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Emkay Global
Apollo Tyres (Hold)
CMP: ₹150.3
Target: ₹175
Apollo Tyres plans to issue compulsorily convertible preference shares (CCPS) worth ₹1,080 crore to Emerald Sage Investment Ltd, an affiliate of Warburg Pincus, and use the proceeds for the repayment of high-cost borrowings. An extraordinary general meeting to obtain shareholder approval for the issuance is planned in March 2020.
Apollo Tyres’s net debt stood at ₹5,900 crore as of September 2019, which represents a net debt/equity ratio of 0.6x, and Net Debt/EBITDA (TTM) of 3.2x. The company’s objective of raising the funds is to reduce leverage and interest cost burden during the current scenario of high capex spends and challenging business environment.
CCPS will be converted into 6.3 crore equity shares at a price of ₹171.29/share, within a maximum period of 18 months, resulting in an equity dilution of 11 per cent. The conversion may take place earlier, either at the option of the investor or if the 21-day VWAP stock price reaches the conversion price. CCPS carries a dividend of 6.34 per cent per annum.
The issuance of CCPS and assuming conversion to equity shares, our FY21E EPS forecast could reduce marginally by about 2 per cent as the negative impact of equity dilution will be mostly offset by the reduction in interest cost.
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