AKD Securities Limited - Off the Analyst's Desk (November 18, 2021)

Brokerage

AKD Securities Limited – Off the Analyst’s Desk (November 18, 2021)

November 18, 2021

Karachi, November 18, 2021 (PPI-OT): GTYR: 1QFY22 Analyst Briefing Takeaways

The General Tyre and Rubber (GTYR) held its analyst briefing session today to discuss its 1QFY22 results. To recall, the company posted NPAT of PkR131mn (EPS: PkR1.07) as compared to PkR126mn (PkR1.03) in same period last year, up 4%YoY and loss of PkR64mn (LPS: PkR0.52) in previous quarter.

The gross margin of GTYR has significantly improved in 1QFY22 (GMs: 13% in 1QFY22 vs 7% in 4QFY21) due to the laggard impact of cost pass-on to the OEMs. Going forward, the management expects to sustain the gross margin of 13-14% in upcoming quarters as the rising raw material costs have been passed on to the OEMs in the month of Oct and Nov as well as in the replacement market segment. The revenue contribution from OEM and replacement market segment is 40-60.

According to the management, the company is operating at almost full capacity (max capacity utilization that can be achieved is ~85-90%). The plant is operating 7 days a week to cater the demand which is on the upper end as we are witnessing the boom in auto industry. In order to operate at full capacity, the company substitutes the gas shortfall with LPG that is relatively costly.

According to the management, GTYR has started to supply its products to the new entrants among which Prince Motors has become a major customer. In addition to this, the company seems optimistic to close the deals with other new entrants. Since there are capacity constraints, the company plans is planning to expand its capacity as well as increase its efficiency by replacing the machines.

The company will start the production of OTR (Off the road) tyres to cater the demand from construction segment which is currently on the rise. Besides, the government’s efforts to curb the smuggling activities and increasing prices of imported tyres (not to forget the 100% cash margin requirement for imports) has provided a level playing field for the local players.

ITTEFAQ: FY21 Analyst Briefing Takeaways

ITTEFAQ held its analyst briefing today to apprise about its FY21 result and future outlook. To highlight, the company reported NPAT of PkR78.4mn (EPS: PkR0.54) in 1QFY22 vs. NPAT of PkR37.7mn (EPS: PkR0.26) in the same period last year. For FY21, the company reported NPAT of PkR78.4mn (EPS: PkR1.85) in FY21 vs. net loss of PkR212.8mn (LPS: PkR1.27) in the same period last year

Revenues increased by 141.6/83.2%YoY in 1QFY22/FY21 mainly reflecting higher rebar prices (+15.4%QoQ in 1QFY22 and +38%YoY in FY21). Operating profit increased by 41/16%YoY in 1QFY22/FY21 and is expected to increase further as a result of operational efficiencies.

The management remains hopeful that uptick in construction demand is expected to continue which will stimulate long steel demand while increase in raw material prices would be passed on to end consumers.

Because of efficient scrap procurement from UK by the help of newly established company (ITTEFAQ trading), the company looks confident of improvement in gross margins because of increase in local rebar prices up 38%YoY in FY21. To highlight, gross margins stood at 10.4% in FY21 vs 0.5/9.4%YoY in FY20/19.

Moreover, company is working to enhance its dealer network and increase its share in retail sector after being already very well established in corporate sector.

Penetration into retail sector is key for company’s upcoming products (T-Iron and I beam) whereas robust demand in rural areas are major drivers behind the extension in product line which is slated to come online by FY22.

From demand’s vantage, management remains optimistic and expects robust demand to continue specially for girder (20% contribution in sales in 1QFY22 vs 10% in FY21) where only (Mughal and Shalimar) are two other players in the segment and company’s aggressive penetration in Punjab, KPK and Baluchistan is reaping rewards in the shape of advance orders.

For rebar, company’s sales pipeline projects include Mohmand Dam, Dassu Dam, Sukhi Kinari Dam, Lime Light and other multiple mega construction towers in different cities of Punjab and KPK. Company is targeting expected volumetric sales of 80K tons in FY22 vs 57.3K tons in FY21, an increase of 40%YoY.

Regarding the entry into copper segment, Ittefaq is already in the process of developing infrastructure for non-ferrous segment and management is hopeful of including copper into its product portfolio in the future.