Crescent Steel and Allied Products Limited (PSX: CSAP) was incorporated in Pakistan as a public limited company in 1983. The company operates in five diverse segments - steel, cotton, Investment & Infrastructure Development (IID), Energy and Hadeed (Billet) segment.

Pattern of Shareholding

As of June 30, 2022, CSAP has a total of 77.632 million shares outstanding which are held by 3171 shareholders. Local general public has the highest stake of 39.5 percent in the company. This is followed by Associated Companies, Undertakings & Related Parties holding 20.97 percent shares of CSAP. Within this category, Crescent Textile Mills Limited has the highest shareholding of 11 percent. Local and foreign companies collectively hold 19.19 percent shares of CSAP while Banks, DFIs and NBFIs have 12.09 percent stake in the company. Insurance companies account for 3.52 percent of the outstanding shares of the company. The remaining shares are held by other categories of shareholders.

Financial Performance (2018-23)

Since 2018, CSAP’s topline has only posted a yea-on-year growth in 2021. Its bottomline had also been inching down until 2020 where it registered a net loss. It recovered in 2021 and 2022 but lost its footing in 2023. CSAP’s margins which had also been riding a downward trajectory until 2020 rebounded in 2021. Gross and operating margins nosedived in 2022 while net margin continued to grow. In 2023, the gross and operating margins were in a better shape when compared to the previous year, however, net margin slumped. The detailed performance review of each of the years under consideration is given below.

In 2019, CSAP’s topline massively fell by 42 percent year-on-year due to retarded infrastructure and construction activity in the country. This was backed by a tapered PSDP outlay which also dampened the manufacturing and industrial activity. CSAP didn’t make any export sales in 2019. In the local market, while pre-coated pipes and raw cotton posted an uptick in revenues, it was offset by a substantial reduction in the revenue from bare pipes and pipe coating. This coupled with high inflation and currency depreciation wreaked havoc on the gross profit of CSAP which fell by 73 percent year-on-year in 2019, culminating into a GP margin of 5.4 percent much lower than a GP margin of 11.5 percent recorded in 2018. Income from investment, which forms a huge chunk of operating profit of the company also plunged by 61 percent in 2019 due to thinner dividend income. No commission expense incurred during the year drove the distribution expense by 17 percent in 2019; however, administrative expense grew by 9 percent on account of higher payroll expense. Operating profit shrank by 78 percent year-on-year in 2019 with OP margin drastically falling from 17.1 percent in 2018 to 6.6 percent in 2019. Finance cost grew by 6 percent in 2019 on account of higher policy rate and increased working capital related borrowings obtained during the year. CSAP’s gearing ratio grew from 21.3 percent in 2018 to 27 percent in 2019. Net profit slumped by 81 percent year-on-year in 2019 to clock in at Rs.143.48 million with an NP margin of 3.5 percent versus 10.7 percent in 2018. EPS also fell from Rs.9.68 in 2018 to Rs.1.85 in 2019.

2020 witnessed a further 6 percent slid in CSAP’s topline. While the local industry was already grappling against high inflation and tamed demand, it was further halted by COVID-19. The decline in revenues was mainly led by tapered revenue from pre-coated pipes followed by raw cotton and pipe coating while steel billets and bare pipes performed well during the year. Cost of sales dipped by 2 percent on account of higher inventory handling and plant idling due to lockdown. Consequently, gross profit plunged by 77 percent year-on-years in 2020 with GP margin sliding down to 1.3 percent. Income from investment came to the rescue as it grew by 103 percent year-on-year in 2020 due to robust dividend income and higher unrealized gain on FVTPL investment. Distribution expense also slipped by 10 percent year-on-year in 2020 due to a slump in advertisement and promotion budget and lesser legal and professional charges incurred during the year. Conversely, administrative expense enlarged by 30 percent in 2020 as the number of employees grew from 755 in 2018 to 778 in 2019 and so did the payroll expense. Operating profit shrank by 29 percent year-on-year in 2020 while OP margin settled at 5 percent, which although was lower than the previous year’s level but higher than the GP margin on account of higher income from investment. Finance cost ticked up by 26 percent in 2020 which drove CSAP’s gearing ratio to 35.5 percent. Higher finance cost was the result of inventory buildup as well as higher short-term and long-term borrowings. The company incurred a loss after tax amounting to Rs.17.124 million in 2020 with a loss per share of Rs.0.22.

