Ghandhara Tyre & Rubber Company Limited

Ghandhara Tyre & Rubber Company Limited (PSX: GTYR) was previously known as The General Tyre & Rubber Company. It was established as a private limited company in 1963 under the Companies Act, 1913 (repealed by Companies Ordinance, 1984). The company was later converted into a public limited company. It manufactures and trades tyres and tubes for automobiles and motorcycles.

Shareholding pattern

As at June 30, 2021, close to 58 percent shares are held by the associated companies, undertakings and related parties. This category includes Bibojee Services (Private) Limited and Pakistan Kuwait Investment Company (Private) Limited. The local general public owns 18 percent shares while roughly 4 percent shares are held under each of the following categories: insurance companies, NIT & ICP and others. The directors, CEO, their spouses and minor children own about 2 percent shares while the remaining close to 9 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has largely witnessed a growing topline with the exception of FY16, FY19 and FY20. Profit margins in the last six years have declined between FY16 and FY20 before improving again in FY21.

At 22.2 percent, the company witnessed the biggest growth in topline thus far during FY18 with revenue reaching close to Rs 12 billion in value terms. But this did not reflect in a higher gross margin that reduced to 17.7 percent from 21.3 percent as cost of production consumed more than 80 percent of revenue. This was attributed to rising raw material prices, currency devaluation and severe competition in the market. Moreover, the company also faces competition from the undocumented sector, thus net margin was also impacted that was down to 6.1 percent from last year’s 9.1 percent.

In FY19, revenue fell by 11 percent due to economic challenges such as a general slowdown, high interest rates and inflation and currency devaluation that collectively also affected disposable incomes. This in turn adversely impacted demand for auto parts and automobiles. In addition, some OEMs shutdown their plants while the non-filers could not purchase vehicles. Thus, gross margin slid further 15 percent. With finance expense escalating to consume over 5 percent of revenue due to investment in capex as well as a high discount rate, net margin fell to its lowest thus far at 1 percent.

Topline in FY20 contracted by an even higher 16 percent as some OEMs continued the plant shutdown while sales in the second half of the year was impacted by the outbreak of the Covid-19 pandemic. This severely affected the entire auto industry. Thus, gross margin was recorded at an all-time low of almost 12 percent. With rising operating expenses and finance expense escalating to consume almost 10 percent of revenue, the company inevitably incurred a loss of Rs 332 million.

The company witnessed the largest growth in revenue during FY21, by over 58 percent with revenue peaking at almost Rs 14 billion in value terms. This was attributed to resumption of business activities as lockdowns eased a few weeks after the first outbreak of the Covid-19 pandemic. The company also focused on the replacement market that saw growth in nearly all the categories. In addition, export sales posted a growth of 56 percent year on year that contributed to the higher topline. Thus, gross margin improved to 15 percent. With some support from other income and a decrease in finance expense as a share in revenue due to lower interest rates, net margin also improved year on year to 4 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 grew by almost 33 percent year on year as replacement market continued to see better sales. Moreover, reduced availability of smuggled tyres also benefitted the company. However, export sales were lower year on year due to the political situation in Afghanistan. But the overall higher topline did not translate into higher profitability due to rising input costs as noted by production cost consuming 87 percent of revenue compared to 85 percent in 1QFY21. Net margin was also marginally lower at 3 percent versus 3.9 percent in 1QFY21.

The second quarter also saw higher topline year on year by nearly 21 percent as similar trend from the previous quarter continued with improved sales in the replacement market in addition to catering to the OEMs, while export sales remained lower year on year due to the political situation in Afghanistan. On the other hand, production cost was significantly higher at 87 percent compared to nearly 80 percent in 2QFY21 that reduced gross margin to 12.8 percent. This also trickled to the net margin that was lower at 2.8 percent compared to 8.6 percent in 2QFY21.

The third quarter saw revenue higher by 32 percent year on year as growth momentum continued but profitability remained low as cost of inputs consumed a larger share of revenue at nearly 88 percent compared to 80.6 percent in 3QFY21. This also reflected in the net margin that was lower at 2 percent versus 6.4 percent in the same period last year. While the company has seen considerable growth in topline, profitability is dependent on stable policies, exchange rate and overall economic environment.