Aisha Steel Mills Limited (PSX: ASL) is one of major steel players in the country and has been operational since 2005. The company is in the business of manufacturing cold rolled coil (CRC) which is steel products that have undergone pickling and rolling processes. CRC is made from Hot Rolled Coils (HRC), which are not currently manufactured in Pakistan and form a major input for steel manufacturers domestically, including ASL. CRC is used in a variety of industrial, engineering and manufacturing industries and is a key raw material for them. The company boasts a current capacity of 220,000 tons every year, with a capacity utilisation of 99 percent in FY18, and all set to raise this capacity to 700,000 tons while adding galvanized iron to its product portfolio. In the outgoing fiscal year, Aisha recorded the highest production in its history.
Shareholdings, expansion and modernisation
The company is owned by the Arif Habib Group, with more than 31 percent of the shares of ASL held by Arif Equity, 18 percent by Arif Habib himself and 7 percent by Arif Habib Corporation as at June-18. Metal One Corporation, a Japanese company also held 8 percent of ASL's shares. The public held 15 percent of the shares as the company wrapped up FY18.
The company's plans to modernise and expand are well into operation. The plan is to expand existing capacity by 200 percent, which would include 450,000 tons of CI and add a new line for 250,000 tons of galvanized iron (GI). The GI line is expected to be commissioned in Dec-18 while the pickling and rolling lines by Apr-19. The cost of the expansion is about Rs5.4 billion with Rs3.24 billion in debt with the rest raised through a right issue.
The plant has also been modernised by procuring new technology and machinery, including a roll grinder to improve the quality of CRC being produced, an electrostatic oiler to improve corrosion protection by ensuring uniform layers of oil on both sides of the sheet service, a 25-ton capacity overhead crane to handle more volume, cranes and fork lifters for easier material transportation flow etc.
Steel demand and market dynamics They say steel is the mother of all industries, and for good reasons. It is a primary input for not only the construction industry but is also used in other major sectors including machineries, automotives and transportation. CPEC infrastructure projects and real estate development bolstered by greater economic activity were propelling outlook for steel and other construction related industries forward.
The steel market in Pakistan has had a significant demand-supply gap-whereas local steel players caters to 60 percent of the local demand for CRC and 50 percent of the demand for GIs, the rest is met by imports. Meanwhile, HRC is also imported. Seeing this huge gap in the market, and projecting high hopes for growth, industry players including ASL embarked on this expansion spree.
(Side note: International Steel increased its CRC capacity from 250,000 tons to 550,000 tons during FY15 and FY16 and raised GI capacity from 150,000 tons to around 460,000 tons with a second line. It is currently upgrading CRC capacity from 550,000 tons to 1.0 million tons at an estimated cost of Rs5.6 billion. Amreli Steels is raising re bar production capacity from 180,000 tons to first 300,000 tons, which will grow to 425,000 tons; billets from 100,000 tons to 600,000 tons; and CRC to 750,000 tons. Mughal Steel is investing Rs 1billion to increase its total capacity from around 690,000 tons to 1.0 million tons).
Back in 2017, ASL projected that the market size will go up between 1.3-1.5 million tons by FY20 and will hit 1.6 million tons by FY22. Its own capacity enhancement is set to diversify its product mix and enter into competition with ISL that is currently the only one manufacturing GI. According to the SBP's latest report: by mid-19, major player's expansion will yield an additional 1.7 million tons of steel capacity at the cost of Rs 15 billion. This would bring the existing 2.8 million tons to 4.5 million capacities. The total demand is around 6-7 million tons.
Financial and operational performance Financially, the company has not been at its best. In fact, it was incurring loses uptill FY16. In FY13, its capacity utilisation was around 32 percent, which was gradually raised to 58 percent and 61 percent in FY14 and FY15. The real turnaround came after FY16, when production was raised to 95 percent in FY17 from 89 percent. Though the net profit margin has remained 7 percent in FY17 and FY18- the first two years the company became profitable- gross margins have witnessed much higher growth.
The company had been facing plant operational issues and was incurring high maintenance costs. While efficiency was a major concern, high finance costs and raw material costs sensitive to global commodity prices of HRC and other inputs were all affecting the bottom-line.
