapidly.
“The challenge is to get a right partner or a good deal. Their ambitions are noble and they understand that organic growth takes more time than inorganic, but they should look at protecting their market share domestically and look for growth opportunities in emerging markets,” Majeed said.
Kanwar said the Cooper setback won’t hold him back from making acquisitions. “The last two years have given me more financial muscle to raise more money through internal accruals,” he said. “Today, we are very healthy. I am going to put focus on inorganic growth.”
But China may be off limits for some time longer.
“I am not in a rush to enter the Chinese market. But you can never tell,” Kanwar said. “If I get an inorganic acquisition in China, I might go. But provided it is on my terms and I am clearly the person who is going to run the show.”
Kanwar had made his ambitions clear about expanding Apollo into a global top 10 tyre maker in early 2012 while addressing executives and workers at the company’s Vredestein brand plant in the Netherlands. Cooper would have taken Apollo into the top seven.
“Now I want to be in the top 10 first. 2017 will be ambitious as we have to put up plants together. We are moving ahead, but we will get close to that. I am still very ambitious and I still have that target of reaching top 10 by 2017,” Kanwar said.
Asked if he is taking a step backward, Kanwar responded in the negative.
“I would say change in strategy. I had my Plan B ready as there is always a risk involved in such a deal. That’s why I sought six months to close the deal, otherwise I would have closed the deal on 12 June itself,” he said.
“I am back on the drawing board and you have to give me time,” Kanwar added. “...My company will grow at the pace that it has seen in the last five years…definitely lower double-digit growth. By 2020, I am 100% sure that I will be able to double my revenue, otherwise I am not doing my job.”
Mahantesh Sabarad, deputy head of research at SBICAP Securities Ltd, says Apollo can indeed expect to double its revenue in four years.
“If they are talking of doubling their revenue by 2020, then I think the company is looking at a CAGR of 14-15%, which should not be a problem given their track record in the past,” he said.
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