Crescent Steel and Allied Products Limited

Crescent Steel and Allied Products Limited (CSAP) started off as a pipe manufacturing facility in 1987 and has since gone through series of diversification and expansions into four segments: engineering, textiles, capital markets and power. The company is listed on the Pakistan Stock Exchange. In 2010, Crescent Steel acquired 100 percent stake in Shakarganj Energy (Private) Limited. In 2012, it acquired a 100 percent stake in CS Capital (Private) Limited, and later next year, the company incorporated a wholly owned subsidiary, Crescent Hadeed (Private) Limited to manufacture steel billets. Its consolidated accounts show performance for Crescent's primary business as well as its now three fully owned aforementioned subsidiaries.
In 2000, the company acquired Crescent Cotton Products, a high revenue source for the company. Crescent now runs on three distinct business units primarily, steel, cotton and investment and infrastructure development. The Company's steel segment manufactures large diameter spiral submerged arc welded steel line pipes and a pipe coating facility capable of applying multi and single layer, high density polyethylene internal and external coatings. Both units are located at Nooriabad.
The Steel segment also operates an engineering unit, capable of fabricating and erecting reliable machinery. This unit is located in Faisalabad and caters primarily to the sugar, cement, paper and dairy industries.
The Cotton segment comprises of one spinning unit with 19,680 spindles producing mixed yarn at a capacity of 6.5 million kg annually; which is a daily production capacity of 500 bags of cotton carded yarn, in counts ranging from 6s to 30s.
The Investment and Infrastructure Development Division (IID) manages a portfolio of equity investments and real estate, and was carved out as a separate business unit in 2007. Revenues from this segment are recorded under "Income from investments."
As at June 2016, 11 percent of the company's shares were held by Crescent Textile Mills Limited; six percent by Islamic Development Bank while 34 percent of the shares are held by the general public.
Expansion and progress:
The outgoing fiscal has been a busy and successful year for the company. Not only did it start commercial production at its subsidiary Crescent Hadeed (Private) Limited for steel billets, it also issued rights to finance expansion in the line pipe manufacturing by adding another line. CSAP now has increased its steel pipe production capacity from 90,000 tons to 200,000 tons per annum. The company also installed condensing extraction steam turbine generator of 16.5 MW at Shakarganj Energy (Private) Limited for off-season electricity generation.
Recent financial and operation performance:
After starting cotton production, the segment was one of the big performers accounting for almost 71 percent of the company's top line in FY15, but revenues posted for FY16 were primarily driven by the steel division with the cotton division non-operational during the year due to market conditions. During FY16, the IID Division was a key driver of short term working capital to finance operations in the Steel Division through both short-term borrowings and liquidity generated from the sale of trading investments.
In June 2016, the company decided to shift operations from 100% cotton to polyester cotton (PC) and polyester viscose (PV) blends.
Company's total revenues grew phenomenally, many times over from Rs2.1 billion to Rs7.4 billion between FY15 and FY16. These revenues were almost entirely steel based though in FY15; steel's share in total revenues was only 29 percent. Investment income from IID Division fell from Rs308.7 million in FY16 to Rs42.5 million while Cotton sales nosedived to merely Rs33.9 million when it constituted bulk of the revenues (Rs1.49 billion) in FY15.
Steel's division outperformed itself owing largely to the planned capacity expansion in the gas distribution network and reduction in Hot Rolled Steel Coil prices. Capacity utilization of the pipe plant was increased from 3.2 percent to 64.7 percent in FY16. Steel is also a high margin segment which contributed to a jump in margins in FY16-steel margins in themselves grew as well, from 15 percent in FY15 to 31 percent in FY16. The cotton division incurred a loss due to fix costs.
Total profits grew from Rs107 million to Rs967 million between FY15 and FY16 contributed by Rs1.3 billion of profits from the steel division (while it incurred a loss in the previous year) and a loss from the cotton division. Overall the company is showing mammoth growth at the back of orders from gas utility companies and infrastructure projects. Meanwhile, income from investments was down 71 percent in FY16.
Subsidiary performance:
The company reported a loss of Rs55.3 million for its subsidiary Shakarganj Energy (Private) Limited (SEL) even though it earned a profit of Rs9.8 million in the previous year due to fixed production overheads, low activity and high off-season bagasse cost. A 16.5 MW condensing extraction steam turbine generator was installed during the year for off-season power generation. CS Capital (Private) Limited (CSCL) added Rs5.4 million to the group's bottom line. Meanwhile, Crescent Hadeed (Private) Limited (CHL) went into trial production using power from SEL. Commercial production was commenced from 1st June 2016.
Snapshot of Q1FY17:
So far so good: Unconsolidated accounts show a 167 percent growth in the top line and a 191 percent growth in the bottom line earning a profit of Rs375 million in Q1FY17. It appears that the IID segment is performing much better this fiscal than last year-reflecting a positive income of Rs174 million compared to a loss this time last year. Earnings per share have climbed by three times over.
Outlook:
Cotton and textile in Pakistan is in a tough spot and this segment may not yield a lot for Crescent. The company is however in a sweet spot to incur gains from infrastructure and gas projects that the government is in post haste to finish. The increase in production capacity of steel pipes bodes well for the growing demand in the country's multiple gas supply network projects to cater to power plants that are being set up.
Demand for large diameter pipe is buttressed by the 1200 km North-South gas pipeline, while the Iran Pakistan gas pipeline that has been in the works for several years may get rejuvenated with the two countries set to negotiate a Gas Sale purchase agreement. The 700-km Gwadar-Nawabshah gas pipeline is also in the works.
The company fears that Chinese manufacturers may have a competitive edge in the local market on account of lower prices on the back of export rebates offered by Chinese government to its exports. Price competition may erode on the margins for the steel division. Hot rolled steel coil prices may increase over the coming months which may put pressure on margins. In Q1FY17, cost of sales as a share of sales grew from 67 percent in the period last year to 80 percent. Prices may already have a play. From demand dynamics perspective, Crescent is set.

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Unconsolidated accounts for Crescent and Allied Products

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Rs (mn)                           Q1FY17     Q1FY16       YoY

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Sales                            2,520.6      943.5      167%

Cost of Sales                    2,020.0      632.6      219%

Gross Profit                       500.5      310.9       61%

Income/ (Loss) from investments    174.2      (31.6)

Distribution cost                    5.1        3.0       70%

Administrative cost                 48.2       37.4       29%

Finance cost                        58.6       30.1       95%

Other income                         7.0        5.7       23%

Profit before taxation             479.5      195.8      145%

Taxation                           104.5       67.0       56%

Profit after taxation              375.0      128.8      191%

Earnings per share (Rs)             4.83       1.85      161%

GP margin                           19.9%      33.0%

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Source: PSX

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5% or more, Pattern of Shareholdings of Ordinary Shares

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(as at June 2016)                          Shares           %

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The Cresent Textile Mills Limited       8,538,303       11.00

Islamic Development Bank                4,743,956        6.11

Bilquis Saleem                          4,251,250        5.48

General Public: Local                  26,478,086       34.11

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