Steel is the mother of all industries. The two categories of steel being manufactured in Pakistan are long and flat rolled steel products. Whereas long products are primarily used in construction and infrastructural development, flat products have wide ranging industrial uses including being inputs to the manufacturing of electronics, machineries, automotives, transportation goods and so on. Aisha Steel Mills Limited (PSX: ASL) is one of the flat steel players in the country in operation since 2005. The company manufactures cold rolled coil (CRC), which are steel products that have undergone pickling and rolling processes. CRC is made from Hot Rolled Coils (HRC), which are currently not manufactured in Pakistan and are imported. CRC is a key raw material in a variety of industrial, engineering and manufacturing sectors. ASL currently has a capacity of 220,000 tons per annum, with a capacity utilisation that reached 99 percent in FY18.
There has been a widening gap between local demand and domestic supply. While local steel players caters to 60 percent of the local demand for CRC and 50 percent of the demand for GIs (provided by ASL and International Steels), the rest is met by imports. Seeing this huge gap in the market, industry players including ASL decided to expand. The company is all set to raise this capacity to 700,000 tons while also adding galvanized iron to its product portfolio. The cost of the expansion is about Rs5.4 billion with Rs3.24 billion in debt with the rest raised through a right issue.
According to the nine months financial report for ASL, "The galvanizing line has been commissioned and undergoing trial production. The batch annealing furnaces are being commissioned in phases. The new pickling line is also in the commissioning stage. The erection of the rolling mill is complete and cold commissioning has commenced. The trial production is expected by May 2019".
As per its shareholders' pattern as at June 2018, Aisha Steel is owned by the renowned 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. The Japanese company Metal One Corporation also held 8 percent of ASL's shares while the public held 15 percent of the shares.
Financial and operational performance
It is not easy to be a steel manufacturer. ASL has only been operating for over a decade; much of it was spent incurring losses. Uptill FY16, that is. The company's capacity utilisation has slowly grown from 32 percent in FY13 to 58 percent and 61 percent in FY14 and FY15, reaching 89 percent in FY16. That's when the jump came and continued on till FY18. The company's production was raised by 46 percent in FY16 year on year and capacity utilisation rose to 95 percent in FY17 and 99 percent in FY18. In fact, FY17 was the first time the company had hit a positive bottom line, now occupied about 50 percent market share in CRC. In FY18, bragging almost maximum capacity utilisation, the company recorded the highest production in its history. However, circumstances have changed far too much since then (read "the outlook" section below).
Evidently, as production has improved, sales have improved, revenues have gone up and so have margins. Over the years, the company was incurring high operational and maintenance costs and fluctuation in the prices for HRC was affecting its ability to earn a healthy profit. To that end, ASL modernised its facilities with the installation of new technology, and the construction of mechanical and electrical workshops to do repair and maintenance work in-house. All these steps allowed gross margins to improve substantially where both factors of lowering costs and additional revenue have played together. Despite the rupee devaluation in the outgoing year, and the fact that the company imports HRC, the company has managed to improve its margins substantially since FY14 when they were 1 percent. By FY18, margins had reached 18 percent.
Revenues have also improved as the company has successfully managed to get the National Tariff Commission to impose anti-dumping duties on Chinese and Ukrainian who were found to be dumping CRC and steel sheets into Pakistan, grabbing a market share unfairly. Domestic prices are maintained with the movement of global commodity prices. As earlier calculated, while volumetric sales grew by 20 percent between FY16 and FY18, 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.
The company's expansion plans include procuring new technology and machinery, including a roll grinder to improve the quality of CRC, 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.
Latest financials and outlook
The profitability of the company, it seems was short lived, as the company in its 9MFY19, has reentered its loss phase. Sales dropped by 20 percent year on year, revenues by 6 percent, and despite a tax reversal, the company incurred a loss Rs0.28 per share during the period. Revenue per ton however grew by 18 percent-whatever ASL sold was at a much higher price point than last year. On the other hand are the costs. As calculated, costs of sales per ton rose by a whopping 35 percent in 9MFY19 for ASL against last year.
Demand has been slow as the economy has entered the stabilisation efforts the twin deficits and depleting reserves. The rupee devaluation against the dollar, and lower activity across industries brought demand for ASL down. According to the ASL report, "the local manufacturers were able to pass on only partial impact of devaluation to the customers". Consequently, margins suffered dropping from 18 percent in 9MFY18 to 6 percent during the period this current fiscal year. Meanwhile, finance costs ballooned due to higher borrowing and the increasing cost of it. Despite, a tax reversal, the company could not be buffered from facing a loss just two years after it first earned a profit. The company's earlier projection that by FY22, the company would hit sales revenues of Rs70 billion, may seem far off base at this point, as it earned a top line of Rs19 billion in FY18 and is see that drop by Rs1 billion during FY19. To get to that target, revenues will have to nearly quadruple in the next two years. With Pakistan now at IMF's door, and the next 12-14 months are to be spent in intense economic boot camp, demand is expected to come down further, particularly in automotives, heavy and light engineering, and construction.
The government has announced a housing plan for the construction of 5 million houses but it is uncertain how the plan will be executed during this time of austerity. ASL has done its homework well-it is expanding, and it has modernised and is also diversifying its product bases. Moreover, together with efforts of ISL, a new anti-dumping probe has been initiated by the NTC into CRC imports from Canada and Russia. A remedial anti-dumping duty against these imports would further give the two players market share that currently is being occupied by imports. After all, they now have the capacity to cater to that demand-supply gap. Though how much of that gap still remains is a crucial question to ask.
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Pattern of Shareholding (as on June 2018)
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Categories of Shareholders Share
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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%
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Source: Company accounts
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Aisha Steels: Nine Months Standalone Financials
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Mn Rs 9MFY19 9MFY18 YoY
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Sales 13,542 14,351 -6%
Cost of Sales 12,662 11,697 8%
Gross Profit 880 2,654 -67%
Distribution 17 14 25%
Administrative 194 144 35%
Other operating expenses - 122 -100%
Other income 27 30 -12%
Finance cost 1,347 778 73%
Profit/(loss) before tax (651) 1,628
Taxation (reversal) (499) 521
Profit/(loss) after tax (150) 1,106
Earnings per share (Rs) (0.280) 1.360
GP margin 6% 18% -65%
NP margin -1% 8% -114%
Sales (tons) 134,747 168,618 -20%
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