Amreli Steels Limited

13 Feb, 2018

Amreli Steels Limited (PSX: ASTL) is a renowned name in the steel manufacturing industry being a leading player in the production of steel reinforcement bars (re-bars) in Pakistan. The company began its operations over 50 years ago with small facilities to manufacture hardware items like nails, screws and wire rods; later moving into ship breaking and setting up hot rolling mills to produce steel bars, angles, T-iron etc. By the early 80's, the management scraped the manual re-rolling mills and imported a semi-automatic mill from the UK and converted Amreliwala Hardware Industries into a Private Limited Company.
The company was manufacturing 50,000 tons of steel bars by 1993, which was expanded to 75,000 and later 180,000 tons annually. In 2008, Amreli also introduced Thermo Mechanical Treatment technology in Pakistan for the production of high strength deformed bars. The next year, earthquake resistant rebars were introduced. The company's plant has the capacity to make 30 tons of straight bars each hour.
Earlier, ASTL used to either buy steel billets, that are used to produce rebars, from Pakistan Steel Mills or import them from abroad at varying costs. But the company decided to take raw material costs in its own hands by setting up a Steel Melt Shop to readily feed billets to the plant. The capacity billets production is 200,000 tons. According to its annual report, Amreli has spent approximately $40 million on the project and commercial production of the plant commenced in October 2011.
Shareholdings and expansion plans
The company started off as a small family owned business and has managed to keep it in the family despite going public. More than 56 percent of the company's shares are held by directors and family-of which Abbas Akberali, Chairman Amreli holds 31 percent while Shayan Akberali, CEO of the company holds 12 percent of the company's shares as at June 2017. The total shares held by family and associated parties are 75 percent, which leaves 5 percent of the local public; 11.7 percent to banks and insurance companies; and 6.3 percent to mutual funds.
Seeing demand projections in infrastructure and housing, steel companies have been expanding capacities to cater to the rising demand gap. Amreli isn't behind. Its steel rolling capacity will be grown from 180,000 to 750,000 by FY20 in three phases of expansions. Its steel melting ie billet capacity will be increased from 200,000 to 400,000 tons per year to reach 600,000 tons by the end of FY18. Work has already started on the second phase of expansion. The expansion is being fully financed through equity generated by the company's IPO. The technology used in the new production would result in energy conservation of 25 percent, according to the company's own assessment.
Meanwhile, the company is planning to enter into an investment joint venture with a Chinese company in the production of electrical transmission towers and metal structural products. Amreli Steels will take 65 percent equity stake with an investment of a billion rupees. The plan is at approval stage.
ASTL's financial and operational performance
Amreli has managed to retain its leading status in the business by expanding capacity every few years to keep up with the rising demand. In FY16, it was manufacturing 158,206 tons of bars, growing from 148,988 the previous year. Capacity utilisation increased from 82 percent to 88 percent during the period. With expanding scale, the company's revenues have grown considerably too. Amreli has grown from Rs 4 billion company to Rs 14 billion steel maker between FY10 and FY15 with revenues dwindling over the past two years given higher competition from imports. Competition has also kept prices low.
Margins have grown from 9 percent in FY11 to 23 percent in FY16, which comes on the back of lower costs of production since billets- that are a primary raw material- are produced at its own facilities. This has ensured that Amreli's costs are lower than other steel makers who have to worry about foreign currency fluctuations while importing. However, during FY17, margins fell to 19 percent as steel scrap prices have fluctuated up. Scrap is also a raw material that is imported by Amreli and any changes in the exchange rate affects scrap prices and ultimately company's margins.
Even though distribution and administrative expenses have grown for the company over the years, given a wider outreach of its local markets, the company has managed to bring its financial costs down after the IPO, which will cover the upcoming expansions as well. However, bank lending is still needed for working capital requirements which will increase in coming years.
With expansions, there may be some tax benefits that the company may incur. During FY17, the company saw a tax reversal which brought down the effective tax rate for Amreli.
Risks, opportunities and outlook for Amreli
Steel is a primary input in many industries, especially in building and construction where it makes up for 15 percent of the building costs. Steel production is in the forefront now that the Pakistani infrastructure is moving vertical as well as horizontal-with development of roads, railways and highways while high rise construction and housing localities are mushrooming across and beyond cities.
With a housing shortage of 12 million units across Pakistan; more than 60 million tons of steel will be required to fill that gap. But even when this gap is not filled, the current annual demand for steel rebars is nearly 6.5 million tons with local players catering to 78 percent of the demand, while the rest is imported. Given so much space in the playing field, Amreli's move to expand in phases will bode well for its market share. It will give it scale enough to bring costs per unit down and improve margins in the long run. Better technology will also help in energy efficiency which would again help keep costs down.
On the competition front, the company still faces price point competition from small players who sell low quality steel at cheaper prices. But with the expansion and improvement in technology, the company may be able to gain from economies of scale and bring end-user prices down. That is if competition from small players indeed eclipses some of its market share.
Meanwhile, industry dynamics have changed a lot over the past two years, especially with the regulatory environment improving. China had been dumping steel across the world to which hefty antidumping duties have been levied by countries across the board. Pakistan also joined these ranks, albeit a little belatedly.
In order to curb the effect of cheaper steel being dumped in the country and adversely affecting domestic players, Pakistan imposed anti-dumping duties ranging from 6 percent to 40 percent for a period of five years. In addition, regulatory duties of 30 percent apply on a range of steel products that make imported variety much more expensive. From that perspective, steel makers can relax for a few years and do business without worrying too much about the competition. However, this does give them the opportunity to bring up construction costs for end-users.
Global scrap prices and exchange rate tightening would affect Amreli's margins in the short term. Meanwhile, energy availability is always a concern for industries. Amreli has contracts with K-electric to supply energy to its Dhabeji and Karachi Site plants. The company has laid an extra phase cable to ensure continued supply of power during production and expansion.
Higher indirect costs such as distribution are expected, while finance costs may also rise as the company expands its operations and its working capital needs go up.
The company's new business venture into electrical transmission network may also bode well for its bottom-line, tapping into the demand for electricity transmission equipment that is currency imported. However, the plan remains in its initial stages.
While some small risks exist that could affect year on year financial performance, long term growth for the company, ultimately, is not in question. The expansions coming up each year for the next few years will ensure greater market share, and opportunities for Amreli to diversify its markets.



