Equity Analysis /
Pakistan

Amreli Steel: 2QFY20 analyst briefing takeaways

  • In 2QFY20 ASTL posted LPS of PKR0.78 as compared to an EPS of PKR0.36 in 2QFY19.

  • Major drags were competition, smuggled products lowered pricing power amid cost pressures and finance costs.

  • The above factors & the recent increase in power tariff by KEL will maintain losses for the year, as per management.

Intermarket Securities
5 March 2020

2QFY20 Result Highlights

  • In 2QFY20, Amreli Steel (ASTL) posted NLAT of PKR232mn (LPS: PKR0.78), as compared to a NPAT of PKR108mn (EPS PKR0.36) in 2QFY19. The main reasons behind the decline were (i) lower rebar prices amid rising competition and pricing indiscipline in the industry, (ii) significant buildup in cost pressures due to gas and power tariff hikes and (iii) higher finance cost amid higher interest rates and increase in short term borrowings. 
  • ASTL also booked greater operating expenses due to the implementation of IFRS-9 (higher provision for bad debts). The company could not capitalize on the declining international scrap prices during 2Q, as lower prices were realized only at the end of the quarter.

Business Performance and Outlook 

  • During 1HFY20, ASTL sold 145,819 tons of rebar vs 125,586 tons in 1HFY19. The company is expecting to sell about 320,000 tons of rebar in FY20 (up from 277,000 tons sold in FY19). Moreover ASTL’s presence in the North has increased after it formally inaugurated its warehouse in Lahore and Islamabad (present in 85 cities of Pakistan). 
  • Industry total demand of rebar in North is about 3.1mn tons and 0.75-0.80mn tons in South (though the latter has recently shrunk to about 0.6mn tons). ASTL’s market share in South is 33% and management is hopeful to increase it to 40% in the next two years. In 1HFY20, it sold about 85% its rebars in the South and remaining in the North market.
  • Of its total sales in 2Q, about 57% were to retail clients, 23% to corporate, 4% to government projects, and 10% to CPEC projects.
  • Current prices of rebar in South are PKR110,000/ton, while in North they are hovering around PKR105,000/ton. In our view, prices will remain under pressure as many new capacities will commission in 1-1.5 months from now. These include Al-Haj Faw and Naveena in South and Mughal Steel in North; all three have commissioned their melting shops and are expected to commence rerolling in a month’s time. Total capacity of all 3 manufacturers is 0.8mn tons. Agha Steel has also commenced work on its expansion of 0.2mn tons. However, potential teething issues after commissioning of these plants could delay their entry by a few months.
  • ASTL is expecting to incur additional PKR550mn power costs after a PKR3.0/ kWh increase in tariff (which reflects cumulative fuel price adjustments since FY17) and Industrial Support Package (ISP) from the power utility, K-Electric. The company has contested the abrupt move in the court premised on the NEPRA Law, which allows DISCOs to collect ISP and FPA for the previous four months only. For the time being, the company will provide for the additional cost in its P&L but this will not affect its cash-flows. 
  • Because of the above tariff hike in the midst of weak demand and high competition, the management expects the company’s bottom-line to remain in the red for the rest of FY20. 
  • The new electricity charges will be PKR11.8/kWh in off-peak hours and PKR15.7/ kWh in peak hours (weighted average PKR14.5/kWh after the aforementioned hike). ASTL is also taking advantage of its installed technology of hot charging at the Dhabeji plant (significant cost savings). This is why their per ton COGS has reduced to PKR84,890 in 2QFY20 from PKR85,290 in 1QFY20.
  • Management is expecting volumetric growth of 30% in FY21 and FY22, insofar as the overall economy returns to GDP growth trajectory of 4.5-5.0% (projected by the IMF). 
  • The company’s Distribution expenses are expected to increase further due to their increasing presence in the North market and implementation of Axle load. The transportation cost of ASTL has jumped to PKR3,500/ton from PKR2,500/ton prior to the implementation of Axle load.
  • Presence of smuggled products from Iran, low demand due to economic slowdown and 1.5% turnover tax on dealers are major impediments to demand growth for the industry, which have presently diminished the company’s pricing power.