Crescent Steel and Allied Products Limited

Crescent Steel and Allied Products Limited (PSX: CSAP) was incorporated in Pakistan as a public limited company in 1983. The company operates in five diverse segments - steel, cotton, Investment & Infrastructure Development (IID), Energy, and Hadeed (Billet) segment.

Pattern of Shareholding

As of June 30, 2024, CSAP has a total of 77.632 million shares outstanding which are held by 3225 shareholders. The local general public has the majority stake of 44.34 percent in the company followed by Associated Companies, Undertakings & Related Parties holding 29.75 percent shares. Within this category, Crescent Textile Mills Limited has the highest shareholding of 11 percent. Local and foreign companies collectively hold 9.46 percent shares of CSAP while Banks, DFIs, and NBFIs hold 8.78 percent shares. Directors, CEO, their spouses, and minor children account for 4.97 percent of shares of CSAP. Around 2.10 percent of shares are held by Trustee National Investment (Unit) Trust. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-24)

Since 2019, CSAP’s topline has only posted year-on-year growth in 2021 and 2024. Its bottom line which had been inching down registered a net loss in 2020. CSAP’s bottom line recovered in 2021 and 2022, however, it lost its footing in 2023. In 2024, CSAP’s net profit registered a staggering turnaround. CSAP’s margins had been riding a downward trajectory until 2020 followed by a rebound in 2021. In 2022, gross and operating margins nosedived while net margins continued to grow. In 2023, gross and operating margins posted significant growth, however, net margin slumped. In 2024, CSAP’s margins attained their optimum level (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.

In 2019, CSAP’s topline massively fell by 42.27 percent year-on-year due to retarded infrastructure and construction activity in the country. This was also a tapered PSDP outlay which dampened the manufacturing and industrial activity. CSAP didn’t make any export sales in 2019. In the local market, while pre-coated pipes and raw cotton posted an uptick in revenues, it was offset by a substantial reduction in the revenue from bare pipes and pipe coating. This coupled with high inflation and currency depreciation wreaked havoc on the gross profit of CSAP which fell by 72.84 percent year-on-year in 2019. This culminated in a GP margin of 5.42 percent, much lower than the GP margin of 11.52 percent recorded in 2018. Income from investment, which forms a huge chunk of the operating profit of the company also plunged by 61.34 percent in 2019 due to thinner dividend income. No export commission expense incurred during the year drove the distribution expense down by 17.18 percent in 2019. Administrative expenses grew by 8.84 percent in 2019 on account of higher payroll expenses. CSAP’s operating profit shrank by 77.62 percent year-on-year in 2019 with OP margin drastically falling down from 17.1 percent in 2018 to 6.62 percent in 2019. Finance costs grew by 5.6 percent in 2019 on account of higher policy rates and increased working capital-related borrowings obtained during the year. CSAP’s gearing ratio grew from 21.3 percent in 2018 to 27 percent in 2019. Net profit slumped by 80.91 percent year-on-year in 2019 to clock in at Rs.143.48 million. This translated into an NP margin of 3.53 percent versus an NP margin of 10.67 percent recorded in 2018. EPS also fell from Rs.9.68 in 2018 to Rs.1.85 in 2019.

In 2020, CSAP witnessed a further 6 percent slide in its topline. While the local industry was already grappling with high inflation and tamed demand, the situation was further exacerbated by COVID-19. The decline in revenues was mainly led by tapered revenue from pre-coated pipes followed by raw cotton and pipe coating while steel billets and bare pipes performed well during the year. The cost of sales dipped by 1.95 percent on account of higher inventory handling and plant idling due to the lockdown. Consequently, gross profit plunged by 76.91 percent year-on-year in 2020 with GP margin sliding down to 1.33 percent. Income from investment grew by 103.24 percent year-on-year in 2020 due to robust dividend income and higher unrealized gain on FVTPL investment. Distribution expenses also slipped by 9.88 percent year-on-year in 2020 due to a slump in advertisement and promotion budget and lesser legal and professional charges incurred during the year. Conversely, administrative expenses increased by 30.21 percent in 2020 as the number of employees grew from 755 in 2018 to 778 in 2019 and so did the payroll expense. Operating profit shrank by 28.98 percent year-on-year in 2020 while OP margin settled at 5 percent, which although lower than the previous year’s level was significantly higher than the GP margin recorded in 2020 – thanks to higher income from investment. Finance cost ticked up by 26.47 percent in 2020 which drove CSAP’s gearing ratio to 35.5 percent. Higher finance costs were the result of inventory buildup as well as higher short-term and long-term borrowings. The company incurred a loss after tax amounting to Rs.17.124 million in 2020 with a loss per share of Rs.0.22.

