Amreli Steels Limited

Amreli Steels Limited (PSX: ASTL) was incorporated in Pakistan as a private limited company in 1984 and was converted into a public company in 2009. The principal activity of ASTL is the manufacturing and sale of steel bars and billets.

Pattern of Shareholding

As of June 30, 2022, ASTL has a total of 297.011 million shares outstanding which are held by 10,464 shareholders. Directors, their spouse and minor children collectively hold 56.47 percent shares of the company to qualify as the major shareholders of ASTL. This is followed by Associated companies, undertakings and related parties holding 18.76 percent shares. Local general public have a stake of 13.44 percent in ASTL. Mutual funds account for 2.86 percent shares of the company while Banks, DFIs and NBFIs hold 2.38 percent shares. Insurance companies and foreign general public account for 1.98 percent and 1.34 percent shares of ASTL respectively. The remaining shares are held by other categories of shareholders.

Performance Trail (2018-22)

Except for a marginal 7 percent year-on-year dip, the topline of ASTL has been making great strides in all the years under consideration. However, the bottomline fails to ride the similar trajectory whereby it had been dropping until 2020 to record a net loss. The bottomline significantly rebounded in 2021 and then lost its grounds in the subsequent year. The margins tell the similar tale as the bottomline. It is to be noted that the rich bottomline and margins recorded by ASTL in 2018 seem to be the things of the past as the similar levels haven’t been regained thereafter. Let’s delve into the financial accounts to find out what limits the tremendous topline growth from producing a trickledown effect on the bottomline.

In 2019, ASTL’s sales posted a stunning year-on-year growth of 84.5 percent. The growth was led by both volume and price. The company sold 277,416 tons of prime bars in 2019 which are 61 percent higher than the sales volume recorded in 2018. However, high cost of production which mainly came on the back of Pak Rupee devaluation couldn’t be completely passed on to the customers, which thinned down the gross profit of the company by 12 percent in 2019. GP margin also shrank from 18 percent in 2018 to 8.5 percent in 2019. Distribution expense jumped up by 86 percent year-on-year in 2019 on account of higher advertising and sales promotion coupled with elevated carriage and transport charges as well as salaries and wages. Admin expense also grew by 15 percent year-on-year in 2019. Other expenses considerably plunged due to low WWF and WPFF. Other income dropped because of high base effect as there were some liabilities written back in 2018. High operating expenses put further dent on the performance of ASTL and its operating profit slid by 36 percent year-on-year in 2019 with an OP margin of 4 percent versus 12 percent in 2018. As if this wasn’t enough of deterioration that financial cost gave another major blow as it grew by 165 percent in 2019 due to a rise in the cost of borrowings coupled with increased borrowings during the year. The bottomline slid by 98 percent year-on-year in 2019 to clock in at Rs.32.82 million in 2019 with an EPS of Rs.0.11 versus Rs.5.34 in 2018. NP margin clocked in at 0.1 percent in 2019 versus 10 percent in the previous year.

In 2020, ASTL’s topline took a 7 percent year-on-year plunge as all the businesses including ASTL’s operations were shut down for two months due to COVID-19. In 2020, the company’s sales volume of prime bars shrank by 1.81 percent to clock in at 272,382 tons. The gross profit of ASTL nosedived by 18 percent year-on-year in 2020 with a GP margin of 7.4 percent as the company suffered from fuel charge adjustment (FCA) and withdrawal of Industrial Support Package Adjustment (ISPA) which put immense pressure on the cost of sales. Distribution expense remained in check during the year due to low advertisement and promotion while admin expense posted an increase on account of market induced increase in salaries and wages. The company also booked 368 percent higher allowance for expected credit losses in 2020. Other expense also gave a cold shoulder and magnified by 433 percent year-on-year on account of exorbitant exchange loss due to devaluation of Pak Rupee. The operating profit further narrowed by 57 percent year-on-year in 2020 with a skimpy OP margin of 2 percent. Finance cost also hit hard as it blew up by 82 percent year-on-year in 2020. This came on the back of an increase in discount rate coupled with higher borrowings which pushed up ASTL’s debt-to-equity ratio from 12 percent in 2019 to 49 percent in 2020. Higher financial cost couldn’t be absorbed by the thin operating profit and ultimately produced a negative bottomline of Rs.1126.62 million in 2020. The loss per share stood at Rs. 3.79 in 2020.

