Amreli Steels Limited

Amreli Steels Limited (PSX: ASTL) was established as a private limited company in 1984. It was converted into a public unquoted company in 2009. The company manufactures and sells steel bars and billets at its production plants located in Shershah, Karachi and District Thatta, Sindh.

Shareholding pattern

As at June 30, 2021, over 56 percent shares are held by the directors, CEO, their spouses and minor children. Within this, over 31 percent shares are held by Abbas Akberali, the Chairman of the company. Close to 19 percent shares are owned by the associated companies, undertakings and related parties that solely include Mahvash Akberali. The local general public holds 15 percent shares while the remaining roughly 10 percent shares are with the rest of the shareholder categories.

Historical operational performance

Over the last decade, Amreli Steels has mostly seen a growing topline, whereas profit margins between FY16 and FY20 have followed a downward trajectory before improving slightly in FY21.

In FY18, revenue grew by nearly 17 percent, reaching Rs 15.5 billion in value terms which is the highest seen thus far. In terms of sales volumes as well, the company reached a peak at 172,448 metric tons of prime rebars. Amreli began a new rolling mill at Dhabeji that operated for two months and contributed 4.63 billion sales in the last quarter of the year. The country’s steel industry has seen growth on the back of public spending on infrastructure projects such as roads, bridges and rising private constructions. But with a marginal rise in cost of production, gross margin reduced to 17.8 percent. However, net margin was supported by a positive tax figure compared to a tax expense of Rs 371 million in the previous year.

Revenue in FY19 witnessed the biggest growth at over 84 percent to cross Rs 28 billion in value terms. Sales volumes of prime bars grew by 61 percent, from 172,448 metric tons to 277,416 metric tons that was primarily responsible for the growth in revenue. This, in turn, was possible due to an over 59 percent rise in billet and rebar production. However, this was accompanied by a more than corresponding rise in costs due to currency devaluation that increased the cost of inputs. The cost of manufacturing rose by 27.6 percent on a per ton basis that could not be passed on to the customer entirely. Thus, gross profit fell to an all-time low of 8.5 percent. Combined with an escalation of finance cost that consumed 4.4 percent of revenue, net margin fell below one percent for the year.

After rising for three consecutive years, topline contracted by 7.2 percent in FY20 to fall to Rs 26.5 percent. Sales volumes of prime bars decreased by 1.8 percent to 272,382 tons. Additionally, business activities for also paused for two months due to the Covid-19 pandemic-induced strict lockdowns. Coupled with this was the rise in energy costs, scrap material and currency devaluation that further pushed down gross margin to 6.8 percent. Moreover, finance expense continued to climb upwards due to rising interest rates and an increase in short-term and long-term borrowing. Eventually, the company was unable to cover costs and posted net loss for the first time in a decade, of Rs 1.24 billion.

Revenue recovered in FY21 as it posted a growth rate of almost 48 percent, to cross Rs 39 billion in value terms which is the highest seen thus far. There was 33 percent growth in volumes as well as of re-bars, from 272,382 tons to 362,949 tons. The rise in revenue allowed gross margin to improve somewhat to 11.58 percent. This also trickled to the bottomline that was recorded at Rs 1.368 billion with a net margin of 3.5 percent. This was also supported by a reduction in finance expense that was due to a reduction in interest rates by the State Bank of Pakistan (SBP).

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by almost 50 percent year on year. This was attributed to “better price retention” and a seven percent growth in volumes. This also translated into a better gross margin year on year at 14.3 percent. This trickled down to the bottomline that was recorded at Rs 702 million for the period compared to Rs 111 million in the same period last year.

Revenue in the second quarter of FY22 was also higher year on year, by 55 percent due to growth in volumes and better price retention. But cost of production was only marginally lower, keeping gross margin for the quarter nearly flat. This also reflected in the higher net margin of four percent compared to 3.27 percent in 2QFY21. Overall, 1HFY22 saw an improvement in profitability at a net margin of Rs 1.3 billion versus R 423 million in 1HFY21. There are certain positive aspects in the economy such as iron and steel sector witnessing a positive growth of 25.3 percent and an encouraging regulatory environment for banks to increase the flow of financing towards the housing sector. However, certain factors such as current account deficit and increase in energy costs can become impediments to industrial and economic growth.