Crescent Steel and Allied Products Limited (CSAP), established in 1987, primarily produces coated steel line pipes and cotton yarn. The company’s cotton spinning division has an installed capacity of 19,680 spindles. In addition to its core business, CSAP also holds a well-diversified portfolio in equities and other securities. Associated companies are Altern Energy Limited and Crescent Steel, which hold 16.69% of the company. CSAP is trading at an FY24 P/E of 4.5x, a 75% discount over long-term averages.

·         Crescent Steel posted NPAT of PkR1.6bn (EPS: PkR20.7) in FY24 vs. NPAT of PkR0.18bn (EPS: PkR2.3) in SPLY, up 8xYoY propelled by a profitable pivot to the bare and pre-coated pipes business, where tremendous demand was recorded. Gross Revenues rose by 102%YoY and stood at PkR9.1bn compared to PkR4.5bn in FY23, largely led by gas and water infrastructure sales.

· The company’s specialization in manufacturing large-diameter spiral pipes and pipe coatings has propelled its revenues to new heights due to involvement in the K-IV water line project (Phase-1). Notably, the supplier of the raw material i.e. CHEC, also serves as the contractor for the K-IV project. This arrangement allows the company to treat raw materials as pass-through costs, generating revenue primarily through the conversion/coating of HRC into 68–84-inch diameter pipes.

·         This arrangement shields the company from volatile commodity prices/margins during the import stage, reducing susceptibility to exchange losses. As a result, the company has seen higher margins, with GMs rising to 29% in FY24 vs. 17.2% in SPLY.

·         Notably, the company’s existing contract with CHEC was recently extended for the third time until 2QFY26, raising the original order value to PkR8.6bn (from previously PkR5.9bn) to supply an additional 65k coated steel line pipes for the K-IV project. Further, the company also recently completed a PkR2.0bn order in 4QFY24 for SSGC, delivering 24-inch coated steel line pipes.

·         Further, with Phase-1 of K-IV nearly complete and Phase-2 ongoing—where almost half of the pipeline laying is still under process due to litigation issues and disputed areas, we anticipate the urgency of provincial and federal authorities to commit funds from the PSDP to this project (expected to complete by late 2025). With no major domestic competition producing the required pipe diameter, we hope this results in a secured revenue book for CSAP throughout the medium term.

·         Risks to our thesis include i) Deteriorating liquidity situation of the gas sector to result in reduced capex towards debottlenecking/modernization of domestic gas distribution network, ii) Further cuts in PSDP investments to hamper GoP investments in the country’s water infrastructure, and iii) Volatile exchange rate and lower than anticipated reduction in interest rates may dampen bottom-line.

Courtesy – AKD Research