Ghandhara Tyre & Rubber Company limited (PSX: GTYR) was incorporated in Pakistan as a private limited company in 1963 and was subsequently converted into public limited company. The principal activity of the company is the manufacturing and trading of tyres and tubes for automobiles and motorcycles.

Pattern of Shareholding

As of June 30, 2023, GTYR has a total of 121.933 million shares outstanding which are held by 4524 shareholders. Associated companies, undertakings and related parties which include Bibojee Services (Private) Limited and Pakistan Kuwait Investment Company (Private) Limited, collectively hold 57.79 percent shares of the company. These are followed by local general public having 22.01 percent stake in the company. NIT & ICP accounts for 4.62 percent shares of GTYR while foreign general public holds 3.49 percent shares. Around 2.35 percent of the company’s shares are held by Banks, DFIs and NBFIs and 2.15 percent by Directors, CEO, their spouse and minor children. Insurance companies and Modarabas & Mutual Funds hold 1.67 percent and 1.52 percent of GTYR’s shares respectively. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

Except for year-on-year rise in 2021 and 2022, GTYR’s topline has descended over the period under consideration. Its bottomline posted growth only in 2021. In 2020 and 2023, the company also registered net loss. GTYR’s margins which nosedived until 2020 rebounded in 2021. In 2022, the margins recorded downtick. In 2023, gross margin strengthened, operating margin almost stayed afloat and net margin entered negative territory. The detailed performance review of the period under consideration is given below.

In 2019, GTYR’s net sales plunged by 11 percent year-on-year. Depreciation of Pak Rupee, rising interest rate and restriction on non-filers to purchase vehicles kept a check on the demand of vehicles in 2019. Besides, low demand by farm and truck segment due to depressed economic activity also marred GTYR’s sales in 2019. However, by increasing the prices of its products, strengthening its foothold in the export market and improving its focus on replacement market sales, the company was able to partially offset the impact of low demand by OEMs. High cost of sales due to deteriorating value of Pak Rupee elevated utility prices and other conversion costs resulted in 23.79 percent year-on-year decline in GTYR’s gross profit in 2019. GP margin also slumped from 17.70 percent in 2018 to 15.16 percent in 2019. Distribution expense nosedived by 20.57 percent in 2019 due to lower freight & insurance charges, curtailed advertising & promotion budget and lower payroll expense. The company streamlined its workforce from 1143 employees in 2018 to 1122 employees in 2019 which resulted in lower administrative expense on the back of low salaries expense. Other income also slid by 5.67 percent in 2019 due to high-base effect as the company recorded gain on sale of its operating fixed assets and booked reversal of provision for doubtful debt in the previous year. Other expense also shrank by 12.54 percent due to considerably lower profit related provisioning which offset the impact of higher exchange loss. GTYR’s operating profit weakened by 29.72 percent in 2019 with OP margin falling down from 10.10 percent in 2018 to 7.98 percent in 2019. Finance cost mounted by 127.83 percent in 2019 due to higher discount rate and increased short-term borrowings. Net profit tumbled by 82.83 percent to clock in at Rs.122.876 million in 2019 with EPS of Rs.1.01 versus EPS of Rs.7.04 recorded in 2018. NP margin fell from 6.1 percent in 2018 to 1.17 percent in 2019.

In 2020, GTYR’s net sales further contracted by 16.14 percent. The overall instability prevailing in the economy was further exacerbated by the outbreak of COVID-19. Lockdown imposed by the government due to the global pandemic resulted in lesser production and sales volume. The decline in net sales would’ve been much more intense had the company not focused on replacement market sales in both local and export segments. Lower capacity utilization resulted in under absorption of fixed cost. This resulted in 34 percent thinner gross profit recorded in 2020 with GP margin falling down to 11.93 percent. Distribution expense inched up by 5.10 percent in 2020 due to higher freight and insurance charges as GTYR’s export sales grew by 21 percent in 2020. Administrative expense slid by 7.14 percent in 2020 due to streamlining of workforce to 1079 employees. Other income ticked down by 2.62 percent in 2020 due to lesser scrap sales. Other expense also dropped by 84.24 percent in 2020 due to lower exchange loss and no provisioning for WWF and WPPF done for the year. GTYR’s operating profit lowered by 51.58 percent in 2020 with OP margin moving down to 4.61 percent. Finance cost multiplied by 45 percent in 2020 due to higher discount rate for most part of the year. The company recorded net loss of Rs.332.091 million in 2020 with loss per share of Rs.2.72.

GTYR’s net sales greatly revived in 2021 with 58.34 percent year-on-year topline growth. Robust sales was the result of increased focus on replacement market sales, lesser availability of smuggled tyres, 56 percent higher export sales and demand growth in farm and passenger car tyres in 2021. Better sales mix, improved export sales and the company’s ability to increase its prices culminated into 100.61 percent higher gross profit recorded in 2021. GP margin climbed up to 15.11 percent in 2021. 43.72 percent elevated distribution expense incurred during the year was the consequence of higher payroll expense, rigorous advertising and promotion drives undertaken during the year as well as higher freight & insurance charges incurred due to improvement in demand. Administrative expenses also surged by 14.34 percent in 2021 due to higher payroll expenses as well as increased legal & professional charges incurred during the year. In order to cope up with increased production and sales, the company expanded its workforce which stood at 1133 employees in 2021. Other income strengthened by 166.64 percent in 2021 due to higher scrap sales, exchange gain, re-measurement gain on GIDC liability, and gain on termination of lease. Other expenses also escalated by 276.80 percent in 2021 due to higher profit-related provisioning and generous donations granted during the year. GTYR’s operating profit enhanced by 219.85 percent in 2021 with OP margin picking up to 9.30 percent. Finance cost slid by 40.62 percent in 2021 due to monetary easing. The company was able to emerge from net loss recorded in last year and posted net profit of Rs.575.656 million in 2021 with EPS of Rs.4.7 and NP margin of 4.11 percent.

