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 tor steel, ribbed bars, bailing hoops, wire rods, transmission towers, mild and special steel wires, etc.

Pattern of Shareholding

As of June 30, 2023, MSCL has a total of 30.977 million shares outstanding which are held by 3573 shareholders. Directors, CEO, their spouses, and minor children are the major shareholders of MSCL holding 75.23 percent shares of the company followed by the local general public having a stake of 23.75 percent in the company. The remaining shares are held by other categories of shareholder

Historical Performance (2019-23)

MSCL’s topline which dropped in 2019 and 2020 posted a staggering year-on-year growth in 2021 and the pattern followed in the subsequent year, however with a significantly lesser magnitude. Among all the years under consideration, the company posted net profit only in 2021. In the rest of the years under consideration, the company was not even able to post a gross profit, let alone a positive bottom line. In 2022, MSCL posted the highest net loss despite topline growth. The detailed performance review of the period under consideration is given below.

In 2019, MSCL’s net sales dropped by 48.94 percent year-on-year. During 2019, the company imported various products at competitive prices and dispatched them to the local market. While cost of sales also slid by 29.75 percent year-on-year, yet, couldn’t culminate into gross profit in 2019. In fact, MSCL’s gross loss grew by 3.85 percent year-on-year in 2019 to clock in at Rs.32.788 million, mainly because of the payments made to K-Electric and SSGC for the installation of new connections as the company modernized its plant and machinery and undertook expansion of its furnaces. Moreover, the cost of sales also remained high because of the depreciation charge on building, plant, and machinery recorded in 2019. Administrative charges dropped by 12.4 percent year-on-year in 2019 on the back of lower payroll expenses, legal and professional charges, utilities, etc. Selling and distribution expenses which merely included depreciation charges also slid by 54 percent year-on-year in 2019. 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, hence no other expense was recorded in 2019. Other income also declined by 51.29 percent year-on-year in 2019 as the company incurred realized and unrealized losses on its investments in 2019. MSCL’s operating loss dropped by 7.45 percent year-on-year in 2019 to clock in at Rs.18.513 million. Finance costs 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. Net loss grew by 10.12 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 recorded in 2018.

MSCL’s topline continued its downward trajectory in 2020 and dropped by 2.94 percent year-on-year. Owing to the outspread of COVID-19, economic activities came to a standstill which put a dent on the demand for 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. Cost of sales dipped by 24.2 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. Gross loss dipped by 42.5 percent year-on-year in 2020 to clock in at Rs.18.85 million. While administrative expenses shrank by 35.31 percent year-on-year in 2020 on the back of lower traveling and conveyance, fee and subscription, and utility charges, distribution expenses grew by 1094.12 percent to clock in at Rs. 0.2 million due to forwarding and transportation charges incurred during the year. Other income contracted by 85.49 percent year-on-year in 2020 due to the high-base effect as the company wrote back its liabilities in 2020. Owing to higher distribution charges and lower other income, operating loss magnified by 12.82 percent year-on-year in 2020 to clock in at Rs.20.76 million. Finance cost declined by 13.5 percent year-on-year in 2020 which included only bank charges as the company hasn’t obtained any loan from financial institutions and meeting its working capital requirements by acquiring interest-free loans from the company’s directors. MSCL’s net loss dropped by 10.24 percent year-on-year in 2020 to clock in at Rs. 16.717 million with a loss per share of Rs.0.54.

In 2021, MSCL’s topline boasted a massive year-on-year growth of 238 percent. As the signs of COVID-19 began to diminish, the market responded positively. MSCL’s sales mainly grew on the back of vigorous demand from the 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 expenses rose by 7.95 percent and 80.3 percent year-on-year respectively in 2021 on the back of higher payroll expenses due to high capacity utilization and also because of hefty forwarding and transportation charges. After two consecutive years, the company incurred other expenses of Rs.7.589 million it sustained bad debts, loss on sale of machinery and also booked provisions for obsolete stores and spare. Other income ticked down by 10.29 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 costs further climbed down by 40.63 percent year-on-year due to lesser bank charges. The company reported a positive bottom line of Rs.1.845 million with EPS of Rs. 0.06 and an NP margin of 2 percent.

