Agha Steel Industries Limited (AGHA) was incorporated in Pakistan as a private limited company in 2013 and was converted into a publicly listed company in 2015. The company is engaged in the production of steel bars, wire rods, and billets
Pattern of Shareholding
As of June 30, 2024, AGHA has 604.879 million shares outstanding which are held by 6357 shareholders. Directors, their spouses, and minor children have a major stake of over 52.3 percent in the company followed by the local general public holding 39.9 percent of AGHA’s shares. Insurance companies account for 3.28 percent of the company’s shares while banks, DFIs, and NBFIs hold 1.74 percent shares. The remaining shares are held by other categories of shareholders.
Financial Performance (2021-24)
AGHA’s topline which rode an upward trajectory in 2021 and 2022 began to decline in 2023. Its bottom line staggeringly grew in 2021, however, followed a downhill journey thereafter and posted a net loss in 2024. The company’s gross margin dropped in 2021 and 2022, followed by a rebound in 2023. In 2024, AGHA’s gross margin posted a negative value. Conversely, its operating and net margins strengthened in 2021, however, plummeted thereafter (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.
In 2021, Pakistan’s economy showed signs of recovery post the period of slowdown owing to Covid-19. AGHA’s net sales grew by an impressive 47.9 percent year-on-year in 2021 on account of real estate boom. However, GP margin sank from 25.30 percent in 2020 to 22.67 percent in 2021 as China, the top producer of steel withdrew 13.5 percent of tax rebate to its steel industry. While the prices sky rocketed, the global steel production rose by 9 percent year-on-year to clock in at 1.96 billion metric tons. The steep rise in electricity tariff during the year also squeezed AGHA’s GP margin in 2021. Administrative expense inched up by 10 percent in 2021 due to higher payroll expense as the company expanded its workforce from 258 employees in 2020 to 310 employees in 2021. Fee & subscription charges also grew during the year as the company completed its listing process. Selling & distribution expense spiked by 33.72 percent in 2021 due to higher salaries & wages, carriage & freight as well as advertising & marketing expense incurred during the year. In 2021, finance cost decreased by 17.24 percent year-on-year in 2021 owing to stable exchange rate and stagnant discount rate. AGHA’s outstanding borrowings also dropped during the year as the company got listed on the Pakistan Stock Exchange and raised Rs.3.84 billion from institutional investors, high net worth individuals and general public. Other income“ didn’t perform well in 2021 as markup on loan to associate companies which was the major head of “other income” until 2020 faded away in 2021 owing to low discount rate backdrop. Other expense also mounted by 72.29 percent in 2021 due to higher profit related provisioning and impairment loss on trade receivables recorded during the year. AGHA recorded 64.78 percent year-on-year growth in its net profit which clocked in at Rs.2036 million in 2021 with EPS of Rs.3.62 versus EPS of Rs.2.96 recorded in the previous year. NP margin also strengthened from 9.2 percent in 2020 to 10.25 percent in 2021.
2022 was a rollercoaster ride for the steel industry. International steel prices touched an all-time high level of $1100 and then collapsed by 40 percent. The prices of major raw materials such as iron ore and coal also showed significant downward adjustments after peaking to an unsurpassed level. This was because of the demand uncertainty on the back of Russia-Ukraine conflict and a general economic slowdown. Talking about the local scenario, energy slippages, high inflation, multiple discount rate hikes, dwindling foreign exchange reserves and sharp depreciation of Pak Rupee as well as devastating floods in the southern region of the country, the demand from the public and private sector remained subdued. AGHA’s net sales grew by 29.16 percent in 2022. During the year, the company also commenced the production & sale of liquid gases. However, high international prices of raw material for most of the year coupled with Pak rupee depreciation resulted in a thinner GP margin of 21.41 percent in 2022. Gross profit in absolute terms grew by 21.94 percent in 2022. Administrative expense ticked up by 12.76 percent in 2022 due to higher payroll expense as number of employees surged to 395 employees in 2022. Selling & distribution expense spiked by 23.91 percent in 2022 due to excessive salaries & wages, carriage & freight, advertising & marketing expense as well as brokerage charges incurred during the year. Finance cost surged by 51.59 percent year-on-year in 2022 on account of high discount rate and increased borrowings. This pushed OP margin down to 10.4 percent in 2022 vis-à-vis OP margin of 12.65 percent recorded in the previous year. Other expense gave another major blow to the bottomline and grew by 245 percent in 2022 on account of exchange loss and impairment loss on trade receivables recorded during the year. Other income lent a helping hand to the bottomline and grew by 26.67 percent in 2022 as the company made massive profit from its air separation unit. In 2022, AISL installed an air separation unit from IPO proceeds of 2021. The bottomline of AISL shrank by 8.9 percent year-on-year in 2022 to clock in at Rs.1854.77 million with EPS of Rs.3.07 and NP margin of 7.23 percent.
