JK Tyre will be purchasing the Uttarakhand tyre unit of BK Birla flagship Kesoram Industries in a deal which will amount to Rs 2,0002,200c crore.
A deal would take the company’s share of the Indian market to about a fifth from approximately 16% now, bringing JK Tyre on par with No. 2 Apollo Tyres. A formal announcement is expected in the next one week. Both sides are engaged in lastminute discussions, said multiple sources aware of ongoing negotiations. ET was the first to report, on July 6, that JK Tyre had emerged the frontrunner to buy the unit after Kesoram’s negotiations with a number of global and Indian strategic players such as MRF and Apollo weren’t fruitful.
Monetising Assets: Kesoram
Kesoram Industries, which sells tyres under the Birla Tyres brand name, told stock exchanges that it wasn’t planning to sell any business units but was considering ways of monetising assets. “The company has no intentions whatsoever to dispose of any or all business units/arms,” it said. “Reports to the contrary appearing in the media are, therefore, entirely speculative and misleading. However, as already communicated to the exchanges on February 7, 2015, we are looking at monetising some of our assets and would, therefore, inevitably be in discussions in this regard. We must nonetheless reiterate that such monetisation would not include disposing of the business units/arms indicated above.”
A JK Tyre spokesperson said, “JK Tyre continues to focus on its planned expansions and projects and cannot comment on any hypothetical news. Company’s expansions are well under way, which on completion will help further strengthen its market position.”
The deal is likely to be funded through a combination of debt and equity. JK Tyre will borrow Rs 1,500 crore from public and private sector banks, including State Bank of India, with the rest coming from internal accruals, said the people cited above. SBI Caps is advising on the transaction. Last June, Kolkataheadquartered Kesoram appointed a threemember committee of directors to restructure group operations in cement, tyre, rayon, transparent paper and filament yarn. Kesoram subsequently initiated a formal sale process and appointed bankers to manage the exercise.
The committee recommended to the board that the Uttarakhand unit be turned into a separate subsidiary, a process that was completed earlier this year. Most saw this as a precursor to a sale. By selling its principal unit in Laksar, Uttarakhand, Kesoram would be able to deleverage a balance sheet significantly burdened by debt that stood at Rs 4,425 crore at the end of the September quarter and free up working capital for other operations. The tyre business contributes almost 61% of total revenue.
Interestingly, an enterprise value of Rs 2,200 crore for a single unit would be 75% higher than the market capitalisation of Kesoram Industries, which currently stands at Rs 1,256 crore. On Friday, Kesoram’s share price shot up 17.5% to end the day at Rs 114.45. JK Tyre moved up 3.12% to close at Rs 120.55. JK Tyre has nine units, of which six are in India and the rest in Mexico. While 75% of its tonnage volume is contributed by the commercial vehicles segment, the passenger car segment accounts for 15%. It acquired Tornel in Mexico in FY09. The latter has an installed capacity of 6.7 million tyres.
“JKT’s revenues are likely to pick up from 2HFY2016 (second half of fiscal year 201516) on account of pickup in replacement demand and capacity expansion in the truck and bus radial segment,” Bharat Gianani, analyst at Angel Broking, said in a note after the company’s firstquarter results were announced earlier this month. “Further, improving product mix on account of higher proportion of radial prices would also boost margins. Also, we expect JKT’s debt to taper off from FY17 due to peaking out of the capex Programm