THE GENERAL TYRE AND RUBBER COMPANY OF PAKISTAN LTD – Analysis of Financial Statements Financial Year 2006- Financial Year 2010

The General Tyre and Rubber Company of Pakistan Ltd. (Gentipak) is a public limited company with majority of its shares in the hold of Bibojee Services Ltd., Pak Kuwait Investment Company (Pvt) Ltd and National Investment Trust.

The company’s credibility is boosted when the name of ‘Continental AG’ (Germany’s No 1 tyre manufacturer) is taken into consideration as a major shareholder of Gentipak. This international brand also provides Gentipak all the technology needed for production under a long term Technical Service Agreement (TSA) as well.

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Name of Company The General Tyre and Rubber
Company of Pakistan Limited
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Ticker GTYR
Assets (June 2010) Rs 4,813,373,000
Share Capital (Rs. 750,000,000 ordinary shares
of Rs. 10 each)
Sales Revenue (June 2010) Rs. 6,355,293,000
Market Share Price (30th June 2010) Rs. 22.80
Market Capitalization 1,362,785,640
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PThe company’s brand name is taking pace with the passage of time ie ‘GENERAL’. Recently, the company introduced a new variant into its production line of passenger car tyres in line with latest European designs and is being branded under the name of ‘EURO’.

The exports of Gentipak are somehow limited to neighboring and Middle-Eastern companies only. It is still in search of favorable markets.

Gentipak employs directly and indirectly approx. 1800 persons all over the country. It has offices in three other cities of Pakistan besides having its head office in Karachi. It is selling its products in the replacement (after) market through a network of more than 100 dealers and has a back-up in the shape of sales and technical force covering the entire territory.

Sales and production

Last year, the company hit a major land mark regarding growing sales despite the fact the severe power crises and security situation of the state. Besides that, the export projections of the industry were not supportive to Gentipak at all. Moreover, due to the persistence of global recession and credit crunch, the buying power of the major customers both at home and abroad was looking bleak. Also the company had to recover from a negative profit after tax due to a huge amount of debt leverage in the balance sheet. Despite all these factors the company due to sharp and effective steps recorded a huge boost in sales of 20%, a figure which even overshadowed the 16.34% rise in the operating cost thus registering a profit after taxes of Rs 218m. The exports also played a significant part in the increasing sales. The company’s production of the tyres was less than the previous year. The production was 3000 units per day as compared to 5000 units normally due to salary incremental demands from the employees, which were not entertained by the administration and ultimately the workers went on strike. Gentipak is considering now to compete with the smuggled tyres available in the market giving direct threat to the company. For that matter, the company has invested more than 1,250 million rupees to improve and enhance its production facilities.

The trend from the above graph shows that the company has been enjoying almost persistent increase in the gross profit which shows the maturity of the company ie it is growing with a constant growth rate.

Profitability analysis

The automobile parts sector overall remained inclined towards decline during whole of the year with all of the companies enjoying little profit margins in FY09-10. The profit margin of Gentipak was almost 3.44%, which is way more than the last year’s margin of -2.05% mainly because of the increasing costs of the automobiles available in the market. Even then the sales increased by almost 20% and this increase can mainly be attributed to the launch of the country’s most hit car ie Toyota Corolla and latest Suzuki Swift. Against the sales the cost of sales increased by 16.34% last year. Also contributed to this factor is the positive response of the world market to the product quality of Gentipak. The export of new and improved products over Gentipak abroad has helped the company to make a strong position in the world market now and they have got an opportunity to work on their basic factors to transform them into advanced factors.

According to the CEO of the company, smuggled tyres account for 57% of local sales of passenger car tyres, 85% of light truck tyres and 97% of truck and bus tyres. Even then the company is able to survive in such an unfair, unfavorable condition. Ultimately the company came up with the “EURO” brand that is line with the European design and standards, thus creating space for themselves in the European market.

The return on assets also came back to the positive after being negative due to the loss of last years. However it will be improved in the future as the one of the company’s major stakeholder plans to expand its operations directly posing an increase in the expected sales. Last year’s return on assets was 4.54% which is slightly less than the industry average of 5.12% yet it can be accepted as a positive sign as company reduced those assets especially investments which were not yielding the cash flows for the company. Gentipak increased its current assets last year by 41.7% while non-current assets almost remained the same. The company also reduced its stake in the other subsidiaries of the Business Groups by 28% and brought the long terms loans owed to itself to Rs 173 million. All these reductions together with the large profits brought its ROA to 4.54% from -2.50% in FY09.