The sales growth continued in 2022, however, with a considerably lower degree of 8.7 percent year-on-year. The sales growth was driven by the demand for spoke wire, MS wire, spring wire, high carbon wire, and MS products. However, the high cost of sales due to the commodity super cycle in the global market coupled with the Pak Rupee depreciation culminated in a gross loss of Rs.17.65 million in 2022. Administrative and selling expenses grew by 26.25 percent and 14.48 percent respectively in 2022 due to higher salaries, fee and subscription charges, and freight charges. Other expenses drastically grew by 969.76 percent year-on-year as the company booked provision worth Rs. 81.18 million for doubtful debt. Other income performed well and registered growth of 814.31 percent year-on-year as a 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 expenses, the company posted an operating loss of Rs. 79.779 million, the highest among all the years under consideration. Finance costs also grew by 21 percent 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.

In 2023, MSCL’s topline slid by 1.52 percent in 2023 due to subdued demand from both automobile and construction sectors due to ongoing economic and political crises. Due to sluggish demand, the company’s capacity utilization stood at 6.11 percent in 2023 versus 7.21 percent in 2022. Cost of sales dropped by 9.81 percent in 2023, yet the company posted a gross loss of Rs.7.573 million, down 57 percent year-on-year. Administrative expenses multiplied by 34.95 percent in 2023 due to higher payroll expenses as well as legal & professional charges incurred during the year. MSCL significantly downsized its workforce during the year to bring it down to 9 employees in 2023 from 27 employees in the previous year. Distribution expense nosedived by 1.43 percent in 2023 due to lower forwarding and transportation charges amid thin demand. Other expenses dropped by 86.83 percent in 2023 due to lesser provisioning done for doubtful debts. Other income also slumped by 46.12 percent in 2023 due to the high-base effect as the company wrote off directors’ loans in 2022 and also because of scrap sales made in 2022. Operating loss contracted by 82.96 percent to clock in at Rs.13.594 million in 2023. Finance cost surged by 278.26 percent in 2023 on account of higher bank charges & commissions and also because of LC charges incurred during the year. MSCL posted a net loss of Rs.13 million in 2023, down 83.73 percent year-on-year. Loss per share stood at Rs.0.42 in 2023.

Recent Performance (9MFY24)

In 9MFY24, MSCL’s topline grew by 54.87 percent year-on-year. Pak Rupee depreciation and escalated raw material and conversion costs resulted in a 74.76 percent higher cost of sales during the period. However, low demand in the market and idle plant capacity didn’t allow MSCL to pass on the impact of cost hikes to its consumers. This resulted in a 71.39 percent lower gross profit recorded during 9MFY24 with a GP margin of 2.51 percent versus a GP margin of 13.61 percent recorded during 9MFY23. Administrative expenses escalated by 21.91 percent during 9MFY24 due to inflationary pressure as the company was in the process of streamlining its workforce (as per the 2023 annual report). Distribution expense tumbled by 1.78 percent in 9MFY24 supposedly due to lower forwarding and transportation charges incurred during the period. Other income strengthened by 55.23 percent in 9MFY24 due to higher interest income from saving deposits and TDRs. Superior other income greatly buttressed the operating performance of the company during 9MFY24. Operating profit picked up by 46 percent during 9MFY24, however, OP margin slightly ticked down from 5.62 percent in 9MFY23 to 5.30 percent in 9MFY24. Finance costs hiked by 198.41 percent during 9MFY24 due to higher bank charges and commissions paid during the period. The effect of deferred taxation slashed tax expenses for the period by 86.85 percent. Net profit enhanced by 22.84 percent to clock in at Rs.5.217 million in 9MFY24 with EPS of Rs.0.168 versus EPS of Rs.0.170 recorded during the same period last year. NP margin slid from 6.56 percent in 9MFY23 to 5.2 percent in 9MFY24.

Future Outlook

Economic and industrial activity isn’t expected to witness any sound recovery in the near term. The automobile industry, construction, and foaming industry which are the key customers of MSCL are already grappling with the economic headwinds due to the curtailed purchasing power of consumers. Further expected hikes in energy prices, elevated discount rates, and inflation are further denting the performance of these industries. This will create a ripple effect on the demand for steel and other ancillary industries. Pak Rupee depreciation will continue to amplify the cost of MSCL which depends on imported raw materials.