The company has been improving and modernising its facilities to boost efficiency as mentioned above. The company has built mechanical and electrical workshops to do repair and maintenance work in-house. All these steps allowed gross margins to improve from 10 percent to 18 percent between FY16 and FY18 where both factors of lowering costs and additional revenue have played together in tandem.
The company enjoys tariff protections from the government that include custom duties and regulatory duties, which provide a cushion for the company's margins. Meanwhile, anti-dumping duties on China and Ukraine worked to revive domestic sales of local players. And the company maintains prices at the same levels as international prices so movement in global commodity prices would mean domestic prices to be adjusted accordingly. As a point of comparison, volumetric sales grew by 20 percent between FY16 and FY18, while revenue per unit grew by a whopping 64 percent during the time period. The company states in its annual report that the industry has a cyclical nature, which is why the margins between CRC and HRC (input) are stable in the long run.
Latest financials Demand is visibly seeing a slowdown. In 1QFY19, the company saw a drop in revenues and profits, a slight increase in indirect expenses as a share of revenue (3% from 2%) and a 26 percent increase in finance cost. Why is the latter significant? Finance costs are 9 percent of revenue in 1QFY19, which is a big share. They used to be 5 percent this period last year. The expansion as well as modernisation debt is putting on the heat while drastic devaluation of the currency against greenback is also pulling costs. The company projected early that by FY22, the company would hit sales revenues of Rs70 billion from its current Rs 19 billion (FY18). Will that be possible?
Risks, opportunities and outlook for ASL Back when growth projections were made, Pakistan was under a different government and it was a different time. Now the country is clamoring to survive, and well into an austerity drive under the reins of Premier Imran. While CPEC projects already underway are still on the map, many projects under the larger plan are no longer going into implementation. Commercial real estate development as well as activities in automotives, heavy and light engineering sectors may diminish.
On the other hand, is the Naya Pakistan Housing Plan that espouses to construct 5 million houses over the five years. This ambitious-some argue unrealistic- plan, if materialises could push the demand for steel significantly, and/or replace some of the slowdown being observed in other areas. The net affect should be positive. That is an opportunity for ASL, which it will be well-placed to capture, given its massive incoming expansion.
The diversification is definitely one of its strong steps while earlier investment in improving efficiency and technology have already boded well for Aisha Steel already.
Other risks include international prices for HRC and exchange rate movements. While prices at home are adjusted accordingly, the recent devaluation puts a dampener. The company believes it could explore exporting markets not only to diversify but also utilise this opportunity of a weaker rupee which would make exports more competitive in the international markets.
While expansion, modernisation and diversification-both in products and in markets-are positive for the company, factors such as currency fluctuation, removal of import protection or regulatory duties by the new government, the retiring anti-dumping duty on Chinese and Ukrainian, and other countries dumping steel into the country remain credible risks. Careful planning, better inventory management, diversifying into export markets can all be steps to mitigate some of these risk factors.
=================================================
Aisha Steels: First Quarter Standalone Financials
=================================================
Mn Rs 1QFY19 1QFY18 YoY
=================================================
Sales 3,091 4,239 -27%
Cost of Sales 2,592 3,493 -26%
Gross Profit 499 746 -33%
Distribution 5 4 19%
Administrative 62 45 40%
Other operating expenses 12 35 -66%
Finance cost 265.90 211.10 26%
Profit before tax 156 459 -66%
Net profit for the period 121 309 -61%
Earnings per share (Rs) 0.14 0.4 -65%
GP margin 16% 18% -8%
NP margin 4% 7% -46%
=================================================
Source: Company accounts
=========================================================
Pattern of Shareholding (as on June 2018)
=========================================================
Categories of Shareholders Share
=========================================================
Directors and their spouse(s) and minor children 18.00%
Arif Habib 18.04%
Associated Companies, and related parties 46.77%
Arif Habib Equity 31.44%
Arif Habib Corporation Limited 7.16%
Metal One Corporation 8.02%
Public Sector Companies 0.08%
Banks, development finance institutions, 12.20%
insurance, non-banking finance companies etc.
Mutual Funds 2.78%
Public 15.42%
Others 4.72%
Total 100%
=========================================================