After turning losses for six consecutive quarters, Amreli steel (PSX: ASTL) is reverting back to positive earnings buoyed by domestic demand, higher prices in the market, and a demonstrable control over costs and expenses.
Though latest accounting suggests federal PSDP spending is 16 percent lower in the first half of FY21 compared to 1HFY20, Amreli’s revenue flows indicate the company has found strong demand in private commercial and housing projects. Much of the private sector construction activity is coming through from delayed projects being resurrected (note: as part of the construction package, builders were allowed to register existing projects to avail the new fixed tax regime and other ensuing benefits).
Evidently, price increase is also a contributing factor. Market insights suggest rebar prices were raised by 4-6 percent by many rebar steel manufacturers. The PBS’ wholesale price index—on the other hand—suggests steel bar and sheets prices in Dec-20 went up 3 percent compared to this time last year, and by 23 percent compared to Dec-18 (the index includes price of flat steel as well).
On the costs side, Amreli has improved margins in 1HFY21 despite global average scrap prices during the Jul-Dec period this year standing at about 8 percent higher than average scrap prices the corresponding period last year. Comparatively, rebar prices were up 4 percent during this period. Domestic prices are typically closely pegged to international prices.
However, it seems Pakistani scrap imports came home cheaper. According to PBS import data, in dollar terms, import of scrap cost 9 percent lower per ton in 1HFY21 compared to last year (and steel manufacturers imported about 30 percent more scrap during the period than the previous year in tonnage).
Comparing Amreli’s performance to the newly IPO-ed contender Agha’s however, margins for the former lag behind (see graphs). Agha’s costs are substantially lower than Amreli—which could be associated to lower (and cheaper) quality scrap used in the manufacturing process or more negotiated contracts with scrap suppliers.
In addition, Amreli’s earnings per share are also lower (in comparison to Agha), even though it has improved significantly from an earning loss last year. With improving margins, the company has also kept its purse strings tight on overheads (static at 4% of revenues) while lowering debt and reduced finance costs have also worked wonders. In fact, finance costs as a share of revenue declined to 5 percent in 1HFY20 compared to 9 percent last year; which was a hefty burden to bear.
Moving forward, Amreli has the construction turnaround to look forward to. Once housing projects begin grey construction—specially in high-rise buildings—demand for rebars would catapult and Amreli is well-prepared with capacity to meet it. Growing demand however may compel steel companies like Amreli to further increase prices which does not bode well for new home buyers and renters as rising construction costs will put pressure on housing prices which are already far from affordable. That, however, may not be Amreli’s concern.
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