2021 posted a strong rebound in CSAP’s sales revenue which grew by 90 percent year-on-year. It is pertinent to mention that 2021 was the only year when CSAP posted a topline growth among all the years under consideration. Revenue growth was mainly driven by demand recovery in steel billet and steel pipe segments whose sales grew by 124 percent during the year. This was on account of recovery in construction activity in the country particularly government housing scheme which spurred steel demand. Energy infrastructure projects also contributed to the demand resurgence of the steel segment. Cotton division also performed exceptionally well in 2021 owing to 10-year high cotton prices in the local market due to 38 percent plunge in cotton production. Improved revenues offset 79 percent rise in the cost of sales and culminated into 876 percent higher gross profit in 2021 with GP margin of 6.8 percent. Income from investments slumped by 40 percent in 2021 due to significantly low dividend income. Distribution expense grew by 10 percent year-on-year due to higher sales volume while administrative expense largely remained constant at last year’s level as the number of employees reduced to 765 in 2021. Other income posted a colossal 454 percent growth in 2021 due to gain on disposal of investment property, unwinding of discount on long-term deposit as well as exchange gain. All these factors translated into a 233 percent bigger operating profit in 2021 with OP margin rising to 8.78 percent. Finance cost slashed by 32 percent year-on-year in 2021 due to lower discount rate coupled with lower borrowings due to better cash management. CSAP was able to trim down its gearing ratio to 24.2 percent in 2021. A net profit of Rs.351.86 million was registered in 2021 with an NP margin of 4.8 percent and an EPS of Rs.4.53.

CSAP’s topline once again took the downward route and slashed by 2 percent year-on-year in 2022. This was due to economic and political turbulence circling the country which greatly suppressed the construction and infrastructure development activity in the country. Significantly higher steel prices also kept the investors at bay. Cost of sales grew by 6 percent year-on-year resulting in a gross loss of Rs.65.30 million in 2022. Income from investment served as a remarkable buffer as it grew by 317 percent year-on-year in 2022 on the back of remarkable dividend income earned during the year. This played a vital role in CSAP attaining positive operating results in 2022 despite 4 percent rise in distribution expense and 33 percent hike in administrative expense. Other expense also spiked by 131 percent year-on-year due to exchange loss. High base effect on account of gain on disposal of plant, property and equipment in the previous year resulted in a 69 percent dive in other income in 2022. Operating profit recorded in 2022 was 12 percent lesser than that of 2021 with OP margin tapering to 7.9 percent. While the company considerably reduced its borrowings in 2022 which is evident in its gearing ratio falling to 14.8 percent, high discount rate during the year drove the finance cost up by 17 percent. This suppressed the profit before tax by 26 percent year-on-year in 2022; however, a tax credit of Rs.51.57 million resulted in a 4 percent growth in net profit. Net profit stood at Rs.366.688 million in 2022 with an NP margin of 5.2 percent – slightly higher than 2021. EPS was recorded at Rs.4.72 in 2022.

The downhill journey didn’t cease in 2023 and CSAP’s topline posted a substantial 36 percent decline. During the 2HFY23, the company also suspended its cotton plant operation owing to low demand and shortage of raw material on the back of import restrictions. Depressed industrial and manufacturing activity as well as infrastructure development also contributed a great deal to lackluster sales in 2023. Cost of sales slumped by 48 percent year-on-year in 2023 and the company was able to post a gross profit of 17.2 percent – the highest among all the years under consideration. Income from investments didn’t prove to be encouraging in 2023 and dipped by 79 percent year-on-year. Distribution expense posted a colossal 330 percent hike in 2023 while administrative expense grew by 18 percent year-on-year in 2023. Other expense dropped by 73 percent year-on-year in 2023 supposedly due to lower provisioning for WWF and WPPF and also because of lower exchange loss incurred during the year when compared to the previous year. Other income grew by 29 percent year-on-year in 2023. Operating profit grew by 6 percent in 2023 with OP margin ticking up to 13.2 percent. Finance cost posted a substantial 46 percent rise not only because of monetary tightening but also on the back of the issue of long-term Sukuk certificates of Rs.800 million during the year to meet its working capital requirements amidst high inflation and cost of production. This pushed the net profit down by 52 percent year-on-year in 2023 to clock in at Rs.176.857 with an NP margin of 3.9 percent and an EPS of Rs.2.28.

Future Outlook

While import restrictions have been eased, high cost of raw materials in the international market coupled with a poor state of local currency still continues to a source of concern for CSAP. High steel prices, hike in electricity tariff and petroleum prices as well sky-rocketed cost of borrowing have further dampened the margins of the steel industry. Moreover, crestfallen demand owing to the ongoing political and economic mayhem is further hampering the growth potential of steel industry.