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Pattern of Shareholding (as on June 30, 2017)
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Categories of Shareholders Share
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Directors and their spouse(s) and minor children 56.33%
Abbas Akberali 31.12%
Shayan Akberali 12.02%
Kinza Shayan 0.59%
Mariam Akberali 12.60%
Associated Companies, and related parties 18.76%
Mahvash Akberali 18.76%
Public Sector Companies 0.02%
Mational Investment Trust and
Investment Corporation of Pakistan 0.02%
Banks, development finance institutions,
insurance, non-banking finance companies etc. 11.72%
Banks 2.26%
Insurance Companies 9.46%
Mutual Funds 6.33%
Public 5.18%
Others 1.47%
Total 100%
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Source: Company accounts



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Amreli Steels: First Quarter
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Mn Rs 1QFY18 1QFY17 YoY
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Sales 2,706 3,218 -16%
Cost of Sales 2,196 2,754 -20%
Gross Profit 510 465 10%
Administrative 101 70 44%
Distribution 55 82 -32%
Other operating expenses 19 18 2%
Finance cost 97.06 74.01 31%
Other income 0.32 0.50 -36%
Profit before tax 238 225 6%
Taxation (Expense)/Reversal (42) 0.26 n/a
Net profit for the period 196 226 -13%
Earnings per share (Rs) 0.66 0.76 -13%
GP margin 19% 14% 31%
NP margin 7% 7% 3%
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Source: Company accounts

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