Amreli Steels Limited (ASTL) announced its 4QFY21 financial result today where the company posted a profit after tax (PAT) of PKR 443mn (EPS: PKR 1.49), compared to a loss of PKR 439mn (LPS: PKR 1.48) in SPLY. This took the FY21 bottom-line to PKR 1,368mn (EPS: PKR 4.61), vis-à-vis last year’s loss of PKR 1,127mn (LPS: PKR 3.79).

Key Takeaways

· Topline in 4QFY21 witnessed a noteworthy growth of 2x YoY (all time high quarterly revenue of PKR 12bn) given a significant jump in rebar prices to PKR 115k tons alongside surge in offtake to 104k tons (new record made in Jun’21 of 43k tons).

· During FY21, revenue surged by 48% YoY to PKR 39bn with the company manufacturing over 362k tons (FY20: 276k tons; up by 33% YoY) together with improved pricing (+11% YoY). Volumetric growth was supported incentives of the govt and the SBP including tax amnesty, housing loans, construction package, higher PSDP expenditure and overall u-turn in the economy aiding per capital income.

· Pertinently, the company’s share in the retail segment went up to 64% from 59% in FY20 as it managed to open more retail outlets across the country (157 vs. 113 in SPLY).

· In FY21, margins settled at 11.6% vis-à-vis 7.4% in SPLY due to strong topline growth, improved utilisation / economies of large scale production and PKR appreciation. While a change in depreciation policy, now in-line with the industry, aided the profitability by PKR 325mn in FY21.

· On a QoQ basis margins dipped by 314bps (3QFY21: 13.9%) due to higher scrap prices (at USD 460/tons compared to USD 413/ton in 3Q) which side-swept the impact of higher retention prices and PKR appreciation. There was however, relief on account of change in inventory recognition policy from FIFO to average pricing which cushioned the bottom-line by PKR 43mn.

· The company continues to avail tax credit under section 65E of the Ordinance on its Dhabeji plant, which explains the low tax charge of 3% in 4QFY21. This will remain in place till FY23 and in order to take maximum benefit of it, ASTL plans to utilise 75% of the Dhabeji plant while only 25% of the Site rolling mill in the upcoming years.

· On the pricing front, the management of ASTL believes that it will continue hiking prices in order to pass on the impact of higher scrap prices (which made a high of USD 560/ton last month and have slightly come down to the current level of USD 520/ton). Moreover, a 37% hike in the electricity tariff had also augmented costs significantly, which needed to be passed on. Current tariff is around PKR 20/KwH. The company believes scrap prices will stay downwards sticky on account of rising global demand (US announced a package of over USD 1trn), concession on ports of Germany, India and China (curtailing supply), and removal of tax rebate on Chinese steel exports.

· Ideally the company should maintain atleast 45 days of scrap inventory and 15 days of billets inventory but given the uncertainty in global prices, and robust domestic demand, ASTL had much lower levels in hand and had to stop its order book twice during the ongoing month. The strong local demand also signals at improved pricing power.

· Additionally, the delta between graded and ungraded steel has now compressed to PKR 6,000 per ton against PKR 25,000 per ton just two years back. This shows that ungraded players are gradually being pushed out of the market as their prices remain high but quality of rebars is much inferior.

· Whereas prices in the North and South region have now become almost identical (barring the transportation costs). For the upcoming year, ASTL targets to sell 50% of its total offtake to North, due to the oversupply situation in South, and on the back of its now widespread retail network.

Courtesy – AHL Research