General Tyres was set up in 1863 with a capacity of manufacturing 120,000 tyres per annum. Bibojee brought it from US-based General Tire International Corporation (GITC) in 1977, while GITC retained 10 percent ownership. In 1987, GITC was acquired by Continental AG, Germany's tyre manufacturer thus becoming 10 percent owners in GTR. According to the company's official website: "Continental provides Technical Assistance to GTR under a program, which includes training of our people, formulations, recipe, and selection of equipment and approved suppliers. GTR under this agreement with Continental is bound to follow all rules and regulations provided by Continental including the given quality standards".
GYTR went through a series of expansions over the years with capacity growing to over 3 million tyres today. The company caters to all the segments of the automotive industry catering to more than one third of the country's tyre demand for passenger cars, light trucks, heavy trucks and buses, motorcycles, tractor front and rear tyres and rickshaw tyres. Its biggest buyers are passenger car and motorcycle manufacturers and assemblers.
Aside from supplying to OEMs, the company has a strong presence in the replacement market through 150 authorized dealers and distributors. Meanwhile, it also supplies to government departments, institutions as well as in the exporting markets, particularly to Middle Eastern countries.
Shareholdings
The company's shareholding pattern has not changed a lot over the last few years. For the year ending June-18, Bibojee Ltd. held 27.79 percent of the shares in General Tyres while Pak Kuwait Investment Company held 30 percent of the shares in the company. The remaining shares are held with the general public and institutional investors. As mentioned above, the company has a technical service agreement with Continental Global Netherlands AG for modernization, training of human resource and quality supply of products to end-users. This tech partnership was recently renewed for seven more years.
Operational and financial performance
According to the latest Pakwheels survey with over 35,000 respondents, General Tyre is one of the five most favoured tyre brands in Pakistan, alongside Yokohama, Bridgestone, Dunlop, and Michelin. Unfortunately, numbers for market share are not available but General's rising production as well as capacity consistently through the years narrate a tale of positive headway for the company. The success or failure of the auto parts sector is highly pegged to the performance of the automotive industry. In that way, auto parts manufacturers are playing a tough game, though the bigger players are able to diversify their markets in order to alleviate the risk associated with supplying to one market.
This is why; General Tyre's presence in the replacement market as well in the exporting markets is integral to its sustainability though both have a smaller share in the total sales mix. Between FY10 and FY18, with the exception of FY13, the company has managed to keep raising production as well as capacity utilization. The latter fell to 68 percent during FY17 but climbed back up to 74 percent during FY18 despite an increase in total capacity from 3.4 to 3.55 million units.
Demand in the passenger car segment as well as the motor cycle segment remained robust throughout FY18, which are the primary markets for General Tyre-passenger cars occupying 45 percent share in the total mix-even though the slow decline in the commercial vehicle was slowing down industry performance. It is clear that the company flourished during the time when inflation was in control and interest rates were lower making financing cheaper for consumers. The company's capacity was raised and utilization remained constant during FY16. This was the year that the economy was in expansion mode. The growth in the motorcycle industry was further boosted as new players entered the market, though General Tyre's contribution to new motorcycle business may not have been huge.
The biggest segment in terms of volumetric sales remains passenger cars with almost 45 percent share in total. The other major segment is Motorcycle is half as much sales as in the passenger cars. Volume wise, motorcycle production has been growing dramatically in the country due to the emergence of new Chinese players but seeing General Tyre's sales numbers, it seems it has not managed to bag contracts with new players.
Revenue growth has followed the growth in production though the company has only raised prices when it became absolutely necessary. The company faces significant competition in the replacement market from cheaper imported tyres while smuggled tyres also flood the markets. Studies reveal that nearly 80 percent of the tyre market is being catered to by imported and smuggled tyres. If the smuggled tyres are removed from the market, General Tyre would gain market share.
On the margin front, the company imports raw materials including synthetic and natural rubber. Global commodity price movements and depreciation of the rupee. Margins have fallen from 24 percent in FY16 to 21 percent and 18 percent in FY17 and FY18 respectively as input costs rose against the revenue per unit sold. The company raised prices during FY18 but it doesn't seem to have helped too much. High fuel prices and imported inputs have ensured the company's margins have remained on the same level, having peaked at 24 percent in FY16.
The company plans to take expansion to 6 million at some point though the plan has not been completely mapped out yet. It has introduced new technology for improved efficiency of its plants which may help in the long run. Already, the company believes the new mixing plant and other machinery have helped register a strong growth in sales.
Recent financials and outlook
Despite dropped margins during FY18, the company's revenues, production and capacity utilization all rose substantially. But it is all downhill from there, if 9MFY19 is any indicator. Revenues dropped by 15 percent, margins dropped to 14 percent from 19 percent while the bottom-line dropped by a whopping 83 percent. Since the company's performance is closely related to the performance of the automotive industry, particularly passenger cars, it is no wonder the revenues have shrunk so sharply.
Both the passenger car and motorcycle segments are witnessing decline in demand. In the previous year, tractor sales were growing which contributed to the higher revenues, though that trend has reversed this year. The company continues to face unfair competition from smuggled tyres since these are not paying duties and taxes and are much cheaper in the after-market.
Finance costs have also grown for General Tyre as interest rates have increase and the company has rising expansion related financing which needs to be paid off. Meanwhile, the 30 percent depreciation in rupee has ballooned costs of production. The resultant after-tax profit is miles away from where they stood last year.
As the economy enters austerity, purchasing power declines, and cost of financing increases, the demand in the automotive industry is downward facing, which will ultimately lead to a loss in business for General Tyres. On the upside, several new players are or have already started local assembly and General has a chance to grab that piece of the pie before it is taken. The Nissan Sunny launch by its associate company Ghandhara may raise its production, though overall outlook for the car as well as the motorcycle segments are not positive. Not to mention, the steep decline the tractor and commercial vehicle segments, particularly trucks are witnessing right now.
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General Tyre Nine Months Ending March 2018
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(mn Rs) 9MFY19 9MFY18 YoY
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Sales 7,493.1 8,774.7 -15%
Cost of Sales 6,431.5 7,140.9 -10%
Gross Profit 1,061.6 1,633.8 -35%
Administrative 227.6 228.4 0%
Distribution costs 293.5 326.1 -10%
Other operating expenses 72.5 111.4 -35%
Finance cost 389.7 183.1 113%
Other income 54.3 45.0 21%
Profit before tax 136.4 834.9 -84%
Taxation 40.4 254.2 -84%
Net profit for the period 96.0 580.7 -83%
Earnings per share (Rs) 0.94 5.72 -84%
GP margin 14% 19% -24%
NP margin 1% 7% -81%
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Source: Company accounts
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Pattern of Shareholding (as on June 30, 2018)
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Categories of Shareholders Share
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Directors and their spouse(s) and minor children 1.220%
Associated Companies 57.8%
Bibojee Services Ltd. 27.79%
Pakistan Kuwait Investment Ltd. 30.00%
Public Sector Companies and Corporations 0.7%
Banks, development finance institutions, 9.36%
insurance, non-banking finance companies etc.
EFU Life Insurance 5.81%
Mutual Funds 6.65%
Foreign Companies 1.30%
General Public 19.30%
Others 3.67%
Total 100%
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Source: Company accounts