CSAP’s sales revenue grew by 89.92 percent year-on-year in 2021. Revenue growth was mainly driven by demand recovery in steel billet and steel pipe segments whose sales grew by 124 percent during the year. This was on account of the recovery in construction activity in the country particularly due to the government housing scheme which spurred steel demand. Energy infrastructure projects also contributed to the demand resurgence of the steel segment. The cotton division also performed exceptionally well in 2021 owing to 10-year high cotton prices in the local market due to a 38 percent plunge in cotton production. Improved revenues offset a 79.32 percent rise in the cost of sales and culminated in 875.98 percent higher gross profit in 2021 with a GP margin of 6.84 percent. Income from investments slumped by 40.27 percent in 2021 due to significantly low dividend income. Distribution expense grew by 12.43 percent year-on-year due to higher sales volume. Administrative expenses largely remained constant at last year’s level as the number of employees reduced to 765 in 2021. Other income posted a colossal 453.97 percent growth in 2021 due to gain on disposal of investment property, unwinding of discount on long-term deposits as well as exchange gain recorded during the year. All these factors translated into 233.39 percent bigger operating profit in 2021 with OP margin rising to 8.78 percent. Finance costs were slashed by 31.77 percent year-on-year in 2021 due to lower discount rates coupled with lower borrowings due to better cash management. CSAP was able to trim down its gearing ratio to 24.2 percent in 2021. Net profit clocked in at Rs.351.86 million in 2021 with an NP margin of 4.85 percent and EPS of Rs.4.53.

CSAP’s topline once again took the downward route and dropped by 2.33 percent year-on-year in 2022. This was due to economic and political turbulence circling the local economy which greatly suppressed the construction and infrastructure development activity in the country. Significantly higher steel prices also kept the investors at bay. Cost of sales grew by 5.81 percent year-on-year resulting in a gross loss of Rs.65.30 million in 2022. Income from investment served as a remarkable buffer as it grew by 317.10 percent year-on-year in 2022 on the back of remarkable dividend income earned during the year. This played a vital role in attaining positive operating results in 2022 despite a 3.83 percent rise in distribution expense and a 32.52 percent hike in administrative expense. Other expenses also spiked by 131.36 percent year-on-year in 2022 due to exchange loss. High-base effect on account of gain on disposal of plant, property, and equipment recorded in the previous year resulted in a 68.7 percent plunge in other income in 2022. Operating profit recorded in 2022 was 11.93 percent less than that of 2021 with OP margin tapering to 7.92 percent. While the company considerably reduced its borrowings in 2022 which is evident in its gearing ratio falling to 14.8 percent, the high discount rate during the year drove the finance cost up by 16.78 percent in 2022. This suppressed the profit before tax by 26.12 percent year-on-year in 2022; however, a tax credit of Rs.51.57 million resulted in 4.21 percent growth in net profit. Net profit stood at Rs.366.688 million in 2022 with an NP margin of 5.17 percent. EPS was recorded at Rs.4.72 in 2022.

The downhill journey didn’t cease in 2023 and CSAP’s topline posted a substantial 36.31 percent decline. During the 2HFY23, the company also suspended its cotton plant operation owing to low demand and shortage of raw materials on the back of import restrictions. Depressed industrial and manufacturing activity as well as infrastructure development also resulted in lackluster sales in 2023. During the year, 73 percent of CSAP’s sales were from the steel division. The cost of sales slumped by 47.73 percent year-on-year in 2023. The company was able to post a gross profit of Rs.775.89 million in 2023 with a GP margin of 17.2 percent. Income from investments didn’t prove to be encouraging in 2023 and dipped by 78.61 percent year-on-year due to thinner dividend income. Distribution expense posted a colossal 330.47 percent hike in 2023 due to a consultant fee of Rs.40.677 million incurred during the year. Administrative expenses grew by 18 percent year-on-year in 2023 due to higher payroll expenses on account of inflationary pressure while the company squeezed its workforce from 769 employees in 2022 to 434 employees in 2023. Other expenses dropped by 73.50 percent year-on-year in 2023 as no exchange loss was incurred during the year. Other income grew by 29 percent year-on-year in 2023 due to higher return on bank deposits, gain on disposal of fixed assets, land licensing fee as well as reversal of provision for slow-moving stores & spares recorded during the year. Operating profit grew by 5.87 percent in 2023 with OP margin ticking up to 13.16 percent. Finance cost posted a substantial 46.23 percent rise not only because of monetary tightening but also on the back of the issue of long-term Sukuk certificates of Rs.800 million during the year to meet its working capital requirements. This pushed the net profit down by 51.77 percent year-on-year in 2023 to clock in at Rs.176.857 with an NP margin of 3.92 percent and EPS of Rs.2.28.

