Metropolitan Steel Corporation Limited

Metropolitan Steel Corporation Limited (PSX: MSCL) was incorporated in Pakistan as a public limited company in 1955. The company is engaged in the manufacturing of steel products such as torsteel, ribbed bars, bailing hoops, wire rods, transmission towers, mild and special steel wires etc.

Pattern of Shareholding

As of June 30, 2022, MSCL has a total of 30.977 million shares outstanding which are held by 3570 shareholders. Directors, CEO, their spouse and minor children are the major shareholders of MSCL holding 75.22 percent shares of the company. This is followed by local general public having a stake of 24.02 percent in the company. The remaining shares are held by other categories of shareholders, including, NIT and ICP, State Life Insurance Corporation, Banks, DFIs and NBFIs.

Historical Performance (2018-22)

MSCL’s topline which had been dropping in 2019 and 2020 posted a staggering year-on-year growth in 2021 and the pattern followed in the subsequent year. However, among all the years under consideration, the company posted a positive bottomline only in 2021. In rest of the years under consideration, the company was not even able to post a gross profit. In 2022, MSCL posted the highest net loss despite topline growth. The detailed performance review of each of the years under consideration is given below.

In 2019, MSCL’s net sales dropped by 49 percent year-on-year. During 2019, the company imported various products at competitive prices and dispatched them in the local market. While cost of sales also slid by 30 percent year-on-year, yet, couldn’t culminate into a gross profit in 2019. In fact, MSCL’s gross loss grew by 4 percent year-on-year in 2019 mainly because of the payment made to K-Electric and SSGC for installation of new connections as the company modernized its plant and machinery and undertook expansion of its furnaces. Moreover, cost of sales also remained high because of the depreciation charge on building, plant and machinery. Administrative charges dropped by 12 percent year-on-year in 2019 on the back of lower payroll expense, legal and professional charges, utilities etc. Selling and distribution expense which merely included depreciation charge also slid by 54 percent year-on-year in 2019. The company didn’t incur any other expense in 2019 as in the previous year the company wrote down its stock in trade to net realizable value and also wrote off guarantee margins and reversal of liabilities which wasn’t done in 2019. Other income also declined by 51 percent year-on-year in 2019 as the company incurred realized and unrealized loss on its investments in 2019. The operating loss dropped by 7 percent year-on-year in 2019 to clock in at Rs.18.40 million. Finance cost which only included bank charges in 2018 grew by 909 percent year-on-year in 2019 mainly on the back of commission paid on Letter of Credit and Letter of Guarantee. The net loss grew by 10 percent year-on-year in 2019 to clock in at Rs.18.62 million with a loss per share of Rs.0.60 versus a loss per share of Rs. 0.55 in 2018.

The topline continued its downward trajectory in 2020 and dropped by 3 percent year-on-year. Owing to the outspread of COVID-19, the economic activities came to a standstill which put a dent on the demand of steel and related products. Although the company kick started 2020 on a robust note and introduced spoke wires for the automobile industry which was well received, however, the lockdown imposed in the last quarter of 2020 took its toll on the overall sales of the company. The cost of sales dipped by 24 percent year-on-year on account of lesser utility charges which amplified in the previous year as the company paid for the installation of new connections. The gross loss dipped by 42 percent year-on-year in 2020. While administrative expenses shrank by 35 percent year-on-year in 2020 on the back of lower travelling and conveyance, fee and subscription and utility charges, distribution expense grew by 1094 percent to clock in at Rs. 0.2 million due to forwarding and transportation charges incurred during the year. Other income contracted by 85 percent year-on-year in 2020 as the company wrote back its liabilities in 2020. Owing to higher distribution charges and lowers other income, the operating loss magnified by 13 percent year-on-year in 2020 to clock in at Rs.20.76 million. Finance cost declined by 14 percent year-on-year in 2020 which included only bank charges as the company hasn’t obtained any loan from financial institution and meeting its working capital requirements by acquiring interest free loan from company’s directors. The net loss dropped by 10 percent year-on-year in 2020 to clock in at Rs. 16.72 million with a loss per share of Rs.0.54.

