Karachi, December 27, 2022 (PPI-OT): GTYR: Battling low demand through replacement and export markets

Ghandhara Tyre and Rubber Company (GTYR) held its Analyst Briefing for FY22/1QFY23 to discuss financial performance and future outlook. Results for the quarter deteriorated 7% QoQ, primarily due to decline in net sales along with higher financial charges.

With 40% of the company’s revenue coming from sales to OEMs, the ongoing issues of automakers are expected to further drag volumes in upcoming quarters.

GTYR has completed an agreement with HCAR to supply tyres for the recently launched HR-V, whereas the company plans to enter the SUV crossover segment with production of 18” tyres for OEMs as well.

PAT squeezed by 7% QoQ

GTYR held its Analyst Briefing for FY22/1QFY23 to discuss the company’s financial performance and future outlook. To recall, the company posted an EPS of Rs0.15 during 1QFY23, down 7% QoQ and lower by 86% YoY primarily due to lower revenue and higher finance costs despite improvement in gross margins.

Plant closures for Auto OEMs causing ripple effects

GTYR witnessed its revenue contract by 44% QoQ to Rs3.2bn during 1QFY23 owing to low demand from the Auto Industry. To recall, sales for autos were down by 53% QoQ during 1QFY23 as subdued demand in the sector was compounded by supply side issues. Due to the administrative controls by regulatory authorities, automakers have been facing issues with the opening of LC’s for CKD imports leading to frequent plant shutdowns over the past few months. Although GTYR itself has not been facing issues in imports so far with 1-2 months inventory on hand, it remains a possibility in the near future. In terms of sales mix, GTYR has a 40%/60% mix of OEMs/ Replacement market sales, respectively, where the company primarily operates in passenger car and farm tractor tyre segments.

Smuggled tyres continue to hamper profits

Smuggled tyres have been a menace to the tyre industry over the years accounting for a major chunk of the industry. Market share of smuggled tyres witnessed a sharp decline in the quarters post COVID owing to tighter border controls, however, with the opening up of economies and relaxation of travel restrictions, smuggling of tyres has been on the rise again, especially over the past six months and the company is working with the GoP to curtail the inflows.

Margins not sustainable at current levels

Despite declining volumes, gross margins witnessed an increase to 18% during 1QFY23 from 14% during previous quarter owing to passing on of costs and better sales mix. Management, however, does not expect margins to sustain at current levels as impact of favourable sales mix is expected to fade away along with impact of PKR/US$. Ninety percent of company’s raw material is imported which primarily constitutes of rubber while carbon black is procured locally. Localization in the industry remains a far-fetched goal as oil producing countries are naturally much more suited to producing rubber locally. However, work is being done to achieve localization through plantation of trees in the country which can then be used for rubber production.

Outlook: Focusing on replacement and export market

Demand for tyres is expected to remain low from the auto sector where we expect auto volumes to decline by up to 50% during FY23 amid subdued demand made worse by supply side issues.

With 40% of GTYR’s sales coming from sales to OEMs, the ongoing issues of the automakers are expected to drag volumes in upcoming quarters which the management plans to tackle through higher focus on the replacement and export markets. Furthermore, GTYR has completed an agreement with HCAR to supply tyres for HR-V whereas the company plans to enter the SUV crossover segment with production of 18’’ tyres for OEMs as well.

Margins are expected to remain under pressure in the coming quarters as well as the benefit of favourable sales mix fades away along with lower volumes and impact of PKR devaluation. Rubber prices on the other hand being a key component in tyre production are expected to broadly track crude oil prices.