August 11, 2020: Pakistan Credit Rating Agency (PACRA) has maintained entity ratings of General Tyre & Rubber Company of Pakistan Limited at A for long-term and A1 for short-term with a stable outlook forecast.
The ratings reflect the realignment of the company’s positioning in the current operating and economic environment of the country. Despite the overall economic slowdown and softening of demand induced by outbreak of COVID-19 with associated lockdown, the company has managed to restrict its top-line loss to 15% in 9MFY20 through focusing on replacement market and rising its market share into this segment.
The non-accommodative monetary policy resulted in significant increase of finance cost which suppressed the company’s profitability for the period under review. Currently there is a considerable reduction in policy rate, and this will enhance the profitability of General Tyre in near future.
Meanwhile the company has undertaken multiple initiatives which will help reduce its operating cost and supplement plant efficiency. The company’s envisaged fresh business strategy with more focus on replacement market and farm segment has helped the company to maintain its margins.
The company has a strong foothold in its respective industry comprising 4-wheeler tyres for cars, LCVs, tractors, buses and trucks. The company is the sole manufacturer of passenger car radial tyres catering the Original Equipment Manufacturers' (OEMs) market.
Two-wheeler market, in contrast, displays a broader competitive landscape wherein General Tyre holds a relatively small market share. In last 3-4 years company has invested significantly in modernization and capacity enhancement of its plant through financing.
Due to prevailing subdued economic situation, the company could not get much benefit of its expansion therefore overall debt servicing capacity of the company decreased. However, the Company is well poised to take benefit from future revival of demand from both OEM and RM market.
Recent drive of Government to curb smuggling may support company in replacement market. The Company is also in close coordination with new auto players and has started supplying tyres to two new auto players. A well-devised governance framework alongside experienced management team is considered positive for the ratings.
Association of General Tyre with Bibojee Services (Private) Limited and Pakistan Kuwait Investment Company Limited is also a consideration. The company's core competence lies in its technical collaboration with Continental AG; Germany (one of the world’s leading tyre manufacturer) which assures adherence to international quality standards. Cautious management strategies amidst changing industry environment are critical.
The ratings are dependent on the company to uphold and improve its business risk vis-à-vis financial risk profile. Revival of the demand driver is crucial. Moreover, prudent management of financial affairs remains important.