In 2024, CSAP’s topline registered a phenomenal year-on-year growth of 101.78 percent. 99.4 percent of the sales recorded during the year pertained to the steel division. Steel division recorded 166.7 percent year-on-year growth in its sales during 2024. One significant project of the steel division was the supply of 53 km of coated pipe and 54.5 km of bare pipe to the China Harbour Engineering Company – Al-Fajr International joint venture. This contributed over Rs.4 billion to the sales of the company in 2024. With stable commodity prices and steady Pak Rupee, the company was able to record 239.78 percent stronger gross profit in 2024 with GP margin jumping up to its highest level of 28.93 percent. Income from investment grew by a massive 415.45 percent in 2024 due to robust dividend income and unrealized gain on FVTPL investments. Lesser consultant fees resulted in a 14.88 percent lower distribution expense in 2024 despite higher sales volume. Administrative expenses surged by 38.16 percent in 2024 due to higher payroll expenses on account of inflationary pressure. Other expenses radically grew by 1541.72 percent in 2024 due to higher provisioning done for WWF, WPPF, slow-moving stores & spares, and doubtful advances coupled with impairment of capital work in progress recorded during the year. Other income mounted by 130.39 percent in 2024 mainly on account of mark-up on loans to subsidiary companies, exchange gain, and land licensing fees. Operating profit mounted by a whopping 408.88 percent in 2024, translating into OP margin of 33.19 percent. Finance costs escalated by 38.18 percent in 2024 on account of the higher discount rate. The company discharged a huge portion of its short-term and long-term liabilities during the year, resulting in a gearing ratio of 11.6 percent in 2024 versus a gearing ratio of 24.9 percent recorded in the previous year. Net profit enhanced by a massive 808.36 percent to clock in at Rs.1606.503 million in 2024. This translated into EPS of Rs.20.69 and NP margin of 17.63 percent.

Recent Performance (1QFY25)

During the first quarter of FY25, CSAP’s net sales dipped by 14.92 percent year-on-year. Unlike 1QFY24, the company sold bare pipes to the local oil & gas sector amounting to Rs. 402 million in 1QFY25. Conversely, sales of coated pipes (the highest contributor to the overall sales mix) and scrap/waste sales massively dropped during 1QFY25, contributing to the topline slide. Out of the total revenue of Rs.1145.82 million recorded by the company during the quarter, 98.85 percent pertained to government-related concerns. Cost of sales plunged by 9.83 percent in 1QFY25, squeezing the gross profit by 30.83 percent. GP margin also fell from 24.26 percent in 1QFY24 to 19.73 percent in 1QFY25. Income from investment plummeted by 95.33 percent in 1QFY25 mainly due to thinner dividend income recognized during the quarter. Lower sales volume of coated pipes compressed the distribution expense by 56.83 percent in 1QFY25. Conversely, administrative expenses mounted by 15 percent due to inflationary pressure. Other expenses shrank by 52.67 percent in 1QFY25 due to the thinner exchange loss incurred on account of a stable Pak Rupee. Other income also dipped by 11.97 percent in 1QFY25 probably due to lesser mark-up income on the back of monetary easing. Operating profit slipped by 72.9 percent in 1QFY25 with OP margin drastically falling down to 12.86 percent versus OP margin of 40.35 percent recorded in 1QFY24. Finance costs contracted by 51.86 percent in 1QFY25 due to a lower discount rate. CSAP recorded a 77.37 percent thinner bottom line to the tune of Rs.73.55 million in 1QFY25. This translated into EPS of Rs.0.95 in 1QFY25 versus EPS of Rs.4.19 recorded in 1QFY24. NP margin also fell from 24.14 percent in 1QFY24 to 6.42 percent in 1QFY25.

Future Outlook

Local economic dynamics have greatly improved of late, signaling greater development expenditure. This will create increased demand for the company’s products. During the 1QFY25, the company discontinued its billet division which was non-operational for a long time. This enabled the company to streamline its product mix and focus on high-margin products. CSAP, through public announcements at the PSX website, has revealed various projects underway e.g. Rs.2740 million project of bare steel pipes awarded by SNGPL and another contract of coated steel pipes worth Rs.1504 million, which are to be completed during FY25 and FY26 respectively. This coupled with improved prospects of oil and water segments will continue to create demand for line pipes.