The lackluster performance posted by ASTL in 2020 was reversed in 2021 as its topline grew by a remarkable 48 percent year-on-year in 2021. This came on the back of robust 33 percent increase in offtake which stood at 363,949 tons in 2021. Radical increase in the cost of scrap and cost of electricity which constitute 79 percent of ASTL’s cost of sales wreaked havoc on its cost of sales. However, it was, to a great extent, passed on to the customers which resulted in a striking 130 percent year-on-year increase in gross profit with a GP margin of 11.6 percent in 2021. Higher freight charges as well as advertisement and sales promotion charges inflated the distribution cost by 39 percent in 2021. Admin expense also soared by 10 percent in 2021. Due to resumption in the business activity the company booked reversals on expected credit losses due to recoveries of due receivables. Higher provisioning for WWF and WPPF pushed the other expense up by 35 percent during the year, however, other income improved by 195 percent year-on-year on the back of gain on disposal of fixed assets as well as government grant. The operating profit posted a staggering increase of 481 percent in 2021 with an OP margin of 7.7 percent. Finance cost also lent a helping hand and tapered off by 29 percent year-on-year due to reduction in the discount rate. ASTL recorded a net profit of Rs.1368.26 million in 2021 with an EPS of Rs.4.61. NP margin clocked in at 3.5 percent in 2021.

In 2022, while the offtake posted a decline of 0.38 percent, the topline grew by 48 percent year-on-year due to upward price revisions. While gross profit increased by 43 percent year-on-year in 2022, GP margin ticked down to 11.2 percent on the back of a huge rise in the cost of electricity and scrap. Inflationary pressure coupled with higher freight, advertisement, bundling and special order charges as well as salaries and wages drove up the operating expenses. Operating profit grew by 46 percent year-on-year in 2022 with a slight downtick in OP margin which clocked in at 7.5 percent in 2022. Multiple upward revisions in the discount rate coupled with increased working capital facilities availed during the year pushed up the finance cost by 42 percent year-on-year in 2022. The bottomline nosedived by 3 percent in 2022 to clock in at Rs1325.52 million in 2022 with an EPS of Rs.4.46. NP margin stood at 2.3 percent in 2022.

Recent Performance (1HFY23)

During 1HFY23, ASTL registered a topline drop of 13 percent year-on-year on the back of low volume as floods hit the country during the first quarter of FY23 which hampered the construction activity in the country. Record high inflation coupled with low offtake cascaded down into a gross profit slide of 28 percent year-on-year in 1HFY23. GP margin also narrowed down from 12.7 percent in 1HFY22 to 10.6 percent in 1HFY23. The company was able to keep a check on its operating expenses, however booked a greater allowance on expected credit losses as slowdown in economic activity lately has rendered many businesses incapable of meeting their financial commitments. Other expenses drastically dropped which might be due to low WWF and WPPF. Despite contained expenses, operating profit slid by 36 percent year-on-year in 1HFY23 while OP margin moved down from 9 percent in 1HFY23 to 6.7 percent during the current period. Finance cost grew by 129 percent in 1HFY23 due to record high discount rate which has escalated the cost of borrowing for the businesses. The bottomline posted a net loss of Rs.184.74 million in 1HFY23 versus a net profit of Rs.1303.48 million during the same period last year. ASTL recorded a loss per share of Rs.0.62 in 1HFY23 versus an EPS of Rs.4.39 in 1HFY22.

Future Outlook

Soaring energy and scrap steel prices, increase in general sales tax, supply chain disruptions on the back of Russia-Ukraine crisis as well as high discount rate will continue to compress the margins of ASTL. Dwindling foreign exchange reserves of the country and the resulting import restrictions and LC issues will further exacerbate the issue by piling up the demurrage and detention cost besides creating a slowdown in operations due to shortage of raw materials. However, the resumption of construction activity post floods and increase in steel prices will buttress the topline of ASTL. How much cost can be passed on to the customers to pull the bottomline out of losses is yet to be seen.