Amreli Steels Limited (PSX: ASTL) was set up as a private limited company in 1984. It was later converted into a public unquoted company in 2009. It manufactures and sells steel bars and billets.
As at June 30, 2020, over 56 percent shares are with the directors, CEO, their spouses and minor children. Of this, the Chairman, Mr. Abbas Akberli owns 31 percent shares, followed by roughly 12 percent shares owned by the CEO, Mr. Shayan Akberali and a non-executive director, Ms. Mariam Akberali. Close to 19 percent shares are owned by the associated companies, undertakings and related parties. This category solely includes Mahvash Akberali. The local general public holds about 12 percent shares; the remaining about 13 percent shares are with the rest of the shareholder categories.
Historical operational performance
The company has mostly seen a rising topline through the years, except for in FY16 and more recently in FY20. Profit margins rose gradually, reaching a peak in FY16 after which it declined until FY20.
After contracting by nearly 14 percent in FY16, revenue grew by a little over 7 percent in FY17. During the year, the company reached the highest level of sales volume at 181,000 tons of rebar. Overall, there was a 10.6 percent increase in volumes and a 4.6 percent drop in price that contributed to the higher topline. The drop in price was due to passing on the benefit to the consumer of cost of raw materials. Despite the higher sales, gross margin reduced to around 18 percent compared to over 22 percent in FY16. This was attributed to price drop as well as imported rebars sold at a lower margin. Cost of production increased to consume more than 81 percent of revenue compared to 77 percent in the previous year. The effect of this also trickled down to the bottomline as net margin was recorded at a lower 8 percent.
In FY18, the company was back on its growth trajectory as revenue increased by 16.7 percent. In volume terms, sales were at 172,448 metric tons of prime rebars. The general steel demand in the country is gaining momentum through an increase in automobile production along with the focus on construction activities and higher public spending on infrastructure. During the year, the company also saw sales from two months of production at a new rolling mill at Dhabeji. On the other hand, cost of production rose to 82 percent bringing gross margin to almost 18 percent. The decrease also reflected in operating margin; however, net margin was higher at 10 percent owing to a positive tax figure.
In FY19, the company experienced a sharp incline in its topline, by over 84 percent, crossing over Rs 28 billion. Sales volume of prime bars increased by nearly 61 percent, from 172,448 tons to 277,416 tons. This was a result of a higher production of 297,283 metric tons of billets compared to 186,471 metric tons in FY18 as well as increase in production of rebars from 182,741 metric tons in FY18 to 290,892 metric tons in FY19. However, the rupee devaluation wreaked havoc for the company as despite the phenomenal rise in revenue, costs also increased to consume over 91 percent of revenue, causing gross margins to drop to single digits. Moreover, finance expense also increased significantly due to higher borrowing and higher cost of borrowing. Thus, net margin fell to less than 1 percent.
With the first half of FY20 being affected by the stringent economic policies within the country and globally, the US-China trade war, and the second half affected by the outbreak of the Covid-19 pandemic, revenue for Amreli Steels contracted by over 7 percent. Sales volumes for prime bars also decreased by almost 2 percent, from 277,416 tons to 272,382 tons. With currency devaluation and high costs of energy, the company was unable to pass the burden entirely to consumers, in a volatile and unstable economic condition, marked by slow demand. Cost of production further climbed to over 92 percent of revenue, bringing gross margin to an all-time low of 7.45 percent. With finance expense also escalating to make up over 8 percent of revenue, the company incurred a loss of over Rs 1 billion for the first time since FY11.
Quarterly results and future outlook
As business activities resumed after the lock down eased, the first quarter of FY21 saw revenue rising by 30 percent year on year. This was attributed to a sales volume gain that also stood at 30 percent. There was also an improvement in profit margins year on year during 1QFY21 as the company posted a net margin of 1.4 percent for the quarter compared to the loss of Rs 81 million in 1QFY20.
The second quarter saw higher revenue compared to both the previous quarter as well as year on year. This was a result of better capacity utilization. The period saw volumetric sales of 175,728 tons. With decrease in borrowings as well as interest rates, the company was able to improve profit for the quarter.
The third quarter saw a further improvement in revenue and profits due to a stable price, increase in volumes and stability in exchange rate to a certain degree. Thus, the nine months of FY21 saw revenue higher by 27 percent year on year.
GDP growth rate expectations by the State Bank of Pakistan (SBP) improved to 3 percent, from 2.1 percent, along with other positive factors for the economy such as growth in remittances, and stable interest rates during 9MFY21. Moreover, the focus on construction activities will help to keep demand for steel stable, however, the sector faces risks in terms of political instability, and volatility in raw material prices in the international market, along with other input costs.