Amreli: Above par

Rebar manufacturer Amreli Steel (PSX: ASTL) is on a recovery path since incurring losses during FY20 and in the nine-month period for FY22, the company’s earnings have landed at the highest ever, nearly doubling compared to this period last year. Even though construction demand has remained lacklustre throughout the year, the company sold 8 percent more rebars than 9MFY21 that sent revenues up on a strong upward trajectory(up 56%) with a decisive push from prices fetched in the market.

The company enjoys substantial protection from imports which has allowed it to keep raising prices in tandem with costs without having to worry too much about competition. Rising scrap prices (which is a major raw material) in the international market, rupee depreciation, expensive freight and higher energy tariffs caused costs of production to balloon—the estimated cost per ton sold for Amreli was up 45 percent in 9MFY22. The revenue per ton sold mimics costs, up 45 percent. The builders and construction industry has been vocal about the exorbitant and prohibitive construction material prices, of which steel is a dominant commodity. But there isn’t much Amreli could have done as costs have very evidently been rising and prices had to be raised if the company intended on keeping margins intact (12% as last year).

On the expense side, Amreli’s finance costs and overheads have dropped slightly from 8.7 percent in 9MFY21 to 7 percent in 9MFY22.

This together with gross margin consistency allowed Amreli to improve its net margins; inching up ever so slowly. Moving forward, costs will continue to cast a shadow on the company’s financial performance, though nothing too dramatic. In 9M, a 98 percent growth in after-tax profits is more than decent!

The ongoing Russia-Ukraine war has sent steel scrap prices hurtling forward once again and the company believes it would raise rebar prices further by Rs15,000-20,000 per ton by June to shield margins. Increasing prices of rebars comes at the potential cost of losing volumetric demand; and Amreli will play around with that based on where demand stands in the coming months.Given these changing circumstances, Amreli’s management has cut its annual volume forecast from 400,000 tons to 375,000-380,000 tons; which despite being lower than earlier expectations is still higher than last year.