GAL has risen 400% in a year. What is going on?

Ghandhara Automobile Ltd. (GAL) is known for assembling and selling commercial vehicles and passenger cars in Pakistan. The company has been the talking point among traders and investors this year as its business continues to improve.

The share price of the company has increased 200% in a short period of three months. Since last year, the stock’s returns stand at 410%. What exactly has brought these returns in a high-interest rate environment that is not conducive to this business?

Let us first take a look at what Ghandhara Automobile Ltd. (GAL) does. The company is involved in the local assembly of JAC trucks and Chery SUVs. It also carries out CBU imports – Completely Build Units of Dongfeng and Renault. For Ghandhara Industries Ltd. (GHNI), the company also does toll manufacturing under the ISUZU brand.

The company has an annual capacity of capacity of 4800 commercial vehicle units and 6000 passenger car units.

The slow and steady rise of the stock last year can be attributed to the following:

Axle load control regime

The government of Pakistan enforced the 100% axle load control regime on Nov 15th, 2023. This has resulted in limiting heavy vehicles to only carry 50-70% of their previous capacity. As a result, more vehicles are needed to move the same goods across the country, increasing the sale of trucks.

Economic recovery

While interest rates continue to stay at the same level as late last year, inflation has cooled down. With economic activity picking up, road freight transport(responsible for 90% of all freight transport) was also likely to see a boost. In anticipation of this, many expected truck sales to go up.

The above two factors were priced in by shrewd investors by late last year. But it is the most recent financial result of the company that has everyone talking about the company.

GAL reported a 61% QoQ increase in its sales volumes. While the overall revenue declined 55% in the nine months ending 31/03/2024, it was just a reflection of poor economic conditions and the headwinds that the company is just coming out of.

Investors clearly believe the quarterly performance is an indicator of better things to come. And that has launched the stock price to new highs, with the stock doubling in less than two months.

GAL to launch hybrid Chery Tiggo

The optimism is likely to continue into the future. And the reason for this is the launch of GAL’s hybrid vehicle.

Despite losing market share to SAZEW’s Haval HEV, GAL plans to launch a hybrid version of the Chery Tiggo in the latter half of this year, aiming to regain its market position. The introduction of Chery Tiggo SUVs in FY22 was well-received so investors are hopeful the company can repeat the performance with the hybrid as well.

Dealership network

GAL is also expanding its 3S dealership network, currently totalling 26 locations, to enhance its market reach and customer service.

Financial Metrics Analysis

Earnings Per Share (EPS)

• Trend: EPS improved from -8.28 in FY20 to 4.93 in FY22, though it slightly declined to 1.33 in 9MFY24.
• Implication: Steady improvement indicates better profitability, though recent economic challenges have impacted earnings.

Price-to-Earnings Ratio (P/E)

• Trend: P/E has fluctuated significantly, with a high of 91.84 in 9MFY24.
• Implication: High P/E suggests the market expects future growth, though current earnings are lower.

Book Value Per Share (BV/sh) and Price-to-Book Ratio (P/Bv)

• Trend: BV/sh has consistently increased from 123.2 in FY20 to 145.8 in 9MFY24, with P/Bv showing a reasonable valuation.
• Implication: Increasing BV/sh indicates strong asset management, while a moderate P/Bv suggests the stock is not overvalued.

Return on Equity (ROE) and Return on Assets (ROA)

• Trend: Both ROE and ROA have shown improvement but remain low, reflecting economic challenges.
• Implication: Improved ROE and ROA indicate better profitability management, though there’s room for growth.

Debt Metrics

• D/E and D/A Ratios: These ratios indicate that GAL maintains a manageable level of debt, ensuring financial stability.
• Implication: Low debt ratios suggest that the company is not overly leveraged, providing a cushion against economic downturns.

Margins

• Gross and Net Margins: Gross margins have improved to 11.0% in 9MFY24, while net margins remain low.
• Implication: Improved gross margins indicate better cost management, though low net margins highlight the impact of broader economic issues.

How high can the share price go?

The answer to the above question lies not only in the upcoming growth opportunities but also in the risks in the near term.

Growth Opportunities

• Hybrid Vehicles: The launch of the hybrid Chery Tiggo could tap into the growing demand for eco-friendly vehicles.
• Market Recovery: Economic recovery and increased freight transport demand present significant growth opportunities.

Potential Risks

• Launch Delays: Delays in the hybrid SUV launch could impact market recovery plans.
• Market Acceptance: The new variant may face lower-than-expected acceptance.
• Economic Factors: Prolonged high interest rates could dampen auto sector demand.
• Supply Chain Disruptions: These could affect the company’s production capabilities.

Conclusion

The company has priced in a lot of the good news. As more players try to take market share away from their competitors, the competition will eventually drive margins lower. The first to create an impression is likely to take the lion’s share of the profits in the early days of hybrid vehicles.