In 2022, GTYR’s posted 33.5 percent higher net sales. Not only did the replacement market sales showed improvement in 2022, OEM sales pertaining to truck, bus, light truck and passenger cars also improved over the last year. Global commodity super cycle, higher freight charges due to elevated fuel prices and shortage of containers, Pak Rupee depreciation, usage of LPG due to low availability of natural gas and overall high indigenous inflation resulted in GP margin falling down to 13.2 percent in 2022. In absolute terms, gross profit increased by 16.58 percent in 2022. Distribution expenses escalated by 15.12 percent in 2022 due to higher payroll expenses, increased advertising & promotion budget and elevated freight charges. Administrative expense ticked up by 5.4 percent in 2022 due to slight growth in payroll expense and higher provisioning for ECL booked during the year. GTYR cut down its workforce to 1114 employees in 2022. Other income slid by 28.22 percent in 2022 due to absence of exchange gain, gain on termination of lease and re-measurement gain on GIDC liability. Other expenses soared by 155.19 percent in 2022 due to hefty exchange loss on account of Pak Rupee depreciation. GTYR’s operating profit posted paltry 5.39 percent growth in 2022 with its OP margin falling down to 7.34 percent. Finance cost spiraled by 48.36 percent in 2022 due to high discount rate and increased working capital financing. GTYR’s net profit sank by 37.82 percent to clock in at Rs.356.065 million in 2022 with EPS of Rs.2.92 and NP margin of 1.92 percent.

After two successive years of topline growth, GTYR’s topline succumbed to economic and political pressure and dropped by 19.2 percent year-on-year in 2023. Replacement market sales were badly affected due to monsoon rain the 1QFY23 and dumping of smuggled tyre in Pakistan. Sales to OEM were also affected due to restriction on the opening of Letter of Credit due to thin FOREX reserves of the country. GTYR, itself was also affected due to import restrictions which resulted in curtailed capacity utilization of 38.53 percent recorded in 2023 versus capacity utilization of 65.1 percent recorded in the previous year (see the graph of capacity and production). In absolute terms, gross profit lowered by 6.57 percent in 2023, however, GP margin improved to 15.26 percent due to better sales mix, price increase and enhanced focus on replacement market and export sales. Lower sales volume resulted in 8.93 percent decline in distribution expense in 2023. The company also carried out lesser advertisement and promotion activities in 2023. Lower legal & professional charges and lesser provision for ECL resulted in 6.1 percent lower administrative expenses in 2023. Employee headcount was also brought down to 1078 in 2023. 23 percent year-on-year reduction in other income in 2023 was the primarily the result of lower scrap sales and a downtick in gain on sale of operating fixed assets. Other expense surged by 78.94 percent in 2023 due to whopping exchange loss incurred during the year. GTYR’s operating profit contracted by 19.48 percent in 2023 with OP margin staying almost stable at 7.32 percent. Finance cost surged by 72.74 percent in 2023 due to unprecedented level of discount rate. The company posted net loss of Rs.167.364 million in 2023 with loss per share of Rs.1.37.

Recent Performance (9MFY24)

The tables seem to have turned for GTYR as it was able to record staggering 42.49 percent stronger topline in 9MFY24. This was the result of increased focus on replacement market, strengthening foothold in export market and progressively more diversified OEM portfolio. Better sales mix, higher prices, stability in the value of Pak Rupee off-late and recovery in the sale of tractor tyres resulted in 59.92 percent higher gross profit recorded in 9MFY24 with GP margin of 16 percent versus GP margin of 14.27 percent recorded during the same period last year. Distribution and administrative expenses surged by 30.1 percent and 33 percent respectively due to increased capacity utilization and higher sales. Other income grew by 76.4 percent in 9MFY24 while other expense slid by 89.13 percent during the same period supposedly due to exchange gain. GTYR’s operating profit enhanced by 184.54 percent in 9MFY24 with OP margin clocking in at 10.62 percent versus OP margin of 5.32 percent recorded during the same period last year. Finance cost surged by 39.77 percent in 9MFY24 due to elevated discount rate and increased utilization of working capital lines. The company recorded net profit of Rs.200.745 million in 9MFY24 with EPS of Rs.1.65 and NP margin of 1.33 percent. This was against the net loss of Rs.238.347 million and loss per share of Rs.1.95 recorded during the same period last year.

Future Outlook

Better farm economics due to improved agricultural output will result in higher sales of farm tyre in both OEM and replacement market segments. The company is also striving to increase its export sales in both OEM and RM segments. GTYR is also increasingly diversifying its portfolio by introducing new sizes of tyres for SUV/ crossover segments. All these efforts are expected yield positive results and cast encouraging impact on the profitability and margins of GTYR.