Equity Analysis /

Amreli Steel: FY19 analyst briefing takeaways

    Intermarket Securities
    8 October 2019

    FY19 Highlights

    Amreli Steels (ASTL) recorded NPAT of PKR33mn (EPS: PKR0.11) during FY19, down 98%yoy due to lower gross margin and higher finance cost. In FY19, the company sold record 272k tons of rebars, up 66%yoy with the major contribution coming from 4QFY19 (101k tons).

    In FY19, capacity utilization was at follows:

    • 74% for melt shop (400k capacity)
    • 40% for Dhabeji mill (425k capacity)
    • 68% for Shershah mill (180k capacity)

    As per company estimates, rebar market is of around 4.5mn tonnes with 0.9mn coming from South and rest from the North. In the South market share of ASTL is 24% but it is only 2% in the North. In terms of customers, 55% of sales are to retailers, 8% to government projects and the rest are to corporate clients

    Local rebar prices are currently at around PKR 110k/ton, down PKR3-4k due to declining scrap prices. However, the current inventory is of higher scrap price. Management thinks that they will have to pass on half of the benefit to the customer, due to weak pricing dynamics in the industry.

    Future Demand

    • Company is targeting sales of 350k tons in FY20 by capturing more market share, particularly in the North market. 1QFY20 volumes are flat on a yoy basis (56.5k tons), despite fewer production days on account of the rainy season and religious holidays.
    • Growth will come from a pickup in infrastructure activity. For example, sales have begun for Dasu and Suki Kinari dams.
    • Halt in the ship-breaking industry will also benefit rebar players as they accounted for 15-20% of the market. The current economic conditions have made ship-breaking unviable. Note that rebar from ship-breaking is sub-standard and normally sells at discount.
    • Regarding CNIC condition, the company is working with its 20 distributors to get them registered. Major concern is 1.25% minimum turnover tax for steel dealers compared to 0.25% for cement dealers. This issue is being taken up with FBR.

    Cost pressure and competition scenario

    • Implementation of axle load has increased transport cost from PKR3/ton to PKR4.5/ton on average. This, however, is only for the Punjab side, which is not the major market for ASTL.
    • Advertising expenses will not be reduced as this is part of the strategy to increase brand awareness. Consultancy fees of PKR290mn charged in FY19 will likely be less than PKR100mn in FY20.
    • To control finance cost, the company is looking to reduce its receivable amount and think that it can be reduced by almost PKR1bn (current amount is PKR3.8bn).
    • Only Naveena Group will be a new player entering the market with COD in early next year. However, it takes time for a new mill to achieve efficiencies, particularly in the melting process.
    • Average electricity price from FY20 is PKR11.75/unit, exclusive of sales tax.
    • Contribution margin for the company is PKR13k/ton above 260k units, assuming stable PKR and scrap prices. Management is expecting to arrest quarterly loss from 2QFY20 and be back in profits in 2HFY20.
    • We have a Jun’20 TP of PKR30/sh for ASTL which implies a Buy stance.

    Risks: (i) higher electricity prices, (ii) price war in rebar segment, and (iii) new capacity expansions.