It has been three years since the long-steel rebar maker, Agha Steel went public with an initial public offering (IPO). At that time, the company was in expansion mode having already brought up capacity from 250,000 tons to 450,000 tons for billets, and from 150,000 tons to 250,000 tons for its rebars, promising to take up its melting and rerolling capacity further to 600,000 tons of rebars after its Mi. Da technology was fully operational. This technology was supposed to be a game-changer for the plant and its efficiency; claimed to increase yield efficiency, and result in lower energy, labor and materials cost and allow customized billets production. The IPO proceedings were utilized toward attaining this. But three years on, this Mi.Da has still not “touched” the company into gold. Meanwhile, during the last recorded quarter (Jun-23), the company’s net margins trickled down to 4 percent.

Quarterly net margins used to be 10 percent in FY21 when another rebar maker Amreli’s quarterly net margins averaged at 3 percent. Agha blames this on the atrocious economic conditions, the expensive scrap it has to import from abroad vulnerable to global price movements, the import restrictions enforced by the government, the rupee depreciation, fuel and energy prices, prolonged political instability, governance, the floods, the works! What the company does not spend too much time writing about in its annual report is construction demand, or lack thereof.

In fact, in FY23, Agha’s capacity utilization has dropped to 26 percent for billets (FY22: 38%), and 41 percent for rebars (FY22: 58%). Its revenue dropped 20 percent during the year as a result of reduced volumetric sales—production had declined by 29 percent. Though statistics for sales (in tons) are not revealed, the company’s revenue stream per produced ton of rebar grew 13 percent, compared to 10 percent increase in its cost of goods sold. Pricing was strong and the company manages to shield itself from massive cost inflation through its technology. This is where Agha shines bright—it’s always the gross margins. The Electric Arc Furnace technology enables Agha to produce superior steel more efficiently (lower wastage, low energy consumption) than its competitors that also results in continuously solid margins. The company has made investments in solar energy to reduce energy costs and an air separation unit that would meet gaseous raw material requirements for the production of steel.

But where Agha is losing is the delay in the implementation of the technology it went public for, the abysmal demand which is expected to remain somber and its ballooning finance costs. Borrowing costs were 18 percent of revenue in the final quarter and 16 percent for the whole year (FY23). This will be difficult to manage despite the company working hard to maintain its overheads (3% of revenue for the past three years). The interest coverage ratio for FY23 has dropped to 1.47 compared to 2.62 last year which demonstrates the company’s ability to honor its debt payments—this ability has lowered.

The company predominantly sells to institutions and projects which have thus far worked in its favor as it has to sell less to retail where demand can be erratic. Large development projects typically can absorb the cost overruns better and surpass economic downturn which is another advantage. Despite all the things working for this steel maker, at roughly 40 percent capacity utilization, Agha is skating on thin ice.