2021 came to MSCL as a light at the end of the tunnel as its topline boasted a massive turnaround and posted a year-on-year growth of 238 percent. As the signs of COVID-19 began to diminish, the market responded robustly. MSCL sales mainly grew on the back of vigorous demand from automobile and foaming industry and also because of upward revision in the prices of MSCL products. Pak Rupee depreciation greatly increased the cost of sales; however, MSCL was able to post a gross profit of Rs. 11.5 million after successive years of gross losses. GP margin clocked in at 12.4 percent in 2021. Administrative and distribution expense rose by 8 percent and 80 percent year-on-year respectively in 2021 on the back of higher payroll expenses due to high capacity utilization and also because of forwarding and transportation charges. After two consecutive years, the company incurred other expense as it sustained bad debts, loss on sale of machinery and also booked provision for obsolete store and spare. Other income ticked down by 10 percent year-on-year in 2021 due to lesser realized gain on short-term investment and lesser profit on TDRs. Operating profit clocked in at Rs.1.13 million in 2021 with OP margin of 1.2 percent. Finance cost further climbed down by 41 percent year-on-year due to lesser bank charges. The company reported a positive bottomline with an NP margin of 2 percent. EPS stood at Rs. 0.06 in 2021.

The sales growth continued in 2022, however, with a considerably lower momentum of 9 percent year-on-year. The sales growth was driven by the demand of spoke wire, MS wire, spring wire, high carbon wire and MS products. However, high cost of sales due to commodity super cycle in the global market coupled with Pak Rupee depreciation culminated into a gross loss of Rs.17.65 million in 2022. Administrative and selling expense grew by 26 percent and 14 percent year-on-year respectively in 2022 due to higher salaries, fee and subscription charges and freight charges. Other expense drastically grew by 970 percent year-on-year as the company booked provision worth Rs. 81.18 million for doubtful debt. Other income also performed well and registered a growth of 814 percent year-on-year as director loan of Rs.18.55 million was written back during the year and the company also made scrap sales of Rs.7.3 million in 2022. Due to significantly high other expense, the company posted an operating loss of Rs. 79.78 million, the highest among all the years under consideration. Finance cost also grew by 21percent year-on-year. MSCL posted the highest net loss of Rs.79.88 million in 2022 with a loss per share of Rs.2.58.

Recent Performance (9MFY23)

MSCL’s topline posted a 27 percent year-on-year rise in 9MFY23 mainly on the back of price increase. The cost of sales also grew by 22 percent year-on-year, however, gross profit improved by 71 percent year-on-year with GP margin clocking in at 13.6 percent in 9MFY23 versus 10 percent during the same period last year. Administrative and selling expense by 74 percent and 84 percent respectively in 9MFY23 on account of high inflation which drove up the utility expense, payroll expense as well as freight charges. Other expense magnified by 634 percent year-on-year may be on account of exchange losses and provision on doubtful debt. Other income, on the other hand, grew by 232 percent year-on-year due to scrap sales and profit on bank deposits. MSCL was able to improve its operating profit by 31 percent year-on-year in 9MFY23 with OP margin slightly ticking up from 5.4 percent in 9MFY22 to 5.6 percent during 9MFY23. Although finance cost grew by around 20 times (or 2000 percent) in 9MFY23, it only includes bank charges and LC charges, hence didn’t produce any negative impact on the bottomline. The net profit of Rs.4.25 million recorded by MSCL in 9MFY23 was 32 percent higher than what recorded in 9MFY22. NP margin also improved from 6.3 percent in 9MFY22 to 6.6 percent in the period under consideration. EPS clocked in at Rs.0.137 in 9MFY23 versus Rs.10 during the same period last year.

Future Outlook

With record high inflation and discount rate, the economic and industrial activity is expected to remain tamed in the near term. Automobile industry and foaming industry which are they key customers of MSCL are already grappling against the economic headwinds due to curtailed purchasing power of consumers. Further expected hike in energy prices, discount rate and inflation after the finalization of IMF agreement will put further dent on the performance of these industries. This will create ripple effect on the demand of steel and other ancillary industries. Moreover, Pak Rupee depreciation will continue to amplify the cost of MSCL which depends on the imported raw materials. Let’s see how MSCL alters its sales mix and pricing strategy to prevent losses in the last quarter of 2023.