In 2023, AGHA posted 19.75 percent year-on-year decline in its net sales. This was on account of political uncertainty, unprecedented level of inflation and discount rate, elevated energy tariff, unfavorable exchange rate parity and import restrictions which squeezed the industrial activity by 25 percent. High international scrap prices coupled with Pak Rupee depreciation also took toll on the gross profit by 12.21 percent in 2023. On the positive front, GP margin slightly improved to clock in at 23.42 percent in 2023. Administrative expense dropped by 7 percent in 2023 due to austerity measures put in place by the company. One of those measures was downsizing from 395 employees in 2022 to 350 employees in 2023. Selling & distribution expense plunged by 9.57 percent in 2023 due to considerable decline in advertising & marketing budget for the year. Despite lower sales volume recorded in the year, carriage & freight charges continued to enlarge owing to a spike in the prices of POL products. Finance cost multiplied by 50.23 percent in 2023 due to higher discount rate. Overall borrowings dipped during the year as evident in the gearing ratio of 58 percent recorded in 2023 versus gearing ratio of 60 percent in the previous year. Operating profit tapered off by 63.22 percent in 2023 with OP margin drastically falling down to 4.76 percent. AGHA recorded 76 percent decline in its other expense in 2023 which was the result of lower profit related provisioning and lesser impairment loss booked on trade receivables. Other income grew by 15.78 percent in 2023 which was due to higher profit recognized from air separation unit and higher markup income earned from loan to associates. Despite all the measures undertaken to control its cost and operating expense, AGHA recorded 51.21 percent slump in its net profit which clocked in at Rs.904.896 million in 2023 with EPS of Rs.1.5 and NP margin of 4.4 percent.
In 2024, AGHA’s topline recorded a massive decline of 33.48 percent. This was due to stagnated construction activity in the country owing to exorbitant construction costs owing to fluctuating international prices of raw materials, import restrictions, Pak Rupee depreciation, heightened energy tariff, gas supply constraints and frequent power shortages. Poor politico economic backdrop and shattered investor confidence also pushed down the performance of long steel industry. Tax exemptions provided to FATA/PATA region which was initially aimed to promote development have widely been misused by selling steel across the country without paying taxes. This gobbles up the share of the legitimate steel producers. Despite constrained sales volume, cost of sales only dropped by 9.15 percent in 2024, resulting in gross loss of Rs.628.31 million recorded in 2024. Administrative expense ticked up by 5.86 percent in 2024 due to higher payroll expense which was the result of inflationary pressure as the number of employees stood intact at 350 in 2024. Distribution expense nosedived by 12.43 percent in 2024 due to lower carriage & freight as well as brokerage charges incurred during the year owing to lower sales volume. Finance cost surged by 42.81 percent in 2024 due to higher discount rate and higher working capital related borrowings. Nevertheless, gearing ratio fell to its lowest level of 48 percent in 2024 due to increase in the authorized capital by issuance of preference shares as well as surplus recorded on the revaluation of fixed assets. AGHA recorded a hefty operating loss of Rs.5819.865 million in 2024. Other expense rose by a drastic 1387.22 percent in 2024 due to provision booked for writing down stock-in-trade to NRV. This was necessary as the company encountered fire incident during the year. The company also booked impairment loss on damaged fixed assets and trade receivables during the year. Other income grew by 86.58 percent in 2024 due to insurance claim and higher markup income on loan to associates. AGHA recorded net loss of Rs.5088.565 million in 2024 with loss per share of Rs.8.41.
Future Outlook
Gradual recovery in the economic parameters driven by stable currency, declining interest rates, and controlled inflation may fuel the demand of the steel industry by spurring commercial construction by the end of the ongoing fiscal year. However, with the sustained decline in the purchasing power of consumers, high property prices, excise duties, and taxes as well as wavering consumer confidence, residential construction doesn’t promise any sound recovery.
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