Liquidity analysis

The company’s current ratio is, on a comparative basis, in line with the industry average at 0.98 even though as an individual figure it seems to be low. Note for one of its competitors, Agriautos Industries Ltd, its current ratio touched 5.10 last year which is very high as compared to other competitors in the industry as shown by the below inter-company analysis.

This trend can be explained by looking at the overall behaviour of economy where all the big companies try to finance their operating fund requirements by taking short-term loans from the banks to save their finance costs and the risk of falling equity markets of the country. The company has also done the same. It has taken a fresh loan from various sources of finances worth Rs 1750 million. Due to gradual increase in the interest rates as one of the steps taken by the government for monetary contraction, the accrued interest due on the company has increased immensely. Moreover, due to the increasing debt leverage, the current portion of debt has increased by almost 25%, further increasing the current liabilities. Gentipak has also been able to increase its current asset line by 41.7% and the major credit goes to the stocks inclusive of both in hand and in transit. All these factors were responsible for the comparatively low current ratio but as compared to other notable players in the sectors the company appears to be on a solid footing.

Asset management ratios

The company’s inventory turnover rate has immensely increased from 14.45 in 2008 to 17.84 in the last year. This shows the improvement in the supply chain of the company and focus of the company towards working upon inventory turnover. The stock in hand and in transit has tremendously increased by almost 150%, which is a huge increase in the inventory of the company. The point that further gives boost to the efficiency of the company is that it has also managed to work on a ratio of more than 17.0, which is highly efficient.

The boosting sales have helped the company with Day Sales Outstanding or the amounts of time in which the receivables are converted into cash have also increased owing to the increase in trade receivables by 26%. The company should reduce that time period to increase its liquidity and reduce the risk of default on its short-term liabilities. The total assets turnover has also increased from that of the previous year due to the phenomenal increase in sales and the reduction of the inefficient assets by the company but still Gentipak has invested in expansions of its plants and equipments which have been increased by 5% this year. Moreover the sales to equity ratio have also increased due to increased sales by the company.

Debt management ratios

Due to the increasing trend of the cost of finance being evident in the economy, Gentipak took a bold decision to shift to short term borrowings rather than long-term loans from the banks. The country analysis reveals that this policy was adopted by almost all of the companies in the sector except Agriautos Industries Ltd, which mostly relies on equity rather than debt for its financing purposes. In the post recession periods most of the companies used to rely on the booming equity markets for the financing purposes.

Gentipak reduced its long-term debts by almost 46% by either totally or partially paying principal amount of the debts. For example, Gentipak has totally repaid the huge debt of Rs. 19.940 million and Rs 43.321 million due to a financial institution.

These loans were repaid by either taking the short-term loans, which resulted in 25.7% increase in the current liabilities. That was a very risky step taken by the company, as in the preceding year (2009) it posted a huge loss and loss of liquidity as a result of this step could have been a major issue but Gentipak went onto implementing this policy in a befitting manner which really paid off later on. So the total liabilities were increased by 21.5% and the assets too were increased by 22%, which resulted in the sustainability of the total debt to asset ratio at 72%.

The same trend is evident in debt to equity ratio, which has been greatly increased from 153% in 2009 to 167.0% in last year. Similarly long-term debt to equity ratio showed a decline from 25% in 2009 to 23% in 2010. This decline is not too great as expected by the trend. The TIE ratio has increased from 53% in 2009 to 257% in 2010 at the same time when the company recovered the heavy losses made in the year 2009.

Market value ratios

The earnings per share of Gentipak were back in the positives due to huge increase of 298% in the net income last year. The price to earnings ratio was increased and was positive this time but the average price of the stock was comparatively lower than that in the preceding years. So P/E ratio was 6.74 in the last year.

Future outlook

The way in which Gentipak recovered from its huge loss in FY09, is very effective and worth appreciation. Despite the power crisis and the looming security concerns in the country, the company managed to register a positive profit after tax and earnings per share. The overall automobile and parts sector posted a loss of about 2%. Considering the steps taken by the government to stimulate the growth in the sector, the company seems to have a secure future. Moreover, the government’s plans to construct dams and power houses to hedge against the power crisis presents new opportunities for the entire industry. Also the boosting demand by Indus Motors and Atlas Honda strengthens the future of the company. However the power crisis and oil prices will have to be under the check for the continuation of growth trend for Gentipak.

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