The General Tyre and Rubber

The General Tyre and Rubber (PSX: GTYR) was set up in 1963 as a private limited company and was later converted into a public limited company. The company manufactures and trades in tyres and tubes for automobiles and motorcycles.

Shareholding pattern

As at June 30, 2020, 58 percent shares of the company were held by the associated companies, undertakings and related parties. This category includes Bibojee Services (Pvt) Limited and Pakistan Kuwait Investment Co. (Pvt) Limited. The local general public owns about 25 percent shares, followed by over 5 percent in mutual funds. The directors, CEO, their spouses and minor children own 1.2 percent shares; the remaining about 11 percent shares are with the rest of the shareholder categories.

Historical operational performance

The General Tyre and Rubber has mostly seen a growing topline, with the exception of FY16, and more recently in FY19 and FY20. Profit margins, on the other hand, reached a peak in FY16, after which they have been on a gradual decline.

During FY17, topline grew by 1.75 percent, after contracting marginally in the previous year. the marginal growth in sales in FY17 was attributed to the switch from the old system to a new system i.e., Enterprise Resource Planning (ERP) that adversely affected sales, particularly in the last quarter which is when the system went live. However, the increase in salaries and raw material costs increased the cost of production as a share in revenue, from consuming 75.5 percent of revenue in FY16 to 79 percent in FY17, thereby shrinking gross margin to 21 percent. The effect of this also trickled down to the bottomline with net margin recorded at 9 percent. the lower tax expense year on year kept the net margin from falling drastically.

The company witnessed one of the highest topline growth rates in FY18, at over 22 percent, with revenue nearing Rs 12 billion in value terms. However, the growing cost of production due to a combination of factors such as increase in raw material prices, currency devaluation and stiff competition in the market, kept gross margin from improving, that reduced to 17.7 percent; production cost made up over 82 percent of revenue. The company could not increase selling prices as it faces competition from the undocumented sector that does not pay taxes and duties. The lower gross margin also translated into a lower net margin that reduced to 6 percent for the year.

The General Tyre and Rubber saw the highest contraction in revenue in FY19, thus far, by 11 percent. This was due to the demand being adversely impacted by a general economic slowdown, currency devaluation, higher interest rates and inflation, that also impacted disposable incomes. Therefore, demand for auto parts and automobiles was affected. Non-filers were also restricted to purchase vehicles, combined with plant shutdown by some OEMs that reduced sales. Therefore, cost of production also made a larger share in revenue, at 85 percent, reducing gross margin to 15 percent. Net margin was further impacted by a high finance expense, which made over 5 percent of revenue. The high finance expense was a result of investment in capex in addition to a high discount rate. Thus, net margin stood at a little over 1 percent for the year.

Revenue contracted for the second time in a row in FY20, by over 16 percent. The first half of FY20 was affected by “lower production days observed by OEMs”, while the second half of FY20 was impacted by the outbreak of the Covid-19 pandemic; the latter severely affected the auto industry. The Covid-19 pandemic related lock down also affected the production cost as with the plant shut down, fixed costs were under absorbed. Thus, gross margin fell further to 12 percent for the year. with increasing operating expenses and escalation in finance expense, the company incurred a net loss of Rs 332 million.

Quarterly results and future outlook

The first quarter of FY21 saw revenue higher by 42 percent year on year. Along with OEM sales, the company has also been focusing on the replacement market. Revenue has also increase in the basis of lower availability of smuggled tyres and increase in export sales. While gross margin and operating margin, both were higher in 1QFY20, net margin was higher in 1QFY21 due to a drop in finance expense due to a lowering of interest rates.

Revenue in the second quarter was 41 percent higher year on year, on the back of focusing on replacement market, along with increase in exports. Strict border closure due to Covid-19 that has helped to restrict smuggling also supported sales. Production cost during the quarter was lower, therefore gross margin improved year on year, at over 20 percent for 2QFY21. With significant support from other income, net margin was also higher for the period, at over 8 percent.

Revenue almost doubled in the third quarter of FY21 year on year, as the company continued to benefit from growing export sales, sales in replacement market and improvement in all segments. The higher revenue also reflected in the higher gross margin for the period, at over 19 percent; coupled with higher other income and lower finance expense, net margin was also notably higher at 6.4 percent, compared to the loss of Rs 135 million seen in 3QFY20.

The industry faces the challenge of under invoicing that not only impacts the local industry but also reduces tax revenue for the government. Moreover, the company is focusing on making new sizes and designs for the OEM and replacement segments, while also looking towards restricting costs.