Kesoram Industries Ltd has internally valued its tyre factory at Haridwar, which it is hiving off and is looking to sell, at Rs.3,573 crore, at least Rs.1,200 crore more than what the cement and tyre maker had previously said it had invested in building it.
According to analysts, the valuation is ambitious, but it is, at the same time, an indication of what the company is looking to get from selling the factory. The book value of the factory—or the fully diluted cost of building it—is estimated at Rs.2,500 crore.
The Uttarakhand unit, which enjoys some tax breaks, has an installed capacity of producing 600 tonnes of tyres a day or about 4.4 million truck tyres a year, according to Kesoram’s website. It also produces a small quantity of two-wheeler tyres. In a notice to shareholders last week, Kesoram said it proposes to sell the Haridwar factory to a subsidiary—Cavendish Industries Ltd—in a so-called all-stock deal. Subject to shareholders’ and regulatory approvals, Cavendish will pay for the unit in shares worth up to Rs.3,573 crore.
“If at all, we will be looking to sell the factory at a higher price,” Gautam Ganguli, Kesoram’s company secretary and the official spokesperson, said on the ongoing restructuring of the debt-laden company.
At the end of 2013-14, Kesoram’s total liabilities stood at Rs.5,761 crore; it had long term borrowings of Rs.2,549.75 crore and Rs.1,494.11 crore in loans repayable within a year. The company is restructuring its operations to pare debt.
“Our immediate aim is to step up contract-manufacturing at the Haridwar unit,” said Ganguli. “We will think about cashing out if offered the right valuation.”
He described the current volume of contract-manufacturing at the factory as “very small”. In 2013-14, Kesoram’s tyre business (which includes a less efficient and older factory at Balasore in Odisha) generated an Ebidta (earnings before interest, depreciation, tax and amortization) margin of around 7%. It reported an operating profit of Rs.212 crore on a revenue of Rs.3,092 crore.
From the Ebidta standpoint, it isn’t as competitive as some of its competitors such as Ceat Ltd, said Bharat Gianani, an auto sector analyst at Angel Broking Pvt. Ltd. That apart, the Haridwar factory produces more cross ply tyres—about 60% of its total capacity—which is more popular in the replacement market, according to Gianani.
Though this is in line with the current consumption pattern in the bus and truck tyre market, demand for cross ply tyres is shrinking at about 5% a year, he said, and in about two years, consumption of radial tyres would equal that of cross ply tyres.
Tyre makers are ramping up radial production capacity, according to Gianani. Though several companies are said to have expressed interest in acquiring the Haridwar factory, Kesoram’s internal valuation of the unit looks steep, he added.