Beco Steel Limited

Beco Steel Limited (PSX: BECO) was formerly known as Ravi Textile Mills and is incorporated in Pakistan as a public limited company. BECO is an integrated steel producer with products ranging from scrap to billet to various end products including specialty steel.

Pattern of Shareholding

As of June 30, 2022, BECO has a total of 124.962 million shares outstanding which are held by 1043 shareholders. Around 63.099 percent of BECO’s shares are held by its directors and sponsors. Associated companies, undertakings and related parties hold 21.94 percent of BECO’s shares. General public have a stake of 14 percent in the company. The remaining 0.96 percent outstanding shares are held by other categories of shareholders including financial institutions, insurance and investment companies, Modarabas, etc.

Historical Performance (2018-22)

BECO didn’t post any sales for the four successive years after FY16; however, it posted net profit in FY19 and FY20 on account of its other income. At the end of FY14, the company’s operations were resumed after over three years with the support of loans from its directors, however, in August, FY17, its operations were again suspended due to liquidity constraints, non-availability of fresh credit lines from banks and unfavorable circumstances in the yarn market (the company previously operated as a textile concern). The company had been consistently posting net losses since 2010 which had put it under extreme liquidity stress. As the company was unable to meet its financial obligations, it suffered recovery suit from the creditors which resulted in halting its operational activities for many years.

In March, FY20, 51 percent of the company’s shares along with its management control was acquired by Ch. Muhammad Shafique and Muhammad Ahmed Raza who were also the major shareholders of Chaudhary Steel Re-rolling Mills Limited and Beco Steel Re-rolling (Private) Limited respectively. The new shareholders having rich experience in the steel sector changed the company’s line of business from textile to steel. The company started its steel business in July FY21 on toll manufacturing basis and posted net sales. BECO’s net profit massively dropped when compared to FY20 as the company revamped its operations and started from scratch.

2022 mustered staggering growth in both topline and bottomline of BECO with margins in much better position when compared to 2021. The performance review of each of the years under consideration is given below.

As the company didn’t make any sales since 2016, it wasn’t incurring any cost of sales, however, administrative expense and other expense was still incurred. Administrative expense largely comprised of payroll charges. As of June 30, 2014, the company had 380 employees which were significantly reduced to 26 in 2018 and 17 in 2019. Its administrative expense dropped by 51 percent year-on-year in 2019, however still stood at Rs.12.10 million. Other expense comprised of loss on sale of store, spares and loose tools as well as WPPF which the company retained for business use. In all these years of halted operations, the company was surviving on skimpy other income which largely comprised of rental income. Other income massively grew from Rs.0.72 million in 2018 to Rs.113 million in 2019 which came on the back of gain on sale on fixed assets. This enabled the company to earn an operating profit of Rs.94.35 million after ten years (last operating profit was reported in 2009). Finance cost shrank by 94 percent year-on-year in 2019 as the company settled its long-term financing, accrued and deferred markup. The company recognized deferred tax liability in 2019 on surplus on revaluation of operating fixed assets. However, the company disposed off all of its operating fixed assets during the years, resulting in the reversal of deferred tax liability. This made the company to register a net profit of Rs.101.96 million in 2019 with an EPS of Rs.4.08.

2020 was another year of inaction. Administrative expense dropped by another 37 percent year-on-year in 2020 as the number of employees was further reduced from 17 in 2019 to just 4 in 2020. Other expense also ticked down by 65 percent due to reduction in WPPF and no loss incurred on the sale of store, spares and loose tools in 2020. Other income also plunged by 63 percent year-on-year in 2021. While the company made significant profit on saving account coupled with the write back of loan from the ex-director. However, the high base provided by the gain on the disposal of fixed assets in 2019 resulted in a drop in other income in 2020. Operating profit dropped by 66 percent year-on-year in 2020 to clock in at Rs.31.658 million. Finance cost grew by 41 percent year-on-year to clock in at Rs.1.04 million in 2020 on account of interest charges on WPPF, while there was no interest payments in 2020. Net profit dropped by 70 percent year-on-year in 2020 to clock in at Rs.30.197 million with an EPS of Rs.1.21.

With the acquisition, change of management and turnaround of the company’s line of business, BECO posted net sales of Rs. 230.77 million in 2021 from the sale of steel and allied products. High cost of sales translated into a gross profit of Rs.4.03 million in 2021 with a GP margin of 1.7 percent. Administrative expense grew by 99 percent in 2021 to clock in at Rs.15.27 million. The company only hired two new employees which increased the headcount to 6 in 2021. The rise in administrative cost was the effect of higher fee and subscription charges, legal and professional charges and office supplies. The company also incurred a distribution expense of Rs.1.84 million in 2021. Other expense grew by 11 percent year-on-year in 2021 mainly on account of allowance booked for the expected credit losses coupled with loss on sale of fixed assets. Other income sank by 47 percent year-on-year in 2021. While there was a sizeable increase in profit on saving accounts, higher base effect due to write off of loan from ex-director trimmed down the other income in 2021. Operating profit declined by 79 percent year-on-year in 2021, however, OP margin clocked in at 2.85 percent due to considerable support provided by other income. Finance cost slashed by 71 percent year-on-year in 2021 due to lower interest on WPPF on account of monetary easing. Net profit dropped by 92 percent year-on-year in 2021 to clock in at Rs.2.32 million with an NP margin of 1 percent. EPS dropped to Rs.0.09 in 2021.

In 2022, BECO’s topline multiplied by over 26 times (or 2634 percent). In 2022, the company achieved major milestones i.e. the addition of plant and machinery and start of commercial operations on its own manufacturing plant in the last two months of FY22. Before that, the company operated on toll manufacturing facility. For the massive capital investment, the company issued 99.96 million ordinary shares at a premium of Rs.20 per share for a total value of Rs.2,998.975 million in 2022. The net sales clocked in at Rs.6310.32 million in 2021. High cost of sales due to commodity super cycle in the international market coupled with Pak Rupee depreciation pushed the cost of sales up by 2553 percent in 2022. Yet the company was able to make 7247 percent higher gross profit in 2022 with GP margin jumping up to 4.7 percent. Administrative expense grew by 187 percent in 2022 due to staggering growth in payroll expense as the number of employees grew from 6 in 2021 to 160 in 2022. Other factors that pushed up the administrative expense were higher rent, rates and taxes as well as higher legal and professional charges incurred during the year. Distribution expense grew by 755 percent year-on-year in 2022 due to carriage and transport charges. Other expense also grew by 516 percent in 2022 due to higher provisioning for WWF and WPPF. Conversely, other income shrank by around 99.6 percent due to lower profit on saving account. Operating profit grew by 3246 percent in 2022 with OP margin climbing up to 3.5 percent. Finance cost slid by 51 percent year-on-year in 2022 due to lower interest on WPPF. Net profit grew by 8098 percent in 2022 to clock in at Rs.190.52 million with an NP margin of 3 percent. EPS made a handsome growth to clock in at Rs.4.45 in 2022.

Recent Performance (1QFY23)

The company issued its last financial results for the 1QFY23. The company hasn’t issued its financial results for 2nd and 3rd quarter of FY23. In 1QFY23, BECO’s sales grew by 357 percent year-on-year. High cost of sales owing to high international steel prices during the quarter, Pak Rupee depreciation, high energy cost pushed the GP margin down from 7.7 percent in 1QFY22 to 6.4 percent in 1QFY23 despite 283 percent year-on-year rise in gross profit. Administrative expenses rose by 252 percent in 1QFY23 due to rising inflation as well as increase in the payroll expense as the company didn’t start operations on its own plant in the 1QFY22. Similarly, the company didn’t incur any distribution charges in 1QFY22 which stood at Rs.7.25 million in 1QFY23. Other expense ticked down by 36 percent year-on-year in 1QFY23. Operating profit grew by 279 percent year-on-year in 1QFY23, however, OP margin slid down from 6.7 percent in 1QFY22 to 5.5 percent in 1QFY23. The company didn’t incur any finance cost in the 1QFY22 versus finance cost of Rs.0.09 million in 1QFY23. Net profit grew by 261 percent in 1QFY23 to clock in at Rs.135.49 million with an NP margin of 4.3 percent versus 5.4 percent during the same period last year. Despite growth in net profit, EPS dropped by 28 percent from Rs.1.50 in 1QFY22 to Rs.1.08 in 1QFY23 due to increase in the number of outstanding shares from 25 million to 124.962 million shares.

Future Outlook

Significant increase of 47 percent in PSDP allocation to Rs.1.15 trillion in the federal budget FY24 will boost the reconstruction and rehabilitation activities in the areas affected by the Monsoon floods. This will buttress the demand of long-rolled products. Moreover, with the downward revision in international steel prices and the improvement in the value of Pak Rupee in the short-term due to foreign inflows, the company would be in a better position to stock up on its inventory.

On the flip side, the prices of steel have also reduced in the local market. This will result in inventory losses for the company and put downward pressure on its topline. Furthermore, high local inflation and soaring energy prices will also suppress the margins. However, with expected robust demand, the company is expected to sail through FY24 with resilience.