Home >Market >Mark-to-market >Mark to Market | Equity dilution concerns in Apollo Tyres’ plan to tap funds

Shares of Apollo Tyres Ltd ended slightly lower after Monday’s announcement of its intent to raise up to 800 crore through qualified institutional buyers. It also stated that the foreign institutional investor limit would be expanded from 30% to 40% of the authorized share capital.

After an initial euphoric rise of around 3% on estimates of growth prospects and capacity addition, the Apollo Tyres stock closed marginally lower at 92.15 as concerns on equity dilution cropped up.

The management has not spelt out the reasons for raising funds. But it is certainly timely, with appetite for tyre firms ruling strong.

The stock has more than doubled since January.

Rubber prices have been receding since a few quarters. Strong replacement market demand, which comprises around 60-70% of the firm’s domestic revenue, compensated for a slowdown in original equipment commercial vehicle and passenger vehicle sales, translating into improved profitability. Operating margin has improved over the last five quarters, with the April-June period posting a nearly 250 basis points increase from the year-ago period. A basis point is 0.01%.

Perhaps with strong replacement market demand and with its domestic units operating at near full capacity (1,300 tonnes per day), Apollo Tyres may have raised funds for future requirements.

What seems more likely though is the company’s expansion or setting up of greenfield facilities in the international arena, too.

Early this year at the Geneva motor show, the firm’s senior management had said that Apollo was scouting for suitable locations in Eastern Europe to set up a greenfield facility for passenger radial tyres (7-10 million tonnes per day), over the next two-three years, with an investment of €150-200 million ( 1,020-1,360 crore). Overseas expansion could also help rope in global investors.

The above strategy seems prudent given that its European subsidiary, Apollo Vredestein BV, although operating at a little over three-fourths of capacity, accounts for one-fifth of Apollo’s consolidated revenue and one-third of its consolidated net profit.

According to Surjit Arora, analyst at Prabhudas Lilladher Pvt. Ltd, “Apollo’s intent to raise funds is timely given the cyclical nature of the tyre industry and favourable rubber prices at the moment that has improved the margin outlook for the near term." Analysts are hopeful of a doubling of consolidated net profits in the September quarter.

That said, if the company decides to raise the full 800 crore at its current market price, there would be an equity dilution of nearly 15-16%. This may dampen the bullish sentiment in the counter, unless earnings momentum can outpace the same.

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