Agha Steel Industries Limited (ASIL) is a fully automatic steel manufacturing company engaged in the production of steel bars, wire rods, and billets. With an annual melting capacity of 450,000 metric tons and a rolling capacity of 250,000 metric tons, ASIL is one of the largest private sector investments in Pakistan's steel industry.
ASIL employs the most state-of-the-art technology such as Catfish, EBT Eye, and EBT sand to enhance its furnace performance, increase its capacity, and continuously improve the quality of its products. The company also boasts to be the pioneer of TMT technology in Pakistan which has enabled it to manufacture the top quality rebars. ASIL also introduced the first-ever green ship recycling yard in Pakistan.
The company was initially incorporated as a private limited company in 2013 and then converted into a publicly listed company is 2015.
Pattern of Shareholding
As of June 30, 2022, ASIL has an outstanding share capital of 604.87 million shares which are held by over 6000 shareholders. Directors, their spouses, and minor children enjoy a major stake of 74 percent in the company’s shareholding. Then comes the local general public holding 14.79 percent of ASIL’s outstanding share capital. Insurance companies own 5.29 percent of the company’s shares, followed by banking and nonbanking financial institutions with a shareholding of 2.77 percent. The remaining shares are held by other categories such as Modarbas and Mutual funds, foreign companies, etc.
Historical Performance (FY18 – FY22)
ASIL’s top line has shown an upward trajectory in all the years except a minor year-on-year downtick of 2 percent in FY19 which came on account of the fact that the company made no sale of billets during the year. The gross profit margin also dropped from 25.2 percent in FY18 to 19.3 percent in FY19 as the cost of sales rose despite a plunge in the top line. The GP margin of the company rose in FY20 but rides a downhill journey thereafter as global steel prices touched record high levels.
In FY21, Pakistan’s economy showed signs of recovery post the period of slowdown owing to Covid-19. Net sales grew by an impressive 48 percent year-on-year on account of real estate boom. However, the GP margin sank as China, the top producer of steel withdrew 13.5 percent of tax rebate to its steel industry. While the prices sky rocketed, global steel production rose by 9 percent year-on-year to clock in at 1.96 billion metric tons. The GP margin of AISL also dropped in FY21 due to a steep rise in electricity tariffs during the year. In FY21, finance costs played a vital role in giving a boost to the bottom line. Finance costs decreased by 17 percent year-on-year in FY21 owing to a stable exchange rate and stagnant discount rate. This helped ASIL attain a bottom-line growth of 65 percent year-on-year in FY21.
It is to be noted that “other income” which has been lending a helping hand to keep the bottom line buoyant didn’t perform well in FY21 as markup on loan to associate companies which was the major head of “other income” until FY20 faded away in FY21 owing to low discount rate backdrop. Other income posted a major year-on-year increase of 2.8 times in FY20 because of massive increase in markup on loan to associates, exchange gain and effect of discounting of supplier credit.
FY22 was a rollercoaster ride for the cement industry. International steel prices touched an all-time high level of $1100 this year 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 is because of the demand uncertainty coming on the back of the 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.
High international prices of raw material for most of FY22 coupled with Pak rupee depreciation proved to be a double whammy for AISL, shrinking its gross margin in FY22. Then finance cost surged by 52 percent year-on-year on account of a high discount rate, pushing the operating margin to 10.4 percent in FY22 vis-à-vis 12.65 percent in the previous year. As if this was not enough that “other expenses” gave another major blow to the bottom line and grew by 2.4 times in FY22 on account of exchange loss and impairment loss on trade receivables. “Other income” lent a helping hand to the bottom line as the company made a massive profit from its air separation unit. In 2022, AISL installed an air separation unit from IPO proceeds of 2021. The bottom line of AISL shrank by 9 percent year-on-year in FY22 with the lowest PAT margin of 7.23 percent witnessed by the company in the last five years.
Recent Performance (1QFY23)
During 1QFY23, the topline of the company contracted by 23 percent year-on-year on account of depressed market backdrop floods in the major region of the country and high inflation which put brakes on the purchasing power of the consumer. Besides, Pak Rupee depreciation and import restrictions on account of low foreign exchange reserves affected the overall business of AISL.
Due to stumbled business activity during 1QFY23, cost of sales also shows a halt, the result of which was a steady GP margin of 21.7 percent in 1QFY23 as compared to 23.2 percent in 1QFY22. Finance cost continued to haunt by showing a massive increase of 55 percent year-on-year in 1QFY23. This took its toll on the operating profit margin which stood at 2.44 percent in 1QFY23 compared to 12.88 percent in 1QFY22.
Other income attempted to be the bottom line savior by bagging an impressive growth of 4.25 times, yet in the presence of other distressing factors profit after tax dropped by 73 percent year-on-year which culminated in to a PAT margin of 3.26 percent vis-à-vis 9.08 percent in the similar period of FY22.
Future Outlook
The future doesn’t look promising for the steel industry. With the shortage of raw materials owing to import restrictions and low Pak rupee value, the prices of steel rebars have increased twice during the week to reach at Rs. 235,000 per metric ton as of 11 January 2023. The prices will further fly as steel isn’t included in the priority import list issued by SBP and hence the shortage of raw material will persist in the upcoming quarters. This coupled with energy crisis and downcast demand from both public and private sector; the steel industries would have no option but to shut down their operations.
Even if steel imports are allowed by the authorities, the commodity super cycle in the international market which have soared prices coupled with low Pak rupee value, the cost of production isn’t expected to show any respite. Moreover, with a high discount rate, finance costs will also magnify shoving the bottom line to the red zone.