Gentipak commonly referred to as General Tyre is a public limited company. Majority of this company's ownership is shared by Bibojee Services Ltd, Pak-Kuwait Investment Company (Pvt) Ltd and National Investment Trust.
Gentipak is the largest tyre producer of Pakistan. It produces its tyres under the name of General Tyre due to the international success of this brand name. Recently the company launched a new line of tyres based on European design and technology; under the name of Euro series.
The firm gets technological expertise from world renowned Continental AG, under the Technical Service Agreement. The German tyre giant, Continental also holds Gentipak's shares.
Gentipak employs roughly 2,000 people. Its head office is located in Karachi, while there are three other offices in the country as well. The firm caters the market by a wide network of dealers -more than one hundred- all across the country.
Customers and products
Gentipak makes both radial and cross ply tyres. Radial tyres are mainly used in passenger cars and light trucks whereas cross ply are used in heavy trucks. The company is also engaged in making tyres for tractors. Specifically the product range of the company can be divided into light truck tyre, passenger car tyre, truck and bus tyre, tractor front/rear tyre and rickshaw tyre.
Right now the company is providing tyres to Toyota, Honda, PakSuzuki, Ghandara Industries, Hino Pak, Ghandara Nissan, Al-Ghazi and Millat Tractors and some other players in the industry. Recently the company exported its products to the Middle East. The tyre manufacturer is exploring markets outside Pakistan and plans to export tyres to other parts of the world.
Brief overview of the auto sector Last two years have surely been the years of consolidation for the whole auto and allied sector. As the sector saw surge in the sales of all kinds of vehicles, after the worst slowdown it experienced in FY09.
The increase in demand is mainly attributable to improving rural incomes which have resulted from higher support price set by the government for wheat as well as rising international rates of other commodities. Higher remittance inflows to the country and rising exports from sectors such as textiles have also contributed positively to the demand for tyres.
Although sales for the company have bounced back in recent months, unit sales are still below pre-crisis levels. An industry member while talking to BR Research said that unavailability of auto financing is hindering the growth of the auto-sector and allied industries. He also added that if tractor financing schemes offered by the government had been active, the sales tally would have been substantially higher.
The cost of production for the company is prone to impact from rising fuel costs, while costs of other inputs, including rubber are also instrumental in determining the costs faced by the company. Persistent increases in these costs are constantly pressuring the manufacturer and trimming down profits.
The last six months of 2011 have been particularly turbulent for this sector and General Tyre is no exception. The changed New Entrant Policy; the overnight changes in taxation policies and the whole MFN status mania have kept the sector under immense pressure.
Overview of the company FY11 was a very difficult year for the tyre manufacturer. The company has a continuous production process so the increase in power shortage and frequent load shedding raised the cost of production for the company. Tense law and order situation also hampered the company's growth.
Marketing and distribution costs surged due to inflation. But the biggest blow to the company over this period came when the imposition of taxes on tractors brought the tractor industry to a complete halt. As tractor manufacturers are among major customers for the company; the slowdown in tractor manufacturing and sales also impacted its sales.
The withdrawal of 2.5 percent special excise duty and the reduction in sales tax by one percent slowed down the demand for tyres. Buyers delayed purchases as they wanted to take benefit of favourable rates which were supposed to come in to effect from the start of FY12.
Despite all these adversities, the company was able to sell 1.55 million tyres in FY11 as compared to 1.53 million in FY10.
Net sales The net sales for the firm stood at Rs 7,477 million in FY11, exhibiting roughly 18 percent increase compared to last year. This large increase was seen despite a mere 1.3 percent increase in the units sold. It is clear that the increase is due to the increase in unit price of tyres rather than increase in number of units sold.
The price increase was inevitable as the main component used in making tyres; rubber experienced roughly a 63 percent increase in prices in FY11 compared to FY10. The average price of rubber in FY11 stood at 212.17 US cents per pound compared to 130.18 cents per pound in FY10.The company had to transfer this cost increase to its customers.
The net sales would have been much higher if the tractor industry had not come to a halt and there would not have been a delay in purchases in the last month due to the favorable tax effect. However this is not something to worry about as sales postponed this year would have been realised in the 1QFY12.
Profitability The overall profitability of the company declined as the firm was not able to transfer all of the increase to its customers. The gross profit margin stood at 13 percent in FY11 compared to 15 percent in FY10. The largest increase was seen in the cost of raw materials which rose by 36 percent in FY11, despite a mere 1.3 percent increase in unit sales in FY11. Following raw materials were the power and fuel costs which rose by 26 percent in FY11 compared to FY10.
Profitability further declined as the finance cost increased in FY11. An increase of 27 percent was experienced in finance cost in FY11 compared to FY10.This increase is attributed to the increase in cost of borrowing as the company held a larger inventory of finished goods.
While talking to BR Research a company employee said that "the three main profitability eaters are increasing rubber prices, currency depreciation and power and gas shortages". However the recent plunge in rubber prices takes away one of the agonising factors for this company.
The profit before tax in FY11 was lower than FY10, however lower taxation in FY11 resulted in an increase in PAT from Rs 218 million in FY10 to Rs 258 million in FY11. This translated into an EPS of Rs 4.33 in FY11 compared to Rs 3.65 in FY10.
Technical service agreement The Technical Service Agreement (TSA) between General Tyre and Continental Tyres expired in mid-2009. The company is again making a TSA with the tyre giant, this time on more favourable terms. The agreement is in its final stage and would soon be signed by both the companies.
The new TSA is expected to have a lower technical service fee rate than the previous arrangement. The company management is certain that the fee would be two percent of the net sales value, compared to three percent in the previous TSA.
Short and long term solvency The long term debt position of the company improved slightly. The largest decline was seen in the long term loans as the company successfully paid off the entire outstanding balance of one of its financing facilities. The company also paid instalments of interest and principal payments worth Rs 43 million and Rs 19 million that were due in October.
However the short term solvency position of the company worsened. The current ratio that stood at 1.61 in FY10 fell to 1.03 in FY11. The increase in trade and other payables and short term finances back the worsening of the short term solvency position.
Outlook Performance in FY12 is expected to improve slightly. The inflationary pressure that the company experienced in FY11 would ease, as the cost of production is expected to decrease due to diminishing global rubber prices. General Tyre can also cheer over the resolution of the disagreement between FBR and tractor manufacturers which had kept new tractors out of the market in recent weeks.
On the downside the ban on import of CNG cylinders is expected to dent car sales which in turn would affect the tyre manufacturer. Power outages and increase in fuel prices will also likely continue to hamper the company in the coming year.
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General Tyre
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Unit FY11 FY10 FY09
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Net sales Rs mn 7478 6355 5351
Cost of sales Rs mn 6479 5389 4810
Gross profit Rs mn 998 965 540
PBT Rs mn 395 409 -142
PAT Rs mn 258 218 -109
Profitability ratios
Gross profit margin % 13% 15% 10%
Net profit margin % 3% 3% -2%
Return on assets % 4% 5% -3%
Return on equity % 18% 16% -10%
Turnover ratios
Asset turnover times 1.30 1.32 1.35
Equity turnover times 5.09 4.78 4.81
Solvency ratios
Current ratio 1.03 1.61 0.87
Debt to equity ratio 2.92 2.62 2.57
Debt to assets ratio 0.75 0.72 0.72
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